Unfortunately, it is not uncommon for landlords to encounter problems with commercial property tenants not paying rent on time. To make matters worse, this type of tenant often won’t pay until they have received multiple requests from the landlord or their managing agent. In my experience, no amount of pleading will convert a tenant who is a bad payer into a one that consistently pays on time.
So, what do you do? You need to speak to a commercial lease lawyer and keep reading!
How to get a commercial tenant to pay on time:
- Have a good lease in place
- Have the tenant’s obligations backed by security
- Set clear due dates
- Agree on the method of payment
- Act fast
- Make a formal demand in writing
- Landlord’s remedies
Commercial property tenant not paying rent on time? Follow these 7 tips
It is possible to make sure that you get paid on time, but only if you employ proven strategies. So if you’re sick of your commercial property tenant not paying rent, the suggestions set out below may help your tenant to understand that it is easier and cheaper to pay you on time, every time.
1. Have a good lease in place
It is of course more difficult to help a landlord who is owed rent if there is no lease agreement or if the lease has been poorly drafted. A well drafted lease will contain provisions that deal with late payments of rent and will detail what action can be taken by the landlord to deal with a recalcitrant tenant.
If you need assistance drafting your lease or need it reviewed, our contract lawyers are here for you.
At a minimum, the lease should contain the following provisions;
- Clear and unambiguous details of the amount of rent and when it is due;
- That default interest will be charged on overdue rent together with the landlord’s legal costs;
- That the landlord is entitled to re-enter the premises and terminate the lease where the tenant is in default; and
- That the tenant is liable for the landlord’s ongoing costs and losses where it is necessary to take such action.
2. The tenant’s obligations should be backed with appropriate security
It is much easier to get a tenant to pay rent on time on a consistent basis, where the tenant or someone that controls the tenant has something to lose. Unless the tenant is AAA rated, in my opinion, it is vital to have the tenant’s obligations backed by appropriate security. Such security may include one or more of the following (obviously the more the better):
- A charge (mortgage) over the tenant’s real and personal property (this is a clause in our standard lease and can provide a landlord with significant power);
- A personal guarantee(s) (once again, the more the better); and
- A bank guarantee
3. Make sure you are on the same page in terms of the definition of “on time”
A commercial property tenant not paying rent is unacceptable, and they need to know that it will not be tolerated. Ideally, this conversation would happen before the tenant takes occupation and, in my experience, it should be made clear that rent must be paid on or before the due date.
4. Agree on the methods of payment
Arrangements can be agreed and put in place for the method of payment. The most convenient method of payment for both parties is electronic funds transfer to the landlord’s nominated bank account.
Should a dispute over payment of rent arise, either party can rely on bank records to determine whether or not rent was actually paid. The more traditional methods of payment, such as posting of cheques, are outdated and inefficient and arguments can ensue over whether or not rent was paid. If you do find yourself in this position, don’t hesitate to get in contact with our experienced commercial lawyers.
5. Act on commercial rent arrears fast
If, after commencement of the lease, the commercial tenant is not paying rent on time, it is vital that the landlord take action immediately. Written warnings and demands are important, but immediate contact by telephone or in person may have additional impact.
In my opinion, the worst thing a landlord can do is accept late payment. Some tenants will ‘try it on’ to see what they can get away with. If the landlord waits 2 weeks before making contact, it is likely that the earliest the tenant will ever pay is 2 weeks late!
6. Formal demand in writing
Section 10 of the Landlord and Tenant Act, 1936 provides that a landlord shall not re-enter premises for failure to pay rent, until the tenant has been served with a notice to remedy the breach of the lease and given time to do so. Note that if you do not have a proper rent default clause in the lease, there are restrictions on remedies till the arrears are at least 3 months overdue! (s125 Real Property Act, 1886)
A poorly drafted notice of demand or improper service upon the tenant can cause significant consequences for the landlord. On the up side, a properly drafted and served notice of demand (to the tenant(s) and if appropriate to the guarantor(s)) can often be a quick and effective way of getting the tenant’s attention (and that of guarantors). The penalty of having to pay interest and costs can also help get some errant tenants ‘back on track’.
The demand notice should:
- Be served after the time specified in the lease or the relevant legislation
- Specify the amount of rent owing
- Advise the date the rent was due
- Demand payment within a specified time-frame (determined by the lease, legislation or common law)
7. Remedies available to the landlord
Many landlords are hesitant to exercise their contractual rights pursuant to the lease and relevant legislation. The reasons obviously include the cost and not wanting to upset the tenant. A couple of things to keep in mind here:
- A tenant that is consistently late in payment will generally get later and later unless you take a stand
- The tenant will be paying your costs (and interest)
- If you don’t take a stand (and quickly) the tenant will think paying 4+ weeks late is OK. It is not, but it is up to you to let the tenant know
A landlord’s remedies are numerous and include:
Charging default interestIf you are not charging your tenant default interest, they are getting an interest free loan. Most tenants that struggle to pay their bills get used to paying interest, so default interest alone may not be a sufficient incentive for your tenant to pay rent on time, but not asking for it is a clear incentive for them to not pay you!
This is exactly why you shouldn’t be scared of taking action – if you have a well-drafted lease, your tenant will be obligated to repay 100% of your reasonable legal fees. Paying your legal fees can ‘incentivise’ paying the rent on time.
Suing the guarantor(s)
A shelf company may regard itself as immune from recovery action, but if its directors signed a guarantee at the commencement of the lease, a company tenant will often suddenly find the money (plus costs and interest) when they are staring down the barrel of a personal Court action.
Re-entry of premises
Depending on the terms of the lease, the landlord may be entitled to re-enter and take possession of the premises. This right is in addition to the claim for unpaid rent and will authorise the landlord to claim incidental expenses such as legal, bailiff and locksmith’s costs.
Distraint of tenant’s goods for unpaid rent
A right available to landlords in South Australia under the Landlord and Tenant Act, 1936 (“Act”) and s124 of the Real Property Act, 1886 is the right to distrain for unpaid rent. Distraint is “the seizure of someone’s property in order to obtain payment of rent or other money owed”.
With a commercial property tenant not paying rent, the landlord can:
- issue a warrant for seizure of the tenant’s goods to satisfy unpaid rent;
- re-enter the leased premises;
- take possession of the tenant’s goods; and
- sell the goods by public auction to satisfy the rent and costs owing.
This is quite an expensive exercise (generally for the tenant) but extremely effective. It is the ‘thermonuclear option’ where a tenant effectively loses control of their business.
There are a few important points to consider if this right is to be exercised:
- The right to distrain only extends to unpaid rent, not any other costs owed by the tenant; and
- The right does not exist if the landlord has already terminated the lease.
A word of advice from a commercial lease lawyer
Keep in mind that these are strategies and not miracles! Sometimes it is necessary to employ them more than once to get the desired result (a tenant that consistently pays on time without being asked or threatened).
At Beger & Co, we help many clients who own investment property. So if you have a problem with a commercial property tenant not paying rent, please give us a call on a free no obligation basis to find out how we can help.
For further information on landlord and commercial tenant rights, please contact Danny Beger on 8362 6400 or email Danny Beger. Join our mailing list to receive updates and legal advice on current issues.