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What to do if you can't pay your commercial rent

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Updated: 23rd June 2020

Can't pay commercial lease

With so many financial demands on businesses these days - rising business tax and ever-increasing energy bills –paying a commercial lease can be difficult even though it’s a priority payment.

The problem if you don’t pay is that your landlord can take enforcement measures quickly in order to collect their debt. In some cases they don’t even have to go to court to take the legal action that severely damages your business.

Following the onset of the Covid-19 crisis, the government introduced the Coronavirus Act, a piece of emergency legislation to help companies during these extremely challenging times. As part of this legislation, landlords are unable to forfeit the leases of tenants who fall behind on their rent during this time. Following a three month extension, this ruling is now in place until the end of September 2020. While this provides companies with breathing space for the short-term, it is important to remember that this is a temporary measure which will come to an end . Once this happens, you will need to make arrangements with your landlord to clear the arrears which have accrued during this time. Taking advice now will put you in the best position possible when you are faced with resuming your rent payments.

So let’s look at what a commercial lease is, and how you should proceed if you can’t pay.

What is a commercial lease?

Commercial leases are legally binding agreements that lay out the terms and conditions under which your business can occupy its premises. They state your duties and obligations under the agreement, rental payments, and the services the owner/landlord must provide.

So what happens if your business is unable to pay the lease, and what can you do to help yourself in this situation?

When you can’t pay a commercial lease

Contacting your landlord should be your priority as soon as you know business cash flow won’t support your lease payment. Maybe you’re experiencing temporary financial difficulty due to events beyond your control, but if you quickly communicate this with your landlord they may be willing to offer more time to pay.

If your cash flow problems seem more long-term, however, the landlord still needs to be aware of the situation so they understand that you aren’t deliberately trying to avoid payment.

Considerations when negotiating with your landlord

  • Bear in mind that the landlord won’t particularly want to end your lease as it may be costly for them, or difficult to find another business to take it on. If this is the case, you stand a better chance of arriving at an agreement that suits both parties.
  • You may be able to sublet or assign the lease to another business if the terms allow for this. If the right to assign or sublet exists, it will be included in the lease agreement along with any other specific conditions.
  • You’ll probably need to pay off your arrears alongside the current rent payments.
  • A ‘break clause’ in the lease allows you to end the contract without penalty, although if you’ve built up arrears you’ll still need to pay these off.
  • The landlord may agree to end the lease early, but could also demand a lump sum by way of compensation.

What could your landlord do if you don’t pay?

Landlords have various options to recover debt if you fail to pay your commercial lease, including:

  • Obtaining a County Court Judgment (CCJ) against your business
  • Forfeiting your lease and repossessing the premises
  • Seizing business assets under Commercial Rent Arrears Recovery (CRAR) legislation
  • Taking action through the courts to wind up your company, or make you bankrupt if you’re a sole trader

CRAR legislation can only be used to recover rent payments and associated VAT and interest, rather than service charges and other ancillary payments, and only when the premises are used purely for business with no residential aspect.

Having provided seven clear days’ notice bailiffs would enter your premises to identify goods for seizure and potential sale at auction – ‘clear’ days do not include Sundays and Bank Holidays.

What can you do to prevent enforcement action?

Being unable to pay your commercial rent is a serious situation, so it’s important to take action as soon as possible. One option is to secure a source of alternative funding, such as invoice finance or asset-based finance.

 
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If you believe your business may be insolvent you should seek immediate assistance from a licensed insolvency practitioner, who will be able to advise on your best options. These could include formal renegotiation of your debts if the business owes money to more than one creditor, or possibly entering administration if you run a limited company.

Commercial leases are a complex area of business and it can be difficult to know if your landlord/the property owner is following the rules correctly. For professional guidance on this and other matters when you can’t pay your commercial lease, call our expert team at Real Business Rescue. We operate an extensive network of offices throughout the UK, and can offer you a free same-day consultation to quickly establish your position.

Jonathan Munnery

Partner

0800 644 6080
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