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What to do when your tenant gets someone else to pay

15 Jan 2012

In these hard times, tenants may not be able to pay their rent or other sums due under their lease. They may therefore get someone else to pay instead. This may be a director of the company tenant, a family member (if the tenant is an individual or a partnership), or an investing shareholder. There will be good reasons why the rent monies can not 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 that the landlord wants in the current climate is a lack of income. If the landlord’s interest in the property is mortgaged to the bank, the bank will not defer payments from the landlord.  Money from the third party is just as good as the tenants, or is it?

The landlord must be aware that, by accepting the rent, it may (whether it likes it or not) 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. Establishing a relationship of landlord and tenant means in effect that there has come into existence a new lease or tenancy between the landlord and the payer. The establishment of such a lease or tenancy would mean that the formal lease between the landlord and the impecunious tenant has in some way been surrendered and superceded by this new relationship.

iStock falling money

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, so as to show it as addressed to the payer of the rent, so that the payer 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.