Is Your Tenant Likely To Go Into Administration?

In this blog, we are concentrating on "before the event" problems. A few thoughts whilst your tenant is still in apparent good health:-

1. Keep your friends close but your tenants closer still.  Try not to have a tenant failure come as a complete surprise.  That means keeping an active engagement with them or making sure that your managing agent does.  Depending on the size of the tenant's operation, it could be a quarterly call, maybe even an inspection and see if things look well on the ground.  Larger tenants, keep an eye on the press, particularly trade journals that may get a sniff of a problem before the wider world hears about it.
   
   
2. Monitor payment of rent timings.  If over a period of time rents starts to be paid later, it may be a pattern that could evidence pressure from the bank and looming issues for the future.
   
   
3. Never give a sucker an even break.  As a result of the way in which the law has developed, it is a very charitable landlord who allows arrears to build up (because if they go into administration those arrears are lost).  So if the rent is not paid on a quarter day, do not wait for any period of grace in the lease to expire but be straight on the case.  Those periods of grace are only for two purposes, (1) to start interest accruing on the arrears, or (2) to give the landlord the right to forfeit. Neither prevent the landlord from pursuing the rent from the day after the quarter day and if you have got any hope of perfecting any enforcement steps you take, such as putting the bailiffs in, you have to do it sooner rather than later.
   
   
4. For the same reason, do not accept classic excuses for delay, computer systems down, forgot to sign cheques, holidays, sickness etc.  They may be genuine but why take the chance?
   
   
5. Counterintuitively, the days of quarterly rent payments may be dead.  In theory, the landlord is getting a quarter of his money upfront to shield him from three months of grief but, as we have discussed in previous blogs (unless the Court of Appeal changes the law, or Vince Cable in the pre pack review announced on 14 July 2013) you are actually lining yourself up to lose a quarter's rent and stuck with an occupier not paying for that quarter.  Obviously, funding on a property may be geared to quarterly payments, but that would only be a one quarter cash flow issue if you were to change to a more regular process. 
   
   If the rent is due every month you have got a better chance that in times of difficulty you will be in front of the queue - because it may be easier for them to buy off one landlord with a month's rent than many looking for a whole quarter.  In addition however, if they are paying monthly on your unit, when the administrator goes in he has only got the balance of that current month to make his mind up whether to stay in or get out and if he stays in he has got to start paying you the monthly rent by the start of the next month so your loss period opposite the administrator will be foreshortened.
   
   
6. If you do decide to give a struggling tenant pre-administration some sort of rent concession e.g. monthly rent payments within a lease that otherwise is quarterly, then consider making a formal amendment to the lease with a Deed of Variation.  That way you can keep the flexibility of reverting to quarterly if times get better or keep a subsequent administrator of your tenant to a monthly payment plan.
   
   
7. Be realistic about the rent the unit will command should the tenant disappear and the likely letting period.  It is always tricky to negotiate with a tenant who wants concessions in order to stay in business when you are not sure if other forces will bring them down even if you have cooperated, but if you have a healthy idea of the consequences of not helping out you can at least make an informed decision.  Supplemental protection such as rent deposits and guarantors are usually unaffected by the administration and, therefore, give you an added level of protection. Always take care you include guarantors in any changes that you agree.

Next week, I will cover the issues you should be thinking about if your tenant has already gone into administration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.