For both landlords and tenants, it can be tough in the current economic climate, and if a tenant is finding it difficult to pay the rent, it can be disastrous for both. Luckily, if both parties are prepared to negotiate, you can create a win-win situation, in which the tenant is able to continue renting the property and the landlord keeps his tenant along with other advantages.
There are many reasons for landlord/tenant disputes, but consider the following scenario:
It’s been a bad few months for George, who rents a shop along the high street. This month, he finds he can’t pay his rent, and is worried his business is going to fail. As he can’t pay his rent, which the landlord relies on to pay his mortgage, it creates a disastrous situation all round. The tenant is worried and the landlord is angry the tenant can’t pay the rent and is considering measures to evict the tenant and find someone who will be able to pay.
The usual options available to the landlord are often drastic ones which create a bad relationship between him and his tenant, and in fact create an overall loss for the landlord. At the same time, it puts the tenant in a difficult position and makes it harder for him to find the money to pay his rent and resolve the problem. These common options are:
Taking from the rent deposit
Usually, the tenant gives the landlord a ‘rent deposit’ when they begin renting the property. If the tenant is unable to pay rent for the month, the landlord is entitled to take what is owed from the rent deposit. However, this is a temporary fix, as the tenant will be expected to make the deposit money back up, and the landlord will have no reserve funds if the same thing happens the following month.
Pursuing the guarantor
If there is a guarantor on the lease, the landlord is entitled to ask them to cover the rent. Chasing the guarantor is often time-consuming and there is no certainty that the guarantor will be found or will pay. Is it worth the trouble and expense?
Sending in the bailiffs
Making the decision to send in the bailiffs is considered a ‘distress action.’ It is an ancient remedy whereby a beefy bailiff turns up at the tenant’s door waving bits of paper in front of customers and staff, threatening to remove belongings and furniture to sell in order to make up the money the landlord has lost. The current law allows the bailiff to remove property without notice, although there are new measures due in shortly which will help the tenant in this situation. Resorting to the bailiff option is disastrous for the tenant, and is not really helpful for the landlord, as it is a short-term fix and a pretty final solution. Not only will any relationship between the landlord and tenant be ruined, but the laws on when a landlord can send in bailiffs are very complex and it is often more trouble than it’s worth.
Issuing statutory demands
The landlord can issue a statutory demand for any rent arrears and service charges. The tenant will have 21 days to pay or he will be considered insolvent. The advantage to the landlord is that it is quick, inexpensive and a threatening action designed to concentrate the mind of the tenant. However, it won’t help the landlord at all if the tenant doesn’t have the money to pay, and for the tenant, it is disastrous.
The landlord can apply to the court to order that the tenant company is wound up (or, in the case of an individual, made bankrupt) because the tenant cannot pay its debts. For the landlord, this means the tenant must pay his debts or his business is finished, creating immense pressure for the tenant to find the money. Additionally, once the landlord advertises a petition it is very difficult for the tenant to get out of the situation as other creditors join with the landlord. The bank will often freeze the tenant’s accounts at this point. This action is useful if the landlord wants the tenant out, but not useful if he wants to continue on good terms with his tenant or get the money he is owed.
Applying for forfeiture of the lease
Finally, the landlord can apply for forfeiture of the lease. It allows the landlord to take legal possession of the property and end the lease. It is the end of the line for the tenant but, again, doesn’t really help the landlord, unless he simply wants to get rid of the tenant and find a new one.
How can a landlord benefit from this situation instead?
While fear and anger are powerful motivators, there are ways to save a tenant/landlord relationship and create a win-win situation for both parties. If, as a landlord, you’re prepared to negotiate with your tenant, you might find you can turn this difficult time to your advantage. For example, you could choose to reduce the rent or grant a rent-free period, in return for removing a tenant break clause, changing a rent review date or mechanism and negotiating other changes to a lease. But why should you do that? What is the advantage to the landlord in seemingly giving the tenant exactly what he wants?
If you’re prepared to reduce rent for your tenant, or give them a rent-free period, you have the opportunity to add additional time to the lease. For example, you may grant them a six month rent-free period, with the condition that the tenant agrees to rent from you for a further six years after the lease was initially going to end. You may suffer in the short-term, but in the long-term you’ve guaranteed yourself a further six years of income from your rented property. Alternatively, you could promise a rent increase in the future, ensuring you get back any money you’ve waived for the short-term, and the investment value of your property increases. Or you could remove a tenant break-clause, so you don’t need to worry about early termination of the lease, and the value of your investment is once again boosted.
In fact, there are no restrictions on what you could negotiate with your tenant. If you’re prepared to help them, you could reap enormous benefits. You might consider tightening up service charges or insurance charge provisions. You could relax restrictions on subletting – more for the tenant’s benefit perhaps – but another way of guaranteeing you will be earning from the property if this tenant is unable to pay.
Another area that can be improved is the rent review provisions – review dates can be altered, the mechanism for review can be changed, for example, to a RPI linked review or fixed increase review. The benefit of a fixed increase is that it gives more certainly to the landlord and avoids the cost and stress of long, drawn-out reviews.
Better the devil you know
You may be frustrated with your tenant, but at least you know your tenant’s failings. If they have been good tenants up until now, you might consider helping them (and yourself). Also, if you evict your tenants, your property may stand empty for a period of time while you find new tenants to occupy it. You might also think about dilapidations in the property that will need to be fixed before new tenants move in, especially as your current tenants probably haven’t had the money to make these changes themselves. If you don’t find a tenant, you’ll be paying rates and servicing your mortgage with no income from the property.
If these measures are considered, rather than the forceful, frustration-driven ones above, a landlord and tenant can guarantee themselves long-term security and continue to foster a good relationship with each other. Both the tenant and the landlord can help each other by negotiating new terms.
Not sure how to start?
Burt Brill & Cardens Solicitors are landlord and tenant dispute experts and can help you find agreeable terms for both landlords and tenants. We want to talk to you if have any concerns about renting. Call us on 01273 604123 or email firstname.lastname@example.org or email@example.com for a free, no obligation chat about how we can help you add value to your property in the face of financial crisis.
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