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Debt recovery for commercial landlords – What you need to consider

Debt recovery is something that no landlord wants to perform. However, it is crucial that, as a commercial landlord, you understand the process should you ever need to use it.

If you don’t take the appropriate legal action, at the right time, you can incur financial loss and miss opportunities to let your property to more reliable tenants.

Write a clear lease agreement

The starting point for any successful debt recovery procedure begins before a tenancy even commences. A robust lease agreement that clearly states the obligations of both parties is invaluable when enforcing any future action against a tenant.

Having a well-drafted contract written up by you and your solicitor can save a lot of hassle in debt recovery disputes.

You should include clauses specifying late fee penalties and interest rates on debt. These ensure that you can receive compensation on top of the rent you are owed.

Engaging one of our solicitors can provide you with this fundamental basis of effective debt recovery protection.

Great communication

If a tenant falls behind on rent, immediate and clear communication is vital. Often, a formal reminder, known as a ‘Rent Arrears Letter,’ is enough to prompt payment.

Just make sure that any communication is consistent with the terms laid out in the lease agreement because this will help to prevent any future legal disputes being challenged by the tenant.

Commercial Rent Arrears Recovery (CRAR)

In England and Wales, the CRAR procedure allows landlords to seize a tenant’s goods to sell and recover owed rent without going to court.

This is only applicable if:

The lease is written.
The premises are purely commercial.
The debt exceeds seven days of unpaid rent.

If these conditions are met, a certified enforcement agent can execute the process, although proper notice must be given to the tenant.

Forfeiture

Forfeiture allows landlords to terminate the lease if tenants breach its conditions, including non-payment of rent.

It’s essential to note that the right to forfeit is generally subject to specific terms within the lease agreement and must be enacted cautiously to avoid unlawful eviction claims.

So, again, having a robust lease agreement is vital in this stage of the process too.

Mediation and Arbitration

Before a debt recovery dispute reaches court, you should consider taking the mediation or arbitration route.

Mediation involves introducing a third-party who will mediate between you and the tenant. This process involves coming to a mutual agreement on how much the tenant pays you back.

Neither party can be forced to settle during a mediation, and you might not get the exact sum that you are owed, but they generally have a high success rate in debt recovery disputes.

In arbitration, both you and the tenant will agree to abide by the ruling of an arbitrator, who will decide the case, rather than a judge. In this scenario, you may not get the result you want and there are very few ways to challenge the decision.

These are more cost-effective and time-effective ways to deal with debt recovery than going to court but are nonetheless taxing processes.

Court proceedings

If the above routes prove ineffective, landlords can begin court proceedings.

A ‘Letter Before Action’ should be sent to the tenant outlining the debt and your intention to litigate if it’s not settled.

If the tenant doesn’t comply, a claim can be initiated, followed by a judgment and enforcement through bailiffs if necessary.

If the tenant has a guarantor, landlords also have the option of pursuing the guarantor for the owed rent. This is often a less arduous process than legal proceedings against a tenant.

Understanding the legal avenues available for debt recovery can help commercial landlords mitigate losses and maintain profitable operations. For tailored advice on debt recovery, consult with one of our dispute resolution team, or visit our website.

Download the below guides to help residential landlords with rent arrears and possession recovery:

Quick guide for residential landlords

Guide to possession proceedings