PROPERTY JOURNAL

Property management APC: rent and arrears

Rent collection and the recovery of arrears are important aspects of the Property management competency. What do APC candidates need to know?

Author: Jen Lemen

05 July 2021

Office building seen through rainy window

Property management is a core technical competency on the Corporate Real Estate, Residential and Rural pathways, and an optional technical competency on the Commercial Real Estate, Land and Resources, Property Finance and Investment, Taxation Allowances, and Valuation pathways. 

The competency relates to all the day-to-day functions associated with property management. It covers issues relating to works, health and safety, landlord and tenant relationships, and service charges  ̶  in general, any matter associated with the smooth running of a property.

At Level 1, candidates should demonstrate knowledge and understanding of property management and the relationship between owner and occupier. At Level 2, candidates should apply the principles of property management to resolve issues affecting both owners and occupiers of real estate. At Level 3, candidates should provide reasoned advice to the client, such as preparing and presenting reports on property management. 

This article will focus specifically on two of the key property management tasks: rent collection and arrears recovery.

Essential knowledge

All candidates undertaking commercial property management work must comply with Real estate management, 3rd edition and the current edition of Commercial property management in England and Wales RICS guidance note. Section 4.2 of this sets out the best practice requirements for property managers dealing with the collection of monies. 

In particular it requires processes to be in place, and for the property manager to have a robust understanding and experience of:

  • the relationship between the landlord, tenant and other occupiers in a building
  • the contractual requirements set out in the lease and any other legal documents, such as licences, personal concessions or side letters, or deeds of variation; these will set out the payment obligations, including amounts and frequency of payments
  • the financial position of the occupiers in a building, using a database or other data management system
  • clear payment processes to notify occupiers of the payments due, together with a mechanism to identify defaults or disputes about payments
  • reporting processes to inform your client (that is, the landlord) of any defaulted payments or disputes over sums due
  • processes to pursue occupiers for defaulted payment and collection of any arrears.

Rent collection

The diligent collection of rent is contingent on the accuracy of information and timings, and requires the property manager to have up-to-date details of the occupancy and lease terms. Property managers who are responsible for holding client money must also comply with the current edition of Client money handling, RICS professional statement. 

Historically, rent payments tended to be required on the English quarter days; namely 25 March, 24 June, 29 September and 25 December. In Scotland the quarter days are different, being 28 February, 28 May, 28 August and 28 November. Some local authorities and landlords may alternatively use the modern quarter days, that is 1 January, 1 April, 1 July and 1 October. 

Modern leases may require rent payments monthly, and many occupiers have been successful in agreeing personal concessions on this basis to ease cash flow. The wide variety of possible payment dates means that it is essential to check the lease to confirm when rent is due. 

Most leases require rent to be paid in advance, but this should be checked in the unusual event that it is required in arrears. If the lease says nothing on the matter, then Sury v Cole (1793) confirms that the rent will be payable in arrears. 

The amount of rent due also needs to be checked. Although an original sum may have been stated in the lease, it could have subsequently been subject to rent review. Property managers should check the amount owed, reflecting any agreements in rent review memos, personal concessions, deeds of variation or side letters. Any rent-free periods or incentives reducing the rent payable should also be checked, as these may mean that the full payment is not due.

Property managers also need to check whether penalty interest is applicable on arrears when paid late. This is usually payable after a short grace period, such as one to two weeks, and at a percentage more than the base rate, say 2-4% above. VAT may also need to be charged on the rent at 20%, if the property has been VAT-registered by the landlord. 

The lease will confirm the payment methods permitted, such as standing order or direct debit. These methods enable easy administration of the rent account, but they can lead to problems if certain circumstances arise when rent should not be accepted; for example, when it would lead to waiving the right to forfeit or a breach of lease, or where a contracted-out lease has expired, which may create security of tenure under the Landlord and Tenant Act 1954. 

'The diligent collection of rent is contingent on the accuracy of information and timings'
Defaults

Where an occupier defaults on rental payments, the property manager needs to agree a process with their client, the landlord, for dealing with the arrears. This will include when the client wishes to be alerted to the default; as a minimum, they should be advised when a property manager recommends instructing a debt collection agency, commencing legal action, or taking steps in line with the lease to recover the property.

Property managers should be alert to red flags or warning signs of rent collection issues, including bounced cheques, persistent late payments, or the arrival of post-dated cheques. If payment issues are identified, property managers need to consider a variety of arrears recovery options so they can offer diligent, reasoned advice to their clients. 

