Protecting your business: Guide for commercial landlords when a tenant is in financial distress

The final three months of 2024 saw a significant increase in the number of UK firms in financial distress.

Corporate recovery and financial advisory firm Begbies Traynor’s latest Red Flag Report, released in January this year, highlighted the number of UK firms in ‘critical financial distress’ rose by 50.2 per cent on the previous quarter to 46,853.

This rise in companies at risk of insolvency impacts the UK commercial property sector, with more than half of the UK’s businesses renting their trading premises. WHN director Daniel Long, who heads up the firm’s commercial property dispute resolution team, explains the implications and offers advice for commercial landlords.

When a commercial tenant is in financial distress, there are a wide range of implications for landlords.

• Rent arrears: Companies with cash flow issues may be unable to meet their rental payments. Landlords should be aware that when a tenant is in arrears, they have various remedies at their disposal but there may be other creditors awaiting payment.
• Dilapidations: Dilapidations are where premises have fallen into disrepair. Tenants in financial distress may have difficulties paying for the maintenance of their property. This can affect a property’s value and lead to costly repairs when a tenant’s lease ends or is severed, especially if the tenant becomes insolvent.
• Company Voluntary Agreement (CVA): A CVA allows distressed companies to reduce debts or pay them off over a fixed term. Once a CVA is in place, this restricts a creditor’s ability to recover debts, which can affect a landlord’s rental income. CVA proposals often seek to reduce lease liabilities based on a site’s sustainability.
• Other insolvency situations: Commercial landlords may find their tenants enter administration or liquidation. Each insolvency situation has different implications on the remedies available to landlords, including the ability to terminate the lease and take back possession of the premises.
• Difficulties re-letting: During periods of economic downturn, it can be more difficult to re-let commercial properties at the same value once a unit becomes vacant. This can, in turn, affect a landlord’s portfolio value, impacting lending capacity and restricting growth. Forfeiture is not always the best way to go as it means terminating existing lease liabilities, potentially becoming liable for business rates and potentially creating a void.

A landlord’s options

There are a range of options available to landlords when a tenant is in financial distress.

Negotiating flexibility in payment terms and other areas may be the most beneficial option for both parties, as it can help prevent further financial distress and reduce the likelihood of insolvency proceedings, leading to a vacant property. Landlords can consider rent concessions; payment plans and re-gear options.

If a tenant’s lease is coming up for renewal, a landlord may wish to renegotiate the terms or change the payment structure to support a tenant.

However, if a tenant has repeatedly missed payments, failed to maintain their property or breached other terms of their lease, a landlord may wish to terminate the lease.

Forfeiture is a tool available to commercial landlords to protect their interests following a tenant breaching the terms of their lease. Many commercial property leases contain a forfeiture clause which enables the landlord to gain possession of their property, bringing the lease to an end. This can be exercised by peaceable re-entry or issuing court proceedings, depending on the circumstances and the type of breach.

For further information on forfeiture and other landlord options, see our blog posts:

My tenant isn’t paying rent. What can I do?
Forfeiting commercial property leases: The benefits and limitations
A landlord’s guide to forfeiting a commercial lease
A landlord’s guide to terminal dilapidations

Understand your tenant’s financial health

Understanding a tenant’s financial position is key to determining the right course of action to take to protect your business during an economic downturn.

Open communication between a landlord and tenant can often help avoid costly legal proceedings. However, there is also a large amount of information publicly available which will give further understanding of a company’s finances.

This includes:

• Financial accounts available at Companies House
• Credit assessments available from agencies and credit platforms
• News stories about the company in the business media

Once a landlord has the clearest picture possible of a tenant’s financial position, they can make a judgement on the best course of action.

Recovering debts

Recovering debts including rent arrears, dilapidations and other charges is often an important part of dealing with tenants in financial distress and can involve navigating complex legal frameworks.

Gaining professional legal advice can reduce financial loss by helping a landlord:

• Consider and potentially challenge the terms of a CVA proposal
• Deal with administrators or liquidators to recover losses
• Ensure compliance with lease terms and legal obligations
• Identify the right course of action whether negotiation, enforcement or lease termination.

In challenging economic times, proactive steps can help landlords protect their assets. By instructing a solicitor as early as possible, landlords maximise their chances of recovering debts and avoiding restrictions on debt recovery due to insolvency proceedings.

Daniel Long is a director at WHN Solicitors and heads up the firm’s commercial department and property disputes team.

He specialises in resolving disputes between landlords and tenants of commercial leases on matters including rent and service charge recovery, dilapidations, forfeiture, possession, insolvency-related matters, and lease renewal and termination.

For advice on how to deal with a commercial tenant in financial distress, please contact Daniel on 0161 761 8063 or email him at daniel.long@whnsolicitors.co.uk