How can I manage my Scottish company’s rent arrears?
Being unable to pay your company’s rent is a scary and precarious position to be in. And unfortunately, given the rising costs for many Scottish businesses, it’s becoming increasingly common.
Whatever issues you are experiencing, whether it’s a temporary cash flow shortfall or a more sustained downturn, failing to pay the rent can lead to eviction, court action, and ultimately, the forced closure of your business. That’s why it’s so important to act early and tackle the issue head-on.
Commercial landlords, like most unsecured creditors, will generally be willing to negotiate and provide some flexibility. However, you do need to be proactive in exploring your options.
What to do if you can’t keep up with commercial lease or rent payments
There are several steps you can take, from negotiating with your landlord to formal insolvency solutions, to take control of the situation and safeguard your business.
Negotiate with your landlord
The first step is to contact your landlord to discuss your situation before they have to chase you. The last thing landlords want is an empty premises or a costly legal battle, so most will be willing to consider temporary solutions, particularly if you have a good relationship and your current difficulties are only short-term.
It’s always best to be open and honest about your circumstances and explain the steps you are taking to get back on track. Your landlord may be willing to agree to:
- Switch from quarterly to monthly rent payments or vice versa
- A temporary payment holiday
- Short-term rent deferral
- An affordable payment plan for managing arrears
- A temporary rent reduction
Review the terms of your lease
Whatever approach you take, you must understand your legal obligations according to the terms of your lease.
You need to know:
- Whether your landlord can add late payment charges or interest to the arrears
- Your landlord’s enforcement rights
- Whether there are any upcoming break clauses
If the lease is no longer affordable, you may be able to negotiate a lease surrender or assignment, or even sublet some or all of the premises. Leaving the lease in this way can prevent the build-up of arrears and avoid costly legal action.
Consider your funding options
If your inability to pay the rent is due to a temporary cash flow problem, finding a quick way to inject working capital into the business could provide some breathing space.
For example, Invoice finance can be an effective way to turn slow payments into quick cash for companies with business clients. On the other hand, if you sell direct to customers, a merchant cash advance could be the answer.
Alternatively, if the business owns valuable assets, asset-based lending allows you to secure a loan against company assets, such as equipment, stock and machinery. You could also explore equity funding, which adds expertise and capital to the company but will dilute your ownership.
Be aware of the legal consequences
If you cannot obtain funding or reach an informal agreement with your landlord, you should be aware of the potential legal consequences if you do not act.
Some leases allow landlords to terminate an agreement for non-payment (known as irritating the lease in Scotland), but only after serving a formal notice and giving the tenant time to rectify the breach.
If the landlord terminates the lease, they can then pursue the company, or you personally, if you have signed a personal guarantee, for the arrears. They can do that by serving you with a court writ or summons and using Diligence procedures, such as an arrestment or attachment over goods. That is usually a last resort and is most likely if you ignore the debt or your relationship with the landlord breaks down.
Explore formal debt solutions
If your financial problems are long-term and extend beyond rent, or your landlord is threatening or has already commenced legal action, it’s likely to be a sign that your business is insolvent. In that case, there are several formal insolvency procedures that can provide more structured support.
- Company Voluntary Arrangement (CVA)
A CVA is an agreement between your company and its unsecured creditors, including your landlord, to repay debts via monthly instalments over three to five years.
The main benefit of a CVA over an informal agreement is that it is legally binding. That means, once it is in place, your landlord must stick to it as long as you make the scheduled repayments. It also prevents eviction attempts and legal action while freezing additional interest and charges.
- Debt restructuring
Alternatively, it may be possible to work with an Insolvency Practitioner to restructure your debts. That usually involves negotiating with creditors to reduce monthly payments, extend terms, consolidate multiple debts or freeze interest so the business can stabilise.
Although it’s not as formal as a CVA and does not provide the legal protection, a professionally managed restructuring plan can ease cash-flow pressure, bring creditors onside and help the company recover.
- Company Administration
If the company is under serious legal threat from a landlord or other creditors, such as HMRC, putting it into Administration may be the best option. You must appoint a licensed Insolvency Practitioner to act as the administrator. They will work to put a recovery plan in place, and the company will be protected from legal action.
Another option is a pre-pack sale. That allows you to sell the business and its assets immediately upon entering Administration. As the business owner, you may even be able to buy the assets yourself. That could enable you to continue trading under a new company structure, but without the old business’s debts.
Close the company
If you have significant rent arrears and the company has no realistic prospect of repaying them or making a recovery, liquidating the business is likely to be your best option.
You can close the company voluntarily by putting it into a Creditors’ Voluntary Liquidation (CVL). That allows you to wind the company up in an orderly way, brings creditor pressure to an immediate stop and protects you from the risks of wrongful trading.
A licensed Insolvency Practitioner will take control of the company, deal with creditors on your behalf and sell the company’s assets to repay its debts as far as possible. Any debts the company cannot pay in full will be written off, and it will be removed from the official register.
As long as you have met your legal duties when running the business, you will be free to start a new company or become a director of an existing firm. You may also be eligible for director’s redundancy pay, which can provide a handy financial cushion while you consider your next steps.
Need advice?
If you are struggling to pay your company’s landlord or rent arrears in Scotland, the crucial message is – you do have options. Our team of licensed Insolvency Practitioners can assess your situation, recommend the most suitable route and implement the procedure on your behalf. Please get in touch for a free, same-day consultation or arrange a meeting at one of our offices in Scotland.
