Commercial Landlords: What should you do if your tenant stops paying rent?
Updated: May 1, 2019
The first of the month has come and gone and you haven't received a rent cheque from your commercial tenant (or, equally bad, their cheque has bounced). Your tenant didn't paid last month's rent either. You have your own expenses to cover and you rely on your tenant's rent payment to meet your own financial obligations. What should you do?
Talk to your Tenant
If your tenant falls into rental arrears, the first thing to do is to talk to them so you can better understand the situation; this will largely determine how you decide to proceed. Is your tenant going through a temporary period of financial difficulty, are they disputing something under the lease agreement or is there a deeper issue at play?
Don't wait too long
It's best to have this conversation as soon as your tenant misses a payment rather than allowing months of rent to accumulate, which reduces the likelihood that your tenant will be able to catch up.
Put it in writing
If you come to an agreement with your tenant, make sure you send a written letter or email confirming everything you've agreed to in person or over the phone. Also make sure you receive a written acknowledgement. If you have a commercial lease in place, check to see if it includes any provisions that tell you how you should deliver such a letter and the address it must be served to. It's important you keep up with the technical requirements under your commercial lease. If you don’t, you might be prevented from relying on these technical requirements later on.
If Your Commercial Lease Requires You To, Notify Your Tenant of Default
Unless your lease states otherwise, you don't need to provide notice of default to your tenant. If your lease does require you to provide notice, it should tell you how and where it should be delivered.
Decide How To Proceed: Termination v. Distress
If you can't come to an agreement, your tenant is avoiding you, or if they've made repeated commitments that they haven't kept, you'll have to decide how to proceed. This is both a legal and business decision. You have the following options:
Sue for rent and/or damages on the basis that the lease remains in force;
Exercise your right of distress, which allows you to seize and sell your tenant's assets to cover arrears in rent (you can only do this if the lease remains in force);
Inform the tenant that you propose to re-let the property on the tenant's account and enter into possession on that basis
Terminate the lease and sue for rent and/or damages; or
Terminate the lease and notify your tenant that you will claim damages based on the present value of the loss of future rent (i.e. the value of the unpaid rent for the unexpired term less the actual rental value of the premises for that period. If the premises are rented at a lower price than the original lease, then the present value of the difference is the damages).
Keep in mind, termination and distress are mutually exclusive remedies. You can't both terminate your commercial lease and distress your commercial tenant's goods. If you choose to terminate the lease with your tenant, you will lose your right to distress, meaning you won't be able to seize and sell your tenant's property to cover your losses. To recover rent arrears or other damages, you'll have to sue your tenant.
Business Considerations. When deciding whether to terminate, consider the following:
How long will it take you to lease the property again?
Will you have to invest in repairs to get the property ready to be re-leased? If so, how much?
Is your tenant just going through a short period of financial trouble or are they unlikely to be able to stay current with their rent going forward?
Will you have to go to court over this? Generally, its best to avoid litigation unless it's absolutely necessary.
Option 1: Terminate the Lease
Do you need to provide notice?
Generally, your commercial lease agreement will tell you what is required to terminate your lease for non-payment of rent. Sometimes the lease agreement requires you to provide notice before ending the commercial tenancy. If it does, read it carefully for information on how, where and when to deliver the required notice.
If you lock out your commercial tenant, a bailiff will post a notice on the door indicating that you've terminated the tenant's lease for non-payment. If you choose to lock your tenant out, make sure you actually exclude them from the premise (i.e. the locks on all entrances have been changed and the tenant isn't still inside) and do not let them back in.
When can you re-enter the property?
Unless your lease says otherwise, if rent remains unpaid for 15 days, you can re-enter the premise (on the 16th day) without notice and evict your tenant or change the locks. After this type of eviction, you will have to let your tenant remove their property from the premises (remember: you can't seize and sell their property, since you will have forfeited your right to distress).
What damages can you sue your commercial tenant for?
Rent arrears (i.e. unpaid rent to the date of the breach)
Damages under the lease agreement - the present value of the loss of future rent (i.e. present value of unpaid rent for the unexpired term less the actual rental value of the premises for that period).
Keep in mind that commercial landlords have a duty to mitigate: you should take quick steps to have the property listed again for rent.
Option 2: The Remedy of Distress
This self-help remedy is only available if you choose to keep your lease in force. The remedy of distress allows you to seize and sell your tenant's assets (to cover unpaid rent), except for the following:
any goods on the premise that are not the property of your tenant; and
trade fixtures while they remain affixed to the premises.
Remember, if you choose the remedy of distress you can't also terminate your lease. If you do both, you can be liable in damages. Also, distraint which is improper, unreasonable or excessive can open you up to liability. For example, if you exercise your right to distress where there is very little evidence of rent due, if you take a very long time to have goods appraised and sold or if you sell your tenant's goods for substantially less than their value, you may be liable.
If you're a commercial landlord or tenant and have any specific questions you wish to discuss, reach out to me today for a free consultation.