Protecting your rental income is important from the outset, both when selecting a tenant and negotiating a lease. How can you put yourself in the best position if things take a turn for the worse and your tenant is late paying?
‘Some tenant businesses will inevitably go through rough patches or fail,’ says Ian Cowan, a Solicitor in the commercial property team with Richard Reed Solicitors. ‘But there are things commercial landlords should look for in their leases to give them a first line of defence against rent arrears.’
Some of these will be standard lease terms, but there are other things your solicitor will advise you to negotiate when you are agreeing commercial terms with your proposed tenant.
Payment of rent
The obvious place to start is with how the rent will be paid. The standard position for commercial leases is that rent is paid in four quarterly instalments, in advance. Depending on the nature of your tenant’s business and whether you are granting a longer or shorter lease, you could also consider monthly rent payments. These can help a new tenant business with cashflow. If it looks as though the tenant is struggling to pay, you will know sooner than if you were waiting for the next quarterly payment and will be able to act while arrears are at a lower level. Whatever the frequency of rent payments, the lease will set out a clear due date for each instalment so both you and your tenant know what to expect.
Interest
A commercial lease will require the tenant to pay interest on outstanding rent and other money as standard, but your tenant may try to negotiate on the rate of interest and on the grace period (the number of days the payment must be overdue before interest kicks in). Tenants usually end up agreeing interest at 3% above base rate. Grace periods vary, but it is common to agree that interest is payable on any rent outstanding more than 10 working days after it is due.
Security for rent
A clear payment schedule and interest provisions should help ensure that rent is always paid on time, but it is a good idea to set up additional security you can draw on if arrears do build up. The first one to consider is a rent deposit. This is a lump sum, paid to the landlord when the lease is granted, equivalent to an agreed number of months’ rent. This will be held by you as landlord, with rights for you to withdraw money in specific circumstances to cover unpaid rent and other monies and possibly the cost of remedying breaches of covenant. It is important that all of this is clearly set out in a well-drafted rent deposit deed and your solicitor will advise you on the options for how you hold the money, for how long, and when you can draw on it.
The other common security for landlords is to ask the tenant to provide a guarantor. Depending on the nature of your tenant, this could be a parent company or a personal guarantor. The key from your perspective is to make sure that the guarantor has adequate assets to meet the tenant’s liabilities under the lease, particularly the rent payments. Again, a guarantee must be carefully drafted and your solicitor will advise on this.
If your tenant assigns the lease
Unless you are granting a very short lease, your tenant will want the right to assign it to another occupier if the needs of the tenant’s business change. Your solicitor can draft some additional safeguards against rent arrears into the assignment provisions.
The first is to make your consent to a proposed assignment conditional on all arrears of rent being paid before the assignment takes place. As a matter of law, you could still sue the outgoing tenant for their arrears even after they have assigned the lease. But their need for your consent is a useful commercial lever to make sure arrears are settled, as long as your bargaining position is strong enough to get it agreed when you are negotiating the lease.
The second is to require the outgoing tenant to enter into an Authorised Guarantee Agreement (AGA) when they assign, under which they agree to stand behind various of the new tenant’s obligations under the lease, in particular paying the rent. An AGA is a special type of guarantee which comes with some legal limitations, which your solicitor will be able to explain to you. If your outgoing tenant had a guarantor, you may be able to get them to back up the obligations under the AGA as well.
Forfeiture
If all else fails, the forfeiture clause in the lease will allow you to bring it to an end where the tenant is in breach and has not remedied it even after you have served a formal notice requiring them to do so. The clause will set out a list of circumstances when you will have the right to end the lease, typically rent being unpaid for more than 21 days after it is due, breach of other covenants and the tenant becoming insolvent. The process of forfeiture is complex and requires expert legal advice, both on tactics and the required procedure. The vital point to remember is that you must get that advice as soon as your tenant falls behind on the rent, because it is possible for you to waive your right to forfeit and lose this valuable remedy if you are not careful.
How we can help
No landlord wants a tenant who is behind on the rent or to be left out of pocket. Our expert commercial property solicitors will explain how you can give yourself the best protection when you enter into a new lease, as well as standing by to advise you if it looks as though your tenant may be struggling in the future.
For further information, please contact Ian Cowan in the commercial property team
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
