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What to do when your tenant gets someone else to pay

08 Jul 2013

In these hard times, tenants may not be able to pay their rent or other sums due under their lease. So they may get someone else to pay instead, for example a director of the company tenant, a family member or an investing shareholder. There will be good reasons why the rent cannot be passed through the tenant’s books – why not pay the rent direct?

What should the landlord do, when confronted with this situation? It must be tempting just to accept the money. The last thing the landlord wants in the current climate is a lack of income. If the landlord’s interest in the property is mortgaged, the lender will not defer payments from the landlord. Money from the third party is just as good as the tenant’s, or is it?

The landlord should be aware that, by accepting the rent, it may be discarding a right to forfeit the lease; that is to say, to bring the lease to a premature end. Of more practical significance, the landlord will need to ensure that, in accepting the rent from someone other than the tenant, it does not set up a relationship of landlord and tenant with that third party. That would create a new lease or tenancy between the landlord and the payer. The resulting situation would mean the formal lease between the landlord and the impecunious tenant has in some way been surrendered and superseded by this new relationship.

 

The landlord is under no obligation to accept rent offered by a third party. If it does accept the rent, it should take appropriate steps to protect itself. These should include obtaining confirmation from both the tenant and the third party that the third party is paying the rent as agent for the tenant and on its behalf. It would also help if that confirmation extended to an acknowledgement that there was no intention between the three parties that any relationship of landlord and tenant be created between the landlord and the third party.

Any invoices for the rent (including VAT invoices) must continue to be addressed to the proper tenant. The landlord may come under pressure to reissue the VAT invoice to the payer of the rent so they can recover the VAT charged. Such a step could prove fatal to the landlord’s position.

For further information, please contact Richard Freeman-Wallace on 0191 232 8345 or email: richard.freeman-wallace@hay-kilner.co.uk