Doing so requires property managers to be able to consider the financial position of occupiers, based on their arrears, payment history, the level of the passing rent  ̶̶  in comparison to the market rent  ̶  the value of the property as an investment and with vacant possession, and the prospects for reletting. The covenant status of the tenant can be assessed using a credit check or by reviewing its latest accounts at Companies House

Recovery options

There are various options that a property manager can consider to recover any arrears. 

Over the past year, the parties should have considered the voluntary government Code of practice for commercial property relationships during the COVID-19 pandemic. It is endorsed by the RICS and promotes transparency and collaboration, encouraging the parties to leases to act reasonably and respectfully. 

Tenants who can pay in full should do so, and tenants who cannot should pay what they can reasonably afford.

Landlords should support tenants to the extent that it is reasonably possible. The code promotes the use of payment plans, mediation to resolve disputes, and the use of lease regears to agree balanced, viable terms going forward.

The full range of options normally open to recover arrears is as follows, although it should be noted that during the pandemic some measures, such as commercial rent arrears recovery (CRAR) and forfeiture, have not been available. The current moratorium has been recently extended, to expire on 25 March 2022.

  • Payment plans

    Negotiated between the parties, these are an amicable way to keep the tenant in occupation and avoid an empty business rates liability for the landlord. They can help to recover the arrears due over a prolonged period of time, and should generally be the first resort, because they help to maintain a positive relationship between landlord and tenant.

  • Rent deposit

    Any deposit held by the landlord could be used to pay off the arrears. However, this course of action means that the deposit will no longer be available to cover other breaches of lease or at expiry in relation to any dilapidations claim.

  • CRAR

    Created under the Taking Control of Goods Regulations 2013, CRAR replaced the previous common law of distress, also referred to as distraint. It can only be used for leases of commercial premises where rent (including any VAT) have been outstanding for more than seven days. It cannot be used for other sums such as insurance or service charge. An enforcement warning giving seven days' written notice can be served on the debtor, before a certified enforcement agent (not a bailiff) is permitted to take control of goods to pay off the arrears.

  • Existing guarantors

    If arrears are sought from guarantors, the lease and any other documents should be checked to confirm what may be recovered.

  • Subtenants

    Subtenants can also be pursued using a section 81 notice under the Tribunals, Courts and Enforcement Act 2007. This requires the rent due from the subtenant to be paid directly to the superior landlord rather than to the intermediate one.

  • Former tenants

    The property manager could consider pursuing former tenants where they still owe rent if the lease was granted before 1 January 1996 and privity of contract applies (i.e. the original party can be pursued even if it has assigned its interest), or alternatively, can approach that tenant's guarantors using an authorised guarantee agreement if the lease was granted after that date. A section 17 notice under the Landlord and Tenant (Covenants) Act 1995 can be issued within six months of the sums falling due. A former tenant or guarantor that pays sums due can request an overriding lease under section 19, so the risk of this being created (i.e. does the landlord want a lease to be granted to a party of potentially unknown covenant strength) should be considered before the section 17 notice is served.

  • Statutory demand

    Where the arrears exceed £750, a demand can be issued by the landlord or its property manager. This effectively puts pressure on the tenant to pay the arrears, and it is only advisable where the amount is undisputed. The tenant has 21 days to pay the arrears, after which the landlord can present a bankruptcy or winding-up petition to the court. If this is successful, however, the landlord would only be an unsecured creditor.

  • Forfeiture

    This last resort can only be used if it is expressly permitted in the lease. It allows the landlord to re-enter the property and gain possession for a breach of lease, either by peaceable re-entry or following a High Court judgment. The tenant has a six-month period in which to claim relief from forfeiture if the arrears are paid.

  • Court proceedings

    A letter of action must be issued before any court application is submitted. Online claims can be made for amounts between £10,000 and £100,000. Above £100,000, the application must be issued to the county court. Generally, court proceedings are more successful if the tenant is solvent, and often the threat of legal action in itself will help to resolve the issue.

Assessing options and competency

Property managers have a range of options available to them, which should be weighed up so they can give diligent advice to the client on the recommended course of action, highlighting the risks and rewards of each. 

For the APC, evidence of giving advice on arrears recovery would make an excellent example at Level 3 for the Property management competency. 

Jen Lemen FRICS is a partner at Property Elite, providing training and support to RICS APC and AssocRICS candidates

Contact Jen: Email

Related competencies include: Property management

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