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Running a business is rarely smooth sailing. Your company is likely to experience great periods and bad periods of trade. Regardless of business conditions, you, as the commercial tenant, must still pay rent to your commercial landlord. If your business has fallen on hard times, you may fall behind on rent payments. When you experience rent arrears, you breach your commercial lease. Consequently, you will likely lose your commercial premises if you, as the commercial tenant, cannot make rent payments. Worse still, you may also receive a court order requiring you to pay your commercial rent arrears. You may also be required to pay your landlord’s court costs for the commercial rent arrears recovery. This article will outline four options available to you if you are falling behind on rent payments for your shop.
1. Negotiate
Speaking to your commercial landlord and trying to negotiate is a good first step if you are behind on your rent payments. Failure to take action may result in your commercial landlord instigating court proceedings. You do not want this as you will likely be ordered to pay the rent arrears and the landlord’s court costs.
When negotiating with your landlord, tell them why you fail to pay rent on time. For example, perhaps your shop trade is low because your business is seasonal. If this is the case, explain to your landlord that you can clear the arrears when your business reaches peak season. Also, you will be able to continually make rent payments on time. Once your commercial landlord understands your situation, you both may be able to reach a solution. This might be, for example:
- to use the rent deposit to pay off rent arrears where you do not expect them to continue to accrue;
- a temporary rent suspension without interest added;
- a rent reduction; or
- ask your landlord to agree to change to a turnover rent.
The latter option is beneficial for you as a shop owner. A turnover rent clause means that you only make rent payments that fairly represent your turnover. In practice, while your shop trade is low, your rent will be lower. When your business reaches peak season, your rent will gradually increase to reflect the increase in trade. Commercial landlords may benefit from this as while their earnings will fluctuate, the security of their earnings will likely improve as the tenant is likely to stay. If you do reach an amicable agreement, ensure you both record it in a written document.
2. Sub-Lease
Sub-leasing part of your shop and sharing your commercial premises with another business is a good second option. Sub-leasing is where you, the tenant, lease part of your premises to another business owner, who then becomes the sub-tenant. As the tenant, you become the incumbent sub-tenant’s landlord. Due to occupying part of your commercial premises, the sub-tenant will pay you rent. This could help you to meet your current rent obligations and allow you to clear the arrears gradually. However, you are still responsible for your current lease and for passing the rent to your landlord.
To sublease your shop, you will first need your landlord’s permission. You should first check your commercial lease agreement to see if your landlord has given written permission. Before you sublease your shop, you should consider if the layout of your shop would be suitable. Also, you should consider if the sub-tenant’s business complements or directly competes with your business.
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3. End Lease
A third option is to end your lease before the lease end term. You may elect to do this if you believe trade will not pick up enough to pay rent regularly or catch up on arrears. Two options are likely available to you if you choose to end the lease early:
Break Clause
If your commercial lease agreement contains a break clause, you can end your lease before the lease term. Break clauses typically have conditions attached to them. Before you rely on the break clause to terminate the lease, you should check the applicable conditions.
Some break clauses may state a specific date from when you can terminate the lease, and others are less restrictive. Although, quite possibly you may not be able to rely on a break clause where rent arrears are present. If you can use the break clause in your lease, you will still have to pay the rent arrears for your commercial lease.
Lease Surrender
A further option potentially available to you is to ask the landlord to agree to a lease surrender. This means you transfer your interest in the shop premises back to your landlord, so the lease no longer exists.
However, your landlord is under no obligation to agree to a lease surrender. Provided your landlord consents to the lease surrender, you may have to make rent payments until the lease ends.
4. Assignment
Assigning your lease to a new commercial tenant if you cannot pay rent in the future but can settle the arrears with your landlord is a good option. Lease assignment means you, the assignor, transfer or ‘assign’ the lease to a new commercial tenant, the assignee. The lease continues but the new commercial tenant, the assignee, takes over your lease obligations. At which point, you no longer have any lease obligations to fulfil. The effects of lease assignment are that you no longer have to pay rent. However, you also do not have a right to occupy the property as your commercial premises. Furthermore, you will still have to pay your landlord the rent arrears.
Although lease assignment may be an option, you must get your landlord’s permission first. You will then need to find an assignee who your landlord considers suitable before you go through the assignment process.
This cheat sheet outlines what you should be aware of in your lease agreement.
Key Takeaways
Four options are available to you if you are falling behind on rent payments. A good first step is to discuss why you are late with making payments with your landlord. Ideally, you both will come to a mutually amicable agreement. This may include, for example, changing to a turnover rent. A turnover rent means you pay rents that are proportionate to your business’s trading volume. Subleasing your premises so that you share your premises with another business owner is another option. This option is desirable if you want to stay in your current premises, be able to make future rent payments and clear rent arrears.
Ending your lease is another option if you believe you will struggle to make rent payments moving forward. If this is the case, you could surrender your lease or use the break clause to terminate the lease. Another option is to assign the lease. However, you should note you will still be required to pay the rent arrears.
If you need help understanding your options if you are falling behind on rent, contact our experienced leasing lawyers 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. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
If your shop is behind on rent payments for your UK commercial lease, you have various options available to you. For example, you could try to come to a resolution with your landlord regarding the arrears, such as a rent reduction for rent going forward.
A lease assignment is an option if you are behind in rent and can no longer afford to make rent payments on an ongoing basis. It is where you transfer your lease rights and obligations to a third party who becomes the tenant moving forward.
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