Member Article

Advice to landlords as SMEs are still expected to struggle

A recent survey by the Money Advice Service revealed that more than half the country considers they are struggling more financially – despite reports that the economy shows signs of improvement.

In response, a Newcastle property lawyer has warned that if so many people feel their financial situation is worsening, this will affect small businesses, which in turn will impact on landlords of commercial property. However, he urges landlords to consider the various options available to them, before opting for forfeiture to evict tenants who have amassed rent arrears, or are causing other problems.

Matthew Smith, property and commercial lawyer with Samuel Phillips Law Firm, said: “It’s important that landlords understand that forfeiture may not always be the ‘silver bullet’ they seek. What looks like the solution to all problems can actually cost the landlord dearly. It’s definitely a time to weigh the advantages against the disadvantages.”

Mr Smith stated that there are occasions when forfeiture is suitable, especially if the property is falling into hazardous disrepair, or where the landlord already has a new tenant ready and waiting to move in. He added: “There are times when forfeiture can almost be considered a kindness, literally cutting the tenant’s losses. Forfeiture might also be suitable where the relationship between landlord and tenant has broken down completely, and trust can never be restored. However, there is a cost.”

In many instances, the landlord is unlikely to gain any benefit from terminating the lease by forfeiture. It ends the tenant’s obligations, thereby restricting the amount of arrears the landlord can recover. The landlord is also likely to find him/herself liable for payments such as business rates, insurance premiums, and other outgoings. However, if the landlord already has a new tenant lined up, it is understandable that he/she would choose forfeiture, as possession allows the transition to the new tenant to take place.

Mr Smith added: “A landlord needs a well-drafted lease, allowing them rights of access. If for instance there is disrepair, the landlord can then put this right, ideally at the tenant’s expense. Also useful to a landlord is the right to re-enter the property for the purpose of re-marketing to potential new tenants. This is vital towards the end of the lease, but could also be a choice should a tenant default, allowing the landlord to find a new tenant and so avoiding the problem of ‘empty business rates’.

“However, tenants might have statutory security of tenure rights, that is the right to request a new lease. This complication is another reason why landlords must think carefully about the implications of forfeiture before carrying it out.

“We recommend that, when negotiating the lease, landlords take great care to ensure it meets their needs, and is compliant with statute. SMEs may find that business doesn’t get easier for a while yet, and that in turn could affect landlords. However, the supposed quick fix of forfeiture should not be exercised too readily, as the consequences could be even more serious.”

Samuel Phillips Law Firm offers a comprehensive range of legal services to business and private clients.

This was posted in Bdaily's Members' News section by Emma Hignett, i2i Business Solutions .