Landlords: Keeping cash flowing in 2021
James Fownes, partner in the property disputes team, and Jayne Gardner (pictured), partner in the debt recovery team, at law firm, Shakespeare Martineau
The recent extension to the eviction ban on commercial tenants and continued restrictions on CRAR (Commercial Rent Arrears Recovery) has been universally welcomed by tenants, providing extra support for businesses unable to pay their rent. This extension is now helping businesses recover and plan for the coming year. However, for many landlords faced with tenants not paying their rent, money may be getting extremely tight.
Although tenants are struggling, landlords must look at their financial situation and begin putting plans in place to help the rent keep flowing in, while providing support to tenants, where possible.
To plan for a successful 2021, with mutually-beneficial tenant-landlord relationships, there are many things to consider beyond the ban on CRAR until March 2021. Although CRAR is one of the main ways for landlords to recover rent owed without needing court procedures, landlords of commercial properties need to think outside the box. To ease financial burdens on tenants, many of the measures put in place have left property owners in a difficult situation. As this continues, it can be challenging for many landlords to continue to be flexible.
Before considering alternatives to CRAR, landlords may consider analysing their financial situation, particularly at their cash flow to see what other steps may alleviate the problem. Perhaps some processes can be streamlined to maximise efficiency and reduce expenditure, or maybe certain services can be outsourced or brought back in-house, as appropriate? In that way, landlords can seek to reduce their financial strain, which may mean they can afford to be flexible with their tenants for longer.
Negotiating for the better
One alternative to CRAR available to landlords is to negotiate with their tenants. This low-cost option, if successful, could lead to better outcomes for both parties. Through effective communication and a willingness to be flexible, both landlords and tenants can come to new arrangements and preserve their future relationship as best as possible. Renegotiating specific lease provisions will at the very least help landlords know what they can expect in 2021, mainly if tenants are merely not paying (or even communicating with them) now. During negotiations for the coming year, points to raise could include a potential change in the rent payable or a rent holiday / deferral. Alternative payment methods should the current ones not be working, for example, through turnover rents. Any such concession could be in exchange for a longer lease being put in place, other security being provided, or even seemingly unconnected matters such as agreeing on a landlord break clause for redevelopment.
The critical point is that landlords have the opportunities to be creative. There may be concessions that would not be available in Court proceedings which may be mutually beneficial depending on the landlord’s priorities. There are plenty of alternatives, and coming up with bespoke agreements could be advantageous for all. However, these need to be clearly laid out in writing. Such negotiation should consider both parties’ current financial situation and their plans for the coming year (or beyond).
The formal path – court proceedings
A further alternative to CRAR is for landlords to issue court proceedings to recover rent owing (i.e. bring a debt claim). The process is different from CRAR. Given that the proceedings may be more wide-ranging, it can result in a more considerable amount of overall tenant debt being recovered. For example, service charges can be included in court proceedings, whereas CRAR proceedings cover pure rent. Should a court case against the tenant be successfully pursued to judgment, enforcement action can then be used to obtain payment. For example, funds can be retrieved through the removal of goods and property from the premises.
However, in contrast to CRAR, court proceedings are likely to involve more fees, although the court fee for issuing the claim is added to the amount to recover. This process is also expected to be lengthier as a Letter Before Action (LBA), which formally informs the tenants that court proceedings will be brought unless payment is made. The letter must be issued first and the tenant given a reasonable time to respond. Tenants can also file for a formal Defence to a landlord’s claim, which is not available in CRAR.
Issuing proceeding should not be taken lightly and may not be a quick fix. That being said, proceedings may effectively bring tenants to the negotiating table, making a resolution that much faster. Proceedings can be necessary when tenants are refusing to engage with their landlords, leaving the landlord without many alternatives.
Once a judgment has been secured, enforcement action to recover the money will available, this can involve instructing High Court Enforcement officers to enforce a Writ of Control, like CRAR. It is important to remember that if the tenant or guarantor is an individual, and over £5,000.00 are owed, there is the option of serving a Statutory Demand as a threat of bankruptcy proceedings. This can be based on a Judgment but can follow an LBA, provided the individual concerned has not raised any disputes over the amount being claimed.
Starting from scratch
Another option for landlords is to forfeit the lease. It’s important to note that this cannot be done until March 2021, like CRAR. This can be seen as a risky move, especially if there is any dispute over whether the sums have fallen due and may be resisted by the tenant. However, it can be useful if the landlord has other businesses lining up to take the space. Once the eviction ban is lifted, landlords must go through the regular legal procedures to go down this route.
Whether landlords go for the common ground option of negotiation, go through court proceeding to recover rent or take the ultimate gamble and forfeit the tenant, they must look clearly and cleverly at their balance sheets and may be well advised to find a solution which works for both parties, if possible.