What to do if a commercial tenant doesn’t pay rent

There aren’t many more alarming things for landlords than a commercial tenant not paying rent. It can leave the landlord with a financial headache, and they will likely be confused about what to do if a commercial tenant doesn’t pay rent. There may also be other financial problems on top of this, such as the commercial tenant failing to pay their utility bills, which makes the problem more significant.

Unfortunately, it’s a common problem with the recent cost of living crisis putting businesses, such as retail or hospitality, under regular stress and strain. This guide aims to help landlords of commercial properties navigate the situation and explain what to do if a commercial tenant doesn’t pay rent.

We’ll also examine what to do if a tenant doesn’t pay their utilities, when to involve legal professionals, and how to protect future income through lease clauses and tenant vetting.

Understanding why the commercial tenant isn’t paying rent

Knowing what to do if a commercial tenant doesn’t pay rent is crucial for protecting your investment and resolving the situation efficiently. Landlords might feel financial pain as it disrupts cash flow and potentially leaves landlords short of essential outgoings such as mortgage payments. But they should avoid an immediate full-throttle approach. The first thing to do is build context around the missed payments.

For example, the commercial tenant could have an exemplary history of on-time rent payments, and this could be a one-off where they’ve run into short-term cash flow problems. Conversely, the situation could be more serious, such as a situation that has lasted several months or a commercial tenant breaking other terms of the lease agreement.

With context in mind, it might help you to decide which route to go down if a commercial tenant doesn’t pay rent. You may wish to implement a short-term rent holiday, a temporary reduction in rent, or discuss a restructuring of payments before going down a more formal and significant route.

What to do if a commercial tenant doesn’t pay rent

The next step is to review the lease agreement in detail. The lease provides the landlord with legal support as it outlines the responsibilities of both landlord and tenant. In this situation, landlords should check the agreement for:

• Rent payment terms: Just double-check due dates, amounts and any information on grace periods.
• Utility payments: Double-check that the tenant is responsible for the utilities in question, and check the information about this.
• Late payment penalties: The lease agreement might include provisions for overdue rent.

Initiate communication

Depending on the context, it could be worth writing a polite letter or email to the tenant about their overdue rent payment. Landlords should include specific details, such as the amount owed and the due date.

You might also want to arrange a meeting with the tenant to discuss the issue together. This will allow the landlord to better understand the tenant’s position.

The landlord should be professional but empathetic during the meeting or in the letter. It could also be a financially stressful time for the tenant, so deal with the situation sensitively. This will help build up a positive relationship during a testing time. 

When addressing what to do if a landlord doesn’t pay rent, landlords must record the conversations and letters as they might need them during future legal proceedings.

Offering a repayment plan

The tenant might acknowledge their inability to pay the full amount straight away. If the commercial tenant is in a good position, landlords might be able to offer a repayment plan. This can help with both missing rent payments and unpaid utility bills.

A repayment plan can work for both parties. It allows the tenant to clear their debts while the landlord receives what they are owed. The following steps can help you organise this.

1. Negotiate terms: Include a full calendar of repayments and highlight whether you want weekly or monthly instalments. This could be dependent on the tenant’s financial situation.
2. Put the agreement in writing: This is an important step and can help if the matter goes to court later. The document should include deadlines and fees. Both the landlord and the commercial tenant should sign it. 
3. Monitor the payments: Make sure the payments are arriving on time. Another missed payment will likely result in the need to escalate the problem further.

Formal options

If the communication and repayment plan methods fail, then landlords should pursue formal options to resolve the unpaid rent problem. In the United Kingdom, landlords can go down several formal options, including Commercial Rent Arrears Recovery (CRAR) and forfeiture.

Commercial Rent Arrears Recovery 

The Commercial Rent Arrears Recovery (CRAR) allows commercial landlords in the United Kingdom to recover unpaid rent by authorising a certified enforcement agent to take action. This agent will seize and sell a tenant’s goods without going to court.

To call on the CRAR, the rent must be overdue by at least seven days. A written lease agreement must be in place, and the landlord must serve a formal enforcement notice to give a seven-day warning. After this, the agents can access the property through an unlocked or open door. 

When considering what to do if a commercial tenant doesn’t pay rent, landlords must be careful, as CRAR cannot be used if any part of the property serves residential purposes.

Forfeiture

Forfeiture is the process of a landlord taking back possession of their property even if the tenant hasn’t agreed to it. This can only be done if the tenant has breached the lease, which includes missing rent payments. The lease must include a forfeiture clause.

Forfeiture is a contractual right included in most leases and is protected under Section 24(2) of the Landlord and Tenant Act 1954. The landlord can usually act immediately for rent arrears and serve a Section 146 notice. This must include the breach (rent arrears) and notice to pay rent within a reasonable amount of time.

You can repossess the property through peaceable re-entry (changing locks when the premises are unoccupied) or by obtaining a court order. Peaceable re-entry is risky and should only be done with legal advice.

It’s worth bearing in mind that forfeiture ends the lease, so consider the financial consequences of losing the tenant and finding a replacement compared to the ongoing non-payment. 

If CRAR or forfeiture isn’t suitable, you may pursue a court claim for the unpaid rent or utilities. This involves filing a claim through the County Court or High Court, depending on the amount owed. Be prepared for legal costs and a potentially lengthy process.

Legal professionals

When informal approaches fail, or if the situation is complex, it’s wise to consult a solicitor or property law expert. Knowing what to do if a commercial tenant doesn’t pay rent often requires professional guidance to navigate legal options like CRAR, forfeiture, or court claims. 

A solicitor can also advise on what to do if a tenant doesn’t pay utilities, particularly if utility non-payment affects other tenants or breaches lease terms.

Document everything

Commercial landlords should already be in the habit of documenting and recording everything, but it’s even more critical when dealing with a case such as missed rent payments. Maintain copies of invoices, payment receipts and bank statements.

Save all emails, letters and notes from phone calls or meetings with the commercial tenant who has not paid rent. Any notices or conversations with other parties involved should also be recorded and kept. It helps maintain transparency, and you could end up relying on those court documents.

How to minimise the risk of a commercial tenant not paying rent

If you’ve been through the process once before, you’ll probably want to try and avoid it in the future. Whilst it’s impossible to reduce the chances of a tenant not paying rent to zero, you can take steps to mitigate the risks. These steps include;

• Strengthen lease clauses: Work with a legal expert to draft robust lease agreements that include clear payment schedules for rent and utility bills and clearly highlight any penalties. Include provisions for CRAR and forfeiture.
• Improve tenant vetting: Conduct thorough credit checks, review business financials, and request references from previous landlords before signing a lease.
• Require rent deposits or guarantors: A deposit or personal guarantor can provide a financial safety net if a tenant fails to pay rent or utilities.

Landlords should take the actions above as quickly as possible. A delay in understanding what to do if a commercial tenant doesn’t pay rent can worsen the situation, as unpaid amounts accumulate. 

Although you cannot insure for a commercial tenant not paying rent here at CIA, we have the expertise to find the best commercial landlord insurance deals that are suitable for your needs as a landlord. Contact us today at 01788 818733 today, and don’t forget to visit our resource centre for more information on how to be a successful landlord.