Troublesome tenants – can’t pay or won’t pay?

28 September 2011

Whilst economic conditions continue to remain tough and tenants are struggling, the late payment or non payment of rent has become a common feature of the relationship between landlords and tenants. Worse still, is the situation where the tenant leaves owing money and the premises remain empty with the landlord under an obligation to pay rates.

Rent is normally paid quarterly but more tenants are now asking for a “rent holiday” or for the option of being allowed to pay the rent on a monthly basis. Landlords therefore need to weigh up the interruption to their income stream against the likelihood of the tenant going under and the lease coming to an end. With anything other than a system of the normal quarterly payment of rent, there may also be additional administrative costs for the landlord which it would like to recover from the tenant. There are, however, opportunities for landlords to be creative in the deals they can strike with their tenants.

For those tenants fortunate enough to have a break clause in their lease, they could seize the opportunity either to exercise this or to use it as a bargaining tool with their landlord who may not wish to be faced with empty premises and may be willing to reach a more flexible agreement with the tenant. If the break clause is to be exercised, it will be critical to ensure that all necessary pre-conditions have been complied with in order for the break to be effective and there may well be a cost element in this for the tenant if, for instance, the premises need to be put into a good state of repair.

In the current economic climate, landlords should try to monitor their tenants' position with a view to taking speedy action (to recover rent or possession) if it seems that the tenant is about to become insolvent. If the tenant is in financial difficulties, landlords may need to be more imaginative in how they might manage the situation taking into account other factors such as how easy the premises might be to re-let if the tenant were to leave.

For prospective tenants who have the funds to take on new premises, there are more opportunities to negotiate longer rent-free periods and lower rents from landlords who are keen to be rid of empty premises as they are well aware that they may now be in a weaker position in a more challenging market where supply outstrips demand.

In these uncertain times, landlords and tenants need constantly to keep their position under review and to be aware of what options they have and how best to maximise them.

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