Over recent months we have seen the number of Managing Agent clients contacting us to assist them in recovering arrears from commercial tenants continue to rise. This is likely down to the impact on spending with the current inflation rate and cost of living crisis . For businesses within the hospitality, leisure and retail sector it is only likely to get worse when their business rates increase by 75% as their relief ends in the coming months.
If you manage properties containing commercial units, it’s important to realise that the process and tactics involved in recovering service charge arrears from commercial tenants is different to the process involved with recovering arrears from residential leaseholders. As property management specialists, Brady Solicitors have an extensive experience in dealing with commercial arrears, so we’ve detailed some of the key considerations to make when deciding on how to proceed with a commercial tenant in arrears.
Key considerations when managing service charge arrears for a commercial property
- No mortgage lender: If you’ve partnered with us previously to assist you in recovering service charge arrears from an unresponsive leaseholder, you will know that an option available to us is to get in touch with the mortgage provider, should there be a mortgage for the property. When we do this the majority of the time it will result in the arrears being cleared in full and the mortgage provider going on to make the appropriate arrangements with the leaseholder.
- What position is the business in: In order to help you choose the best option for dealing with commercial tenant, it is extremely useful to know as much as possible about the situation the business is in. For example, are there other debts that they owe, are they planning to continue or cease trading. Whilst you can obviously ask these questions, if they aren’t forthcoming with the information, going down the forfeiture route can be away of finding out.
- Replacement tenants lined up: Similar to with leaseholders, forfeiture is always an option if you’ve been unable to collect the arrears following all the correct processes. However, as previously mentioned, lots of businesses are going through an extremely difficult period currently, so how likely are you to find a replacement tenant? We would advise that if you do look to go down the forfeiture route you look to arrange a replacement tenant prior to doing so.
- The impact on other tenants and/ or leaseholders: If you are thinking of going down the forfeiture route, especially without a replacement tenant organised, you need to consider the potential impact on the rest of the block. For example, if the property is empty, how is the hole in the service charge budget going to be filled and will it impact any planned maintenance works.
- Time is of the essence: Through experience, we have found that the quicker you act the more likely you are to receive payment. Therefore, whilst you may be understanding of the unfortunate position a commercial tenant finds themselves in, it’s important not to leave the arrears to build.
Conclusion
To summarise, recovering service charge arrears from commercial tenants is very different to dealing with leaseholders and they therefore require a tailored approach. However, as with leaseholders, it is important to act quickly as it drastically increases the likelihood of a successful recovery of the arrears.
