What do I do if my commercial tenant goes bust?

Question

'I let my property to a business, and I've heard whispers on the grapevine that things aren't looking too rosy for them... where do I stand if they go bust?'

Answer

Letting a commercial property can be a good way of securing a long-term tenant – after all, no business wants the upheaval of moving premises every ten minutes!

However, with 16,502 companies entering insolvency in 2016 it’s clear that it’s not always a guaranteed route to a safeguarded tenant, and you should be aware of your rights should the worst come to the worst.

Keep your eyes peeled

The first thing to do is make sure you are hyper aware of any discrepancies with rental payments. Whilst all businesses experience ebb and flow of cash, if your commercial tenant falls into rent arrears it could suggest that the business is experiencing difficulties. However, if this does happen, before you panic do try and speak with your tenant – there could be a simple explanation!

Whilst a simple solution, watching out for banners and signs shouting about ‘Closing Down Sales!’ and ‘Stock Clearances!’ can also be giveaways that something isn’t right. Whilst many shops use promotions like this as ways to entice shoppers through the door, if this seems unusual activity for your tenant, it might be worth popping in and double checking if everything is ok.

Worst case scenario

If you find yourself in the situation where your tenant has gone bust, you must find out what kind of procedure they are undergoing – administration, compulsory liquidation, voluntary liquidation, receivership or voluntary arrangement. Each has different implications for you as their landlord, so it’s vital that you know where you stand. Whoever is dealing with winding up the business, whether that is an administrator a liquidator, a receiver, or your tenants themselves, make sure you make contact as quickly as possible. However, do remember that this is likely to be an upsetting time, so do try and tread carefully – if the tenant is dealing with the situation themselves they are likely to have lots on their plate, and a supportive approach at this stage is likely to stand you in good stead later in the proceedings.

Rent payments

Whatever the circumstances, you are still due to be paid rent all the time the business is still using your premises. This is only different in the case of Administration, whereby you may be approached and asked to reduce or forgo rent payments in order to ensure that the business can continue trading, or in order to assist with the sale.

If your tenant has fallen into rent arrears, unfortunately in most cases these will not be paid. You may be able to come to a voluntary arrangement with the tenant, in which you can come to a deal where you receive a proportion of the rent owed to you. However, if the company has gone into receivership, banks and secured creditors will take priority and will be paid first, and as an unsecured creditor, unfortunately landlords head to the back of the queue and are left to be paid from what is left of the remaining assets.

Regaining possession

Whether you want to regain possession of the property may depend on if you are continuing to receive rental payments or not.

If you are not receiving payments, you should be able to seek possession of the property as the tenant has breached the tenant of the lease, allowing you to forfeit the lease and bring it to an end. Forfeiture is the procedure by which a landlord can terminate a lease and virtually all commercial leases will have a clause allowing the landlord to terminate the lease if the rent is unpaid for a specified number of days, usually somewhere between 14 -28. Unlike residential leases, commercial landlords do not need a court order to retake possession of leased property if a tenant has failed to make rent payments.

However, if you are still receiving rent payments, even if they are not the full amount, it is worth considering not regaining possession of your property. This is due to the fact that the business may be looking to be sold as a going concern, and the new owners may be looking to take on the existing lease – which would offer you a seamless transition, and if you are left with an empty commercial property you will also be responsible for the business rates that the building is liable for.

You don’t have to pay business rates on empty buildings for three months, with some properties receiving extended relief. These include:

  • industrial premises (eg warehouses) are exempt for a further 3 months
  • listed buildings - until they’re reoccupied
  • buildings with a rateable value under £2,900 - until they’re reoccupied
  • properties owned by charities - only if the property’s next use will be mostly for charitable purposes
  • community amateur sports clubs buildings - only if the next use will be mostly as a sports club
  • You do not have to pay business rates at all on agricultural land or buildings (including fish farms), buildings used for the training or welfare of disabled people, or buildings registered for public religious worship or church halls.

Mitigate the risk

Restaurants and bars have the highest failure rate, with two-thirds failing within the first five years. Before you accept a corporate tenant, make sure you mitigate the risk you are opening yourself up to – if you’re not sure about the viability of the business, or it will require huge changes to your premise in order to make the project work, ask yourself if it might not be worth waiting for an alternative tenant.

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