We are now fast approaching the June Quarter Day.
Remit Consulting recently reported, following a survey of its property management clients, that UK landlords collected just 57% of rent due for the March quarter by the end of that month. The figure was 90% in 2019. The June quarter may produce a similar result.
Faced with these difficulties, it is essential that commercial landlords do not miss the opportunity to pursue former tenants or their guarantors. If you have a tenant who is not an original tenant under a lease this is something you should be considering now.
Not all tenants (or their guarantors) who have assigned a lease will still be liable for rent, and other obligations under the lease. It will depend whether the lease is an 'old lease' or 'new lease' that is granted on or after 1 January 1996, and whether an Authorised Guarantee agreement was entered into if it was a new lease. The first step is to investigate who, as well as your current tenant and their guarantor (if any), may still be liable.
Do not delay. In order to recover the unpaid sum for a former tenant (or former guarantor) who has a liability, a landlord must first serve a notice on them, known as a Section 17 Notice, within 6 months of the debt falling due. This is a short deadline when many landlords have been taking a 'wait and see' approach before taking any action to recover rent.
All monies due under the lease are covered by this procedure. There are specific provisions when it is not yet possible to ascertain the exact amount due, for example in relation to service charges.
If a landlord fails to serve the Section 17 Notice on the former tenant (or former guarantor) within the 6-month period, the former tenant (or former guarantor) is no longer liable for the debt.
Serving the notice does not commit a landlord to taking further action.
However, if a party receives a Section 17 notice and then makes payment in full, it can call for an 'overriding lease' - in effect becoming the landlord's direct tenant.
Therefore, landlords should only consider serving a Section 17 notice on a party whom the landlord is happy to have as a potential tenant. It would be advisable for the landlord to proactively consider the covenant strength of all parties before serving a Section 17 Notice. With the option of forfeiture currently curtailed, this is more of an issue for landlords who will find it more difficult to remove a defaulting tenant.
If it is the March Quarter's rent that is outstanding, any Section 17 notice is likely to need to be served on the previous tenant or guarantor by mid-September. Landlords could serve a Section 17 notice before the June Quarter to put pressure on tenants and their guarantors, or serve notice after the 24 June Quarter day and include both Quarters' rent in the same notice.
The important thing is to carry out your investigations as soon as possible so that no deadline is missed.