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What Can Charity Landlords Do If a Tenant of Commercial Premises Does Not Pay Rent?

on Friday, 10 July 2020.

In the uncertainty surrounding coronavirus (COVID-19), many commercial tenants have come to a stark realisation that they cannot afford to pay rent.

In this blog, we have set out the options available to charity landlords who find themselves with tenants in this position and the factors for charity landlords to consider when deciding what action to take.

What Are My Options As Landlord?

The first question for a charity landlord with a tenant genuinely unable to pay the rent is likely to be whether it is in the charity's interest to support the tenant during this time to allow them to remain in occupation. Such an arrangement may be in the form of a rent suspension to be repaid by the tenant at a later date or a temporary rent reduction or outright waiver.

Any rent concession agreements like this will need to be documented carefully by way of a side letter to the lease to avoid any disputes down the line about what was agreed.

If a rent concession is not possible or in the charity's best interests, there are a number of other options open to a charity landlord to mitigate the impact of the tenant's inability to pay the rent:  

  • Draw on some other security provided by the tenant (eg a rent deposit) to cover the rent arrears
  • Take action (if possible) against the current tenant’s guarantor, a former tenant, or even a former tenant’s guarantor for the non-payment of rent
  • Use the commercial rent arrears recovery (CRAR) procedure which will allow you to take control of your tenant's goods and sell them, in order to recover an equivalent value to the unpaid rent. However, current coronavirus regulations mean that you can only use this if you are owed 90 days of unpaid rent or more. The Government has now proposed that landlords should be owed at least 189 days of unpaid rent before they can use this procedure. This requirement will be effective from 30 June 2020 to 30 September 2020
  • Take steps towards having an individual tenant declared bankrupt or a corporate tenant wound up in insolvency proceedings. However, the temporary ban on serving statutory demands on corporates and restrictions on the use of winding-up petitions currently curtails your ability to do this
  • Bring the lease to an end. It may be possible to bring the lease to an end by serving notice on the tenant or alternatively, you could agree a surrender of the lease with the tenant. Landlords should note that, as a result of the Coronavirus Act 2020 and further secondary legislation, you will not be able to forfeit a lease of business premises and force the tenant out for not paying rent until 30 September 2020. However, the legislation does not prevent forfeiture on grounds other than non-payment of rent.

Which of these options are available to you will depend largely on the terms of the lease, the circumstances surrounding your relationship with your tenant and your commercial aims. 

Coronavirus charities blogs

What Happens to the Lease if My Tenant Does Not Pay Rent?

A tenant's failure to pay rent can have a number of consequences depending on the terms of the lease. For example, many leases will specify that the tenant will be liable to pay interest on the unpaid rent. That will need to be considered in the context of agreeing a rent suspension / deferral.

The non-payment of rent may also have indirect consequences on the tenant's rights. For instance, the tenant may not be able to properly exercise a break clause if it is in rent arrears.

Decision-Making by Charity Trustees

In deciding what course of action to take in relation to a tenant in arrears, the charity landlord's trustees are obliged to act in accordance with what they consider to be the best interests of the charity and to exercise reasonable care and skill in making their decision.

The Charity Commission will expect the decision to fall within the range of decisions that a reasonable trustee board might make. The tenor of their latest guidance for charities during the coronavirus pandemic is that they understand charities are having to make very difficult decisions, during these challenging and unprecedented times. However, good decision-making is essential. In line with the Commission's decision-making guidance, this includes ensuring the trustees have all of the information they need to make the decision (including professional advice if necessary) and that they consider all relevant factors (and disregard any irrelevant factors).

If trustees are considering a rent concession arrangement, as a first step, they are likely to want to satisfy themselves that the tenant is genuinely unable to pay the rent, having sought to access all other forms of business support available to them at this time. While many trustee boards may be motivated to support their longstanding tenants during this time, any support provided must be justifiable as being in the best interests of their own charity, as landlord.

Relevant factors for the trustees to consider are likely to include:

  • The cost to the charity of foregoing the rent or cash-flow implications of agreeing to a deferral
  • The risk to the charity of the tenant failing to meet the rent arrears (plus any interest) following an agreed rent deferral
  • The costs to the charity of taking action to recover the rent arrears (including staff time and professional fees)
  • The potential reputational risks of taking action against a tenant for unpaid rent in the current circumstances
  • The likelihood of re-letting the property if the current lease is terminated (and to a tenant of as good a covenant) and the financial implications of having the property empty if not (eg will you have to pay business rates?).

Ultimately, determining what is in the charity's best interests is likely to involve weighing up the commercial costs to the charity of forgoing or deferring any rent due against the costs and reputational risks of taking action and the risk of not being able to find a new tenant of an equivalent covenant strength.

Finally, it will be important to keep clear records of the factors the trustees took into account and their reasoning as evidence of the decision-making process they have been through.

The above reflects guidance as at 10 July 2020. As the situation develops, it is important that readers check the latest government advice for further updates.

For specialist legal advice or if you would like to know how to deal with a tenant that has failed to pay rent, please contact Katie Hickman in our Real Estate team on 07557 528 936, or complete the form below.

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