Top tips for landlords to protect their investment in a downturn

Many tenants are asking to pay rent monthly rather than quarterly to help their cashflow. This may be sound business practice on the part of your tenant rather than an indication of trouble ahead. Plan your reaction to these and other tenant requests, such as:

• a reduced or varied rent, or rent holiday, in return for an earlier rent review;
• a reduced or varied rent, or rent holiday, in return for reduced rights under a break clause;
• extending the use to which a property can be put, to allow a more profitable activity;
• allowing assignment and subletting;
• extending the term of the lease in return for a lower rent or a rent holiday.

Danger signs

Be alert to other changes in your tenant’s behaviour, such as late payment of rent without good reason, or restructuring of their business (which could indicate a potential insolvency). Remedies such as serving a statutory demand for rent, so you can send the bailiffs in, are only effective if your tenant is still solvent.

Hard line

Letting arrears build up, relying on a tenant’s promises that all will be well, can be a costly mistake. Once you have made concessions to one tenant, others may consider you a soft touch and you could be last in line when they are deciding who to pay first.

Note that special rules apply if the arrears of rent arise from COVID-19 related closures of a business tenant, so always take advice in that respect.

Other avenues

Former tenants may be liable for arrears of rent if the current tenant cannot pay – but you have to serve the appropriate notices or you lose your rights. Even better, there may be guarantors who become liable to pay you if your tenant defaults. Take legal advice on your rights, and who to go against first. Serving a notice on a former tenant may mean you get paid, but it also gives them rights to a lease of the property against you.

If the tenant has given you a deposit, consider the terms of the deposit agreement to see if you can offset that against rent due.

If there is a sub-tenant, you may be able to serve notice on the sub-tenant requiring them to pay their rent direct to you, rather than to your immediate tenant – their landlord.

Forfeiture

Forfeiting the lease of an insolvent tenant, or accepting a surrender of the lease from them, can seem attractive, but take legal advice before taking this step. You do not have to mitigate your loss by forfeiting or accepting a surrender, and it may be better to have an insolvent tenant than no tenant at all if the alternative is an empty property. Although you may be entitled to empty property rates relief, this will only run for a limited period, starting as soon as the property is empty.

If you do have another tenant lined up, ensure you have not inadvertently waived your right to forfeiture, in which case your tenant could claim damages from you if you forfeit. In any event, beware accepting rent on a quarter day, even if your tenant pays monthly, because it can mean you lose the right to forfeit until the next quarter day.

The property may be worth more to you if you can change its use. Consider applying for planning approval for properties that may become empty.

Generally, tenants are more likely to challenge service charges and repair and maintenance obligations in a downturn. Ensure you can justify charges as reasonable. They will also be more aware of their rights under break clauses, and their rights to assign or sub-let.

Extensions

Where a lease is coming to an end, tenants are likely to negotiate – for a shorter term, lower rent, earlier break clauses or extended rights to sub-let all or part of the property. Expect more trouble over maintenance and repair payments. Ensure you are prepared.

Operative date

• Now

Recommendation

• Commercial landlords should review their systems and procedures to ensure they are equipped to monitor and spot signs a tenant could become a problem, and what to do about it if they do.