can t pay commercial rent

What to do if you can’t pay your commercial rent

Education

can t pay rent on commercial lease ukCommercial rent is typically a major business expenditure, and when cash flow is poor it’s easy to fall behind with payments. When you can’t pay your business landlord you need to act without delay as they can take enforcement action quickly to recover rent arrears.

Covid-19 coronavirus has affected all businesses in the UK in some way. It has presented numerous challenges for business across the globe. In the UK specifically, many businesses have had to close due to government guidance to slow the spread of the virus. Some had suffered loss in profits or business interruption/continuity.

If you have been affected by covid-19 and have had to close your business premises, which means shutting down the business too, then you will likely be facing cash flow problems and find yourself unable to afford to pay your rent, through no fault of your own.

My business cannot afford to pay rent

Getting behind with commercial rent jeopardises your business to the point of closure. Given the potential power held by commercial landlords you may only be seven days away from the seizure of your business assets.

Your landlord must provide seven clear days’ notice of attendance by enforcement agents, and a further seven days’ notice of their intention to seize your assets. Goods are likely to be sold at auction to repay the debt, and in some instances the landlord can also seize control of the premises.

  • Can you afford to pay any money towards your rent arrears? If so, it demonstrates that you’re not deliberately avoiding payment.
  • If your business is unable to cover the commercial rent it may have entered insolvency. You need to establish whether this is the case as it dictates your next steps.
  • If the business is insolvent you must cease trading straight away to protect the interests of your creditors, and obtain advice from a licensed insolvency practitioner. Otherwise you could increase creditor losses and face allegations of wrongful trading.
  • Have you signed a lease guarantee?

Why are commercial rent arrears so serious

Getting behind with commercial rent jeopardises your business to the point of closure. Given the potential power held by commercial landlords you may only be seven days away from the seizure of your business assets.

Your landlord must provide seven clear days’ notice of attendance by enforcement agents, and a further seven days’ notice of their intention to seize your assets. Goods are likely to be sold at auction to repay the debt, and in some instances the landlord can also seize control of the premises.

Will my landlord Issue proceedings against my business for recovery of rent arrears

The most likely course of action for a landlord would be to allow the rent arrears to mount up and then, when the business can begin trading again, look to recover the arrears. Landlords may take a commercial approach and settle any outstanding rent through agreement and a payment plan. Nevertheless, there may be some landlords who look to issue court proceedings for the recovery of the full amount of rent arrears immediately.

Proceedings for rent arrears would likely take several months, but if successful, the landlord would be entitled to all arrears plus the costs incurred in bringing such proceedings. Whilst the courts have not yet issued guidance on their approach during the coronavirus pandemic, it is very unlikely a court would look favourably upon a landlord issuing such court proceedings during a time of national crisis.

What is a commercial lease?

Commercial leases are legally binding agreements that lay out the terms and conditions under which your business can occupy its premises. They state your duties and obligations under the agreement, rental payments, and the services the owner/landlord must provide.

So what happens if your business is unable to pay the lease, and what can you do to help yourself in this situation?

Can’t pay rent on commercial lease

Contacting your landlord should be your priority as soon as you know business cash flow won’t support your lease payment. Maybe you’re experiencing temporary financial difficulty due to events beyond your control, but if you quickly communicate this with your landlord they may be willing to offer more time to pay.

If your cash flow problems seem more long-term, however, the landlord still needs to be aware of the situation so they understand that you aren’t deliberately trying to avoid payment.

What is Commercial Rent Arrears Recovery (CRAR)

If rent has not been paid for seven days after falling due, a landlord can instruct an enforcement agent in writing to seize goods from the property belonging to the tenant up to the value of any unpaid rent. The enforcement agent is legally obligated to provide a tenant with seven clear days’ notice prior to entering the property to seize goods.

A landlord may be reluctant to take this type of enforcement action, as seizing goods may impede the tenant’s ability to pay future rent. Further, in light of the government’s restrictions on movement, it would be unlikely such action could be taken at this time.

Commercial Rent Arrears Recovery (CRAR) legislation enables landlords to seize goods from business premises under certain conditions, without having to go to court. Even if this legislation doesn’t apply to your landlord, however, they may still take a different form of legal action to enforce the debt

Emergency legislation by way of the Coronavirus Act prevents landlords from forfeiting the leases of tenants who fail to pay their rent on time. Originally set to run for three months up to 30 June, this has subsequently been extended by another three months until 30 September now it has been extended again until 31st March 2021. This new legislation may mean that rent arrears are not a pressing concern to you right now, but the reality is that this is a temporary measure which will end and you will then be responsible for repaying the arrears that you have built up during this time. If you are struggling to pay your rent on time, you need to take early advice to ensure a swift recovery when this protective legislation comes to an end.

Action you should take if you cannot pay your commercial rent?

If you know your business cannot pay rent, it is best to approach your landlord, informing them of your current situation and try to reach an amicable agreement, potentially including a temporary suspension or reduction in rent. Any agreement should be properly documented. The moratorium proposed by the government means that such discussions can be had without the threat of immediate forfeiture. Further, with the economic impact of the coronavirus still largely unknown, landlords may wish to retain tenants, as it may be unlikely that landlords will be able to find new tenants quickly.

It should however be noted that during the proposed moratorium, any action taken by a landlord other than an express waiver given in writing, will not be regarded as waiving their right to forfeiture for non-payment of rent. Tenants should bear this in mind when discussing rent arrears with their landlord during the moratorium and should request such a waiver where appropriate.

In the present circumstances, many landlords have concluded that it would not be in their own interests to take action against tenants which might increase the chance of a landlord not getting paid at all. If an agreement is reached about a rent concession, it is essential to record it in writing. Indeed, many leases will require variations to be in writing. A deed of variation is unlikely to be necessary, but many leases will require any form of divergence from existing terms to be agreed in writing and, ideally, in a single letter or other document signed by both parties, or by an exchange of communications confirming the terms.

If rent cannot be paid, what options does the business have?

In essence, if the company cannot pay its debts as and when they are due, then it is insolvent. This means directors must look at and assess the options available to them:

  • Seek a time to pay arrangement on other debts such as HMRC – renegotiate such debts
  • Propose a company voluntary arrangement to write off some of the debts and allow an extended period of up to 5 years to pay off the debt
  • Raise additional finance (be careful that this does not delay the inevitable and increase you debt)
  • Go into administration which allows an 8 week moratorium against any further actions against the company allowing breathing space for the company to be rescued via a sale or additional finance.
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