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Lease agreements are legally binding documents and, therefore, provide reassurance that each party will honour their lease responsibilities. However, there are situations when a commercial tenant may not be able to pay their rent and fall into arrears. Both parties should know the potential options if this occurs, such as recovering unpaid rent from the rent deposit. This article will explain recovering commercial lease rent arrears in the UK for the rent deposit.
Recovering Rent Arrears From Rent Deposit
When a commercial tenant enters a lease, their landlord usually requires them to pay a rent deposit. This is a sum of money which reflects the rental amount. The landlord holds the sum until the tenant vacates the commercial premises. At this point, they will return it unless they have had to draw upon it.
Recovering rent arrears from the rent deposit has several benefits. Namely, it provides a fast and simple method for recovering rent arrears, particularly where non-payment of rent is a one-off.
Whilst recovering rent arrears for a commercial lease using the rent deposit is helpful, it does have its downfall. Namely, the rent deposit might not always be large enough to cover all the rent arrears. Additionally, once the rent deposit is gone, the landlord will not have money to draw on for any unpaid dilapidation claims at the end of the lease term.
Legal Considerations For Recovering Rent Arrears
Whether or not a commercial landlord can draw on the rent deposit will depend on various factors, and we explore some of these below.
1. Rent Deposit Deed
A rent deposit deed is a legal document that states the rules about the rent deposit. The terms of a deposit deed will detail what the landlord can and cannot do with the rent deposit. If a commercial landlord can recover rent from the rent deposit, it should say so in the rent deed.
Where a landlord wishes to recover rent arrears from the rent deposit, they must notify their commercial tenant of this. Once they have drawn on the rent deposit, their tenant must top it up to replace the amount the landlord takes.
2. Forfeiture
Commercial landlords should be aware that if they choose to recover rent from the rent deposit, they could lose their right to forfeiture. A right to forfeiture is where a landlord terminates the lease for non-payment of rent.
3. Insolvency
If a commercial tenant becomes insolvent, a landlord may be unable to draw from the rent deposit. The rent deposit deed may provide more information on this. Where the deed gives the landlord control of the deposit, the rent deposit becomes a ‘financial collateral arrangement’. In this instance, the landlord should be able to draw from the rent deposit.
Where the rent deposit deed is not clear about insolvency, a landlord may draw from it anyway. They may do this where they know insolvency is imminent because once the tenant becomes insolvent, they may be unable to.
4. Administration
Where a tenant falls into administration, and they owe rent arrears, these will be a priority debt to pay. This is because rent arrears rank higher than debts owed to unsecured creditors. However, if the landlord has been able to withdraw the rent arrears from the rent deposit, the administrator is not obligated to replace what the landlord has drawn on.
Therefore, if a tenant goes into administration, a landlord should consider whether to draw from the deposit. Instead, they may wish to use this for another purpose, such as dilapidations. They may decide to do the latter and let the administrator cover those rent arrears instead.
This cheat sheet outlines what you should be aware of in your lease agreement.
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Key Takeaways
When a commercial tenant falls into rent arrears, their commercial landlord has various options. One option is to recover the rent from the rent deposit. Recovering rent arrears from a rent deposit can be a quick and easy way to recover arrears. However, the terms of the deposit deed should permit the landlord’s recovery. If a landlord wishes to choose this option, they will need to check that they can do so. Additionally, a landlord will lose their right to forfeit the lease if they recover from the rent deposit. Therefore, it is worth considering all your options before recovering from the deposit.
If you need help understanding your commercial lease obligations, LegalVision’s experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.
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