Are you a commercial Landlord who is worried about how to recover COVID-19 rent arrears successfully from your tenant? If so, you are not alone.
Whilst the country is once again “open for business,” landlords still do not have the full arsenal of debt recovery tools available to pursue unpaid arrears rent that accumulated during the COVID-19 pandemic.
This can cause problems for the unwary. Here are some mistakes that are currently being made by landlords to recover rent arrears…. but what you can do to get things right.
MISTAKE NUMBER 1 – FAILING OR IGNORING OPPORTUNITIES TO TALK THINGS THROUGH WITH YOUR TENANT.
Many landlords have become exasperated having tried to find ways to arrange a repayment plan with their tenants. Now that many businesses have resumed trading, it may be tempting to turn into a “KEYBOARD WARRIOR” or engage in hostile dialogue to strong arm your tenant.
The problem is, if you do, this is unlikely to get your rent arrears paid any faster and your tenant will be less willing to co-operate and provide vital up to date financial information that you need to work out a sustainable repayment strategy.
There’s a saying that goes “It’s good to talk.” Take for example one of our clients. Their tenant complained bitterly that our client showed a lack of care and disregard for the Code of Practice that governed the commercial relationship between landlords and tenants during the pandemic. Consequently, the tenant refused to respond to our client’s demands for payment of rent – and neither party were talking.
This is a mistake because if you are able to get your tenant on side and enter into constructive dialogue, you are more likely to achieve an effective long-term solution to ease your cashflow. Fortunately, we were able to hold “clear the air discussions” on behalf of our client and get the tenant to commit to an affordable repayment plan.
What if all of your efforts to discuss matters sensibly are proving to be futile and you are getting nowhere fast, then what?
MISTAKE NUMBER 2 – INSUFFICIENT KNOWLEDGE OR UNDERSTANDING OF THE COMMERCIAL RENT (CORONAVIRUS ACT) 2022
This Act came into force on 25th March 2022 and landlords need to be fully aware of this (and the revised code of practice) before they commence debt recovery proceedings.
Where a commercial landlord and tenant are unable to reach a resolution concerning an unpaid rent dispute there is a statutory rent arbitration procedure that is compulsory for “protected rent debt” arrears.
The Act defines that what is classed as a “protected rent debt” (which includes rent, service charges, insurance rent, interest, and VAT). In broad terms, if your tenant has a Business Tenancy within the meaning of Part 2 of the Landlord and Tenant Act 1954 – which was forced to close due to a government closure requirement between 21st March 2020 and 18th July 2022, and was adversely affected by Coronavirus, the tenant will be able to apply to an Arbitrator for “payment relief”.
For example, industries such as restaurants, hotels, gyms, and large event venues who were subjected to a closure requirement or a specific restriction can take advantage of the arbitration procedure.
The issue here is that if you are not aware of the “ins and outs” of this legislation you may not be aware (as we have seen from the instructions that we have received) that the Act currently prevents a landlord from using debt recovery weapons action such as forfeiture or re-entry, bringing a new debt claim, using the commercial rent recovery procedure, and presenting a bankruptcy or winding up petition in respect of protected rent debt – (this not an exhaustive list).
The Act is full of potential rabbit holes to fall down, and if you do not know which type of tenancies are protected or fail to differentiate between protected debt rent and unprotected debt rent arrears and attempt to instigate debt recovery action for rent arrears currently prohibited by the Act, you are likely to be throwing good money away. Can you afford to take that risk?
If you do, it is likely that the court will prevent the action that you propose to take. Moreover, there is a strong possibility that you could be on the receiving end of an adverse costs order being made against you.
This will occur if a court considers that you should have known, or ought to have known that debt recovery action should not have been commenced in circumstances where protected rent debt arrears is currently ring fenced.
TO HELP YOU AVOID COSTLY MISTAKES THAT CAN SERIOUSLY DAMAGE YOUR ABILITY TO RECOVER RENT ARREARS SUCESSFULLY CONTACT OUR DISPUTE RESOLUTION TEAM NOW ON 0116 2999 199 OR EMAIL US AT firstname.lastname@example.org
MISTAKE NUMBER 3 – AUTOMATICALLY ASSUMING THAT PROTECTED RENT DEBT ARREARS WILL BE RECOVERABLE FROM AN EXISTING PERSONAL GUARANTOR.
