Reviewed: 7th May 2019
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.
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.
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.
Further Reading on Cash Flow
Free Guide for Limited Company Directors
Business Rescue Advice for Directors
- How to manage company cash flow problems
- Advice on dealing with HMRC
- Understanding rescue and closure options
- And much more...
Business Rescue Guide for Accountants
Dealing with your Insolvent Clients
- Helping you advise insolvent clients
- Spotting signs of client distress
- Exploring business rescue options
- And much more...
