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Rent arrears as a landlord. What are my options and what risks do I face?

It is often the case that a corporate tenant will be in rent arrears as a result of financial difficulty.

As a landlord, you should consider the following options to overcome this:

Options if your corporate tenant is in rent arrears

  • ask your tenant to get a third party to pay its rent
  • consider what to do to if your tenant may become insolvent.

What are the risks?

The risk of accepting payment from a third party

If you accept rent from a third party, there is a risk that a relationship of landlord and tenant could be implied between you and the third party, granting to the agent the rights of a tenant. Therefore you should ensure the following:

That you stipulate in writing:

  • the rent will be paid by the third party as ‘an agent’ for the current tenant;
  • you do not intend this to create a landlord and tenant relationship between you and the third party;

And

  • That you obtain written confirmation from the current tenant and third party that this is the basis on which the rent is being paid; and
  • Rent demands should not be addressed to the third party.

Another issue that must be borne in mind is your right to forfeit the lease. By accepting payment from a third party, you will give up any right that you have to forfeit the lease at that point and this will therefore not be an option available to you.

The risk of dealing with a potentially insolvent tenant

At this early stage, it would be sensible for you to consider what immediate remedies are available to you, since once an ‘insolvency event’ (1) occurs, this may restrict your freedom to sue or forfeit the lease.

Remedies fully available to you as landlord prior to an insolvency event:

  • forfeiture: a right of re-entry for the tenant’s breach of covenants in the lease;
  • distress: a remedy that will allow you to seize, impound and sell the tenant’s goods;
  • court proceedings: a claim against the tenant to recover the rent due;
  • diversion of under tenant’s rent: If the corporate tenant re-lets the property, there is a right available to the superior landlord to demand rent payments direct from the under tenant;
  • drawdown on a rent deposit (provided there are no restrictions on doing this in a rent deposit deed you may have entered into);
  • request payments from a Guarantor: this is available if the lease makes provision for a guarantor to take over the role of the tenant who defaults in rental payments.

You are free to pursue all remedies for recovery of rent arrears until an insolvency event occurs. However, once an insolvency event occurs certain remedies will only be available with the consent of the insolvency practitioner dealing with the tenant’s insolvency, or with the permission of the court.

Consent will not be granted in many cases and to obtain the court’s permission can be lengthy, costly and stressful.

It would not be unreasonable to think long term at an early stage, prior to the onset of the tenant’s insolvency. For example, if you wish to re-let the property to a more financially reliable tenant, you may want to take advantage of the opportunity to recover possession before an insolvency event restricts your ability to do so.

Consider your options now; don’t wait until it is too late.

Footnote (1)

An ‘Insolvency Event’ is one of the following:
The business going into administration;
The business going into liquidation;
A company entering into a Company Voluntary Arrangement; or
The business going into receivership.

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