Before the COVID-19 Pandemic, commercial debt recovery proceedings against a guarantor was a heavyweight tool that landlords could use when their tenants were not paying rent.
We are receiving instructions whereby landlords have assumed that it is a “done deal” to recover unpaid protected rent debt arrears from a guarantor. Not so.
If you pursue debt recovery proceedings (which is temporarily prohibited) against a guarantor in respect of a protected rent debt hoping to get an easier ride – think again. You may end up very disappointed and out of pocket.
Although the Act is not specific on the point, it seems to suggest that a personal guarantor (through the tenant) can also get protection under the Act and force you to go through the compulsory arbitration procedure.
The solution is to start early discussions with a personal guarantor. The reason why is to remind them that they are also on the hook for unpaid rent pending the outcome of the arbitration or court proceedings.
We have seen cases where personal guarantors were oblivious of the gravity of their predicament. They assumed that the tenant was “working something out” with their landlord (which often is not the case). You are likely to get more engagement from a personal guarantor if you make them aware of the situation and the potential consequences for them if rent is not paid.
MISTAKE NUMBER 4 – FAILING TO CONDUCT ANY COST/RISK ASSESSMENT UNDER THE STATUTORY PROCEDURE.
A commercial landlord may be forgiven for taking a bullish and hard-line approach to debt recovery proceedings where their tenant has failed to offer any realistic proposals to repay unpaid rent that accumulated as a result of the COVID-19 pandemic.
The problem here for landlords is this.
Under the statutory arbitration scheme (assuming that the adjudicator has jurisdiction after a referral has been made) – the adjudicator has the power to grant the following payment reliefs concerning ring fenced rent arrears, namely:
What if your tenant puts forward a compelling “viability” case to the Adjudicator (that you completely ignore) and then some of the rent is written off? Unfortunately, this is likely to damage your ability to recover the arrears quickly and have an adverse impact on your cash flow.
On top of that, under the statutory procedure, each party is responsible for paying their own legal costs. So, if you have adopted a hard-line stance and have not considered your tenant’s proposal properly you could find yourself financially worse off.
The solution is to conduct a cost benefit analysis. With your legal team you will be able assess the extent to which any rent arrears might be written off and the costs that you are likely to incur in rejecting a tenant’s proposal.
This will help you evaluate whether there is any commercial mileage in negotiating a reduction in the rental arrears you are seeking to recover and agreeing repayment terms in affordable chunks that benefits you and your tenant. By way of analogy, if you are hungry and require sustenance half a loaf is better than none at all!
It’s very much a judgement call but with careful evaluation and assessment could save you thousands of pounds in the long run – not to mention the grief and heartache in attempting to recover unpaid rent which may prove to be a wasted exercise. This leads to the next mistake.
MISTAKE NUMBER 5 – INADEQUATE DUE DILIGENCE REGARDING THE PROSPECT OF SUCCESSFULLY RECOVERING RENTAL ARREARS.
The COVID-19 Pandemic has undoubtedly had an adverse impact on many businesses. The issue here for most commercial landlords is that when seeking to recover unpaid rent – whether through the statutory arbitration route for protected rent debt or through court/insolvency proceedings for unprotected rent debt (that falls out of the statutory regime) is whether the tenant debtor is good for the money?
If substantial rent arrears have accumulated during the COVID-19 Pandemic, have you fully investigated whether the tenant has any assets to enforce a monetary judgement or in circumstances where a tenant defaults in respect of an award under the statutory scheme?
Commercially, you will need to undertake a risk verses reward analysis to consider whether to cut your losses if you do not have reasonable prospects of successfully recovering your rent. In that situation, you may wish to explore alternative options to minimise your losses which we can discuss with you.
Thinking of taking action against your tenant and want to make sure that you get it right from the start?
CONTACT AUSTIN OGBATA OR A DEDICATED MEMBER OF OUR DISPUTE RESOLUTION TEAM NOW ON 0116 2999 199 TO DISCUSS A STRATEGIC RENT ARREARS RECOVERY PLAN – SO WE CAN HELP YOU AVOID COSTLY MISTAKES THAT CAN SERIOUSLY DAMAGE YOUR ABILITY TO RECOVER RENT ARREARS SUCCESSFULLY.