It has been a tough five years for commercial landlords, what with Covid and the work from home push, then the rapid rise in inflation and interest rates, and now general economic uncertainty resulting from President Trump’s ever-changing tariff agenda. So, if you, as a commercial property landlord, face a situation where a tenant becomes insolvent, you must understand your legal rights so you can act swiftly to protect your best interests.
What Options Do Commercial Landlords Have If a Tenant Stops Paying Rent?
A non-paying tenant is one of the most stressful situations you are likely to encounter as a commercial landlord. If this happens and you suspect your tenant is insolvent, the Insolvency Act 1986 provides for the following remedies.
- Exercise CRAR: This is a statutory process that permits landlords to seize property to cover outstanding rent arrears. Seven days of notice must be given to the tenant before CRAR can begin.
- Bring a Civil Claim for Rent Arrears
- Forfeit the Lease: Either by court action or by peaceable re-entry (modern leases almost always have an express forfeiture provision).
- Issue a Winding Up Petition: If the tenant owes £750 (in the case of a company) or £5,000 (an individual) in commercial rent arrears, you can issue a Statutory Demand for payment. If the tenant does not pay the arrears or make an arrangement to pay them within three weeks, you can apply to the Court for a winding-up petition. This starts the process of sending the business into compulsory liquidation.
None of the above should be attempted without first seeking the advice of an experienced Insolvency Solicitor. Each option could harm your best interests if they are not used carefully and correctly. For example, if you lose a civil claim, you will have to pay the tenant’s court costs as well as your own. In the case of forfeiture, if the correct process is not followed, the tenant could make a claim against you for damages.
What Happens to a Lease When a Company Goes into Liquidation
This depends on the path chosen by the Insolvency Practitioner appointed to manage the business insolvency or the directors of the company (in the case of voluntary liquidation, CVA, or administration).
- Receivership: In the case of an administrative receivership, you can exercise a commercial rent arrears recovery (CRAR), bring a civil claim for unpaid rent, or forfeit the lease without the Administrative Receiver’s or the Court’s permission.
- Administration: The Administrator must notify you (along with all other creditors) to inform you that the business has gone into administration. Because of the moratorium on the actions a creditor can take if a company is in administration, you will need to obtain the permission of the Court or the Administrator before you can take action such as forfeiture by peaceable re-entry or exercise a CRAR (Commercial Rent Arrears Recovery)
- Company Voluntary Arrangement (CVA): You will be bound by the terms of the CVA regarding being paid for any rent arrears. However, you may still have the right to forfeit the lease. The law around this is complex, so it is essential to get legal advice before going down the forfeiture route.
- Winding Up or Liquidation: You can exercise a CRAR, bring a civil claim for unpaid rent, or forfeit the lease (through the Court process).
How Can Commercial Landlords Protect Their Best Interests?
Protecting yourself against tenant insolvency is always cheaper and less stressful than dealing with such a situation. To ensure you can mitigate the risk of losing rent and having to find a new tenant, make sure you invest in the following:
- Have legal and financial professionals undertake robust due diligence on any prospective tenants.
- Secure a healthy deposit and a personal guarantee from the tenant.
- Make sure your commercial tenancy agreements include break clauses. This means you will be able to end the tenancy early if you suspect the tenant is facing financial difficulty.
- Always work with a Commercial Property Solicitor when onboarding a new tenant. Not only can they undertake due diligence, but they can also negotiate deposits and/or guarantees on your behalf.
If your tenant does enter administration, make sure you communicate with the Administrator so you can quickly respond to developments. For example, if the business is to be sold and the lease is assigned as part of that sale, the ongoing rent, before the completion of any assignment, will be paid as an administration expense and will take priority over other creditors.
Getting Legal Advice
As a commercial landlord, you have a right to protect your financial interests, and part of this is being able to recoup rent arrears from a commercial tenant. Getting help from an experienced Insolvency Solicitor and Commercial Property Solicitor will ensure your best interests and cash flow are protected.
If you are worried or need advice on how to respond to a growing risk of tenant insolvency or your tenant has become insolvent, please do not hesitate to reach out to us. As experts in insolvency law, we can provide advice and representation on all insolvency matters. Contact us on 0330 173 6983 or send us an email for more information.
