Landlords take steps to protect their investments in a downturn

Tenant danger signs to look out for, and what to do if you spot one

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Landlords who know their legal position vis-à-vis their tenants and former tenants are better equipped to minimise their risks and act quickly when they need to in times of high inflation and other pressures.

Many tenants are asking to pay rent monthly rather than quarterly to help their cash flow. This can be sound business practice on their part rather than an indicator of trouble ahead. But protect your position by planning your reaction to these and other tenant requests, including:

  • a reduced or varied rent, or rent holiday, in return for an earlier rent review
  • a reduced or varied rent, or rent holiday, in return for reduced rights under a break clause
  • extending the use to which a property can be put, to allow a more profitable activity
  • allowing assignment and subletting
  • extending the term of the lease in return for a lower rent or a rent holiday.

Other changes in your tenant's behaviour which are more likely to indicate potential problems include late payment of rent without good reason or restructuring of their business (which could indicate a potential insolvency).

Take legal advice immediately you think a tenant is, or may become, insolvent as your rights will depend on the type of insolvency proceedings. Experience shows that early contact with an insolvency practitioner (the person appointed to sort matters out in an insolvency) generally leads to a better outcome. You may need to negotiate with the insolvency practitioner if you want to get your premises back. You will need advice to safeguard your position.

Even before an insolvency, allowing arrears to build up once you have spotted a red flag, relying on a tenant's promises that all will be well, can be a costly mistake. Once you have made concessions to one tenant, others may consider you a soft touch and you could be last in line when they are deciding who to pay first.

If your tenant has the money to pay, you could go for a court money judgment against them for rent arrears. Commercial Rent Arrears Recovery is a way for a landlord to take and sell a tenant's goods to recover rent arrears – useful if the tenant has valuable assets that they own outright rather than on hire purchase.

Remedies such as serving a statutory demand for rent, so you can send the bailiffs in, are only effective if your tenant is still solvent. You also need to make sure you are complying with any applicable pre-action protocols.

Other avenues

Former tenants may be liable for arrears of rent if the current tenant cannot pay, but you have to serve the appropriate notices or you lose your rights. Even better, there may be guarantors who become liable to pay you if your tenant defaults. Take legal advice on your rights – the wording of guarantees can vary - and who to go against first. Serving a notice on a former tenant may mean you get paid, but it also gives the former tenant rights to an 'overriding' lease of the property.

If the tenant has given you a deposit, consider the terms of the deposit agreement to see if you can offset that against rent due.

If there is a sub-tenant, you may be able to serve notice on the sub-tenant requiring them to pay their rent direct to you.

Forfeiting the lease of an insolvent tenant, or accepting a surrender of the lease from them, can seem attractive, but take legal advice before taking this step. You do not have to mitigate your loss by forfeiting or accepting a surrender, and it may be better to have an insolvent tenant than no tenant at all if the alternative is an empty property, where you risk becoming liable for rates and other payments.

If you do have another tenant lined up, ensure you have not inadvertently waived your right to forfeit your existing tenant's lease, or they could claim damages from you. In any event, beware accepting rent on a quarter day, even if your tenant pays monthly, because it can mean you lose the right to forfeit until the next quarter day.

The property may be worth more to you if you can change its use. Consider applying for planning approval for properties that may become empty.

Generally, tenants are more likely to challenge service charges, and repair and maintenance obligations, in a downturn. Ensure you can justify charges as reasonable. Tenants will also be more aware of their rights under break clauses, and their rights to assign or sub-let.

Where a lease is coming to an end, tenants are likely to negotiate – for a shorter term, lower rent, earlier break clauses or extended rights to sub-let all or part of the property. Expect more trouble over maintenance and repair payments and ensure you are prepared.

Which option is best varies according to your circumstances, so always consider taking specialist advice.

Landlords should set up systems to monitor tenants' situations and behaviour, and ensure they are equipped to react quickly and appropriately to danger signs.

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Further resources

Read ACCA's Technical factsheet: property tax