Legislative changes coming into force on October 1 will see the current debt threshold at which creditors can serve a statutory demand increase from £750 to £5,000.
For commercial landlords, this change will force them to pursue court judgments and subsequent enforcement action to recover sub £5,000 debts. Commercial landlords must act now to evaluate their options and take appropriate action to reduce the risk of delays, disputes and mounting debtors.
The narrowed ability to serve a statutory demand is the latest in a series of changes which have depleted landlords’ defensive armoury. The 21 days that debtors have to respond to a statutory demand (either to pay, or reach a payment agreement), or face insolvency is an extremely persuasive tactic to recover monies owed. The absence of this option will negatively affect the speed of debt collection and could reduce overall recovery rates.
Just last year, commercial landlords were dealt another blow, when the self-help remedy of distress, the ability to recover arrears through the seizure and sale of goods belonging to the tenant was removed, and replaced by Commercial Rent Arrears Recovery (CRAR). Under CRAR guidelines, landlords are required to give 7 days’ notice before entering the premises to seize goods and another 7 days’ notice prior to sale of these items. This has led to a larger administrative burden and more tenant disputes. In addition, CRAR is somewhat restrictive in that it can only be used to recover rent arrears, not other debts such as service charges and insurance premiums.
In light of these changes, many commercial landlords will have to look to court judgements to force debtors to pay up. However, while necessary in some instances, engagement with the courts is likely to drive up costs. Claims of less than £10,000 will be referred to the small claims court, where the landlord will be liable to pay all costs. In addition, the process can be lengthy, a problem exacerbated by Government cuts and a subsequent reduction in investment in the court system.
Where possible, landlords should pursue preventative action to reduce the risk of tenants falling into arrears, thus reducing the negative impact of this new legislation. They should aim to complete due diligence checks before the tenant signs the contract. Landlords may also choose to demand a larger initial deposit to offset any potential arrears. While this may have been an unrealistic option a few years ago, increased demand for commercial premises compared to supply has afforded landlords greater bargaining power.
Similarly, rather than agreeing to a traditional quarterly rent payment schedule, it may be possible to revert to the model commonly adopted on mainland Europe whereby payments are made on a monthly basis. This way, any late payments can be detected and managed quickly minimising the risk of debts spiralling. Finally, some of the most important considerations for landlords are the simplest. Ensuring that references are collected, credit checks are made and where required guarantors provided, will reduce the burden of debt collection.