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  • Commercial Property

    Interest on late rent payment

    Hi,

    I have a tenant in an office premises whose tenancy started in October 2018. I have received the monthly rent (which should be monthly in advance) mostly a few days late each month.

    This month I have had to chase several times and have only just received funds today which was due by May 31st. I feel I have been patient enough and would like to now write to the tenant and advise that interest will be charged moving forwards on late payments as per the clause in the underlease. Problem is I am struggling to understand how this interest should be calculated! the clause in the contracts reads:

    "If any Annual Rent or any other money payable under this lease has not been paid by
    the date it is due, whether it has been formally demanded or not, the Tenant shall pay
    the Landlord interest on that amount at the Default Interest Rate (both before and
    after any judgment). Such interest shall accrue on a daily basis for the period
    beginning on the due date to and including the date of payment."

    Default interest is stipulated as 4% over the base rate so currently 4.75%. Monthly rent is £1,250 + VAT.

    Can anyone advise how this should be calculated?

    thanks in advance

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    My thoughts - As a completely unqualified person in this area would be:

    The 4.75% is an annual percentage.

    So as your terms state that interest will be charged daily, my calculation would be ((Amount outstanding * Yearly Interest rate) divided by number of days in the year)

    That works out for 1 month (including VAT) as
    (£1,500 * 0.0475) / 365 = 19.5 pence per day

    I could be wrong, but that's how I read it - And is 19.5p per day going to affect their behaviour at all?

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    Interest is charged on the gross amount so £1500.  The annualised interest is 4.75%.  To get the daily rate divide 4.75% by 365 days. Multiply this figure by the overdue amount to get the daily interest of 20p per day.  This charge will be outside the scope of VAT.
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    That is the figure I had got to as well but thought surely not!

    20p will certainly not encourage them to pay on time each month and could possibly make things worse if I highlight to them that the penalty of paying a whole month late is circa £6!
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    As you can see above it’s not worth the effort 20p a day is £6 a month. If you want to encourage them to pay on time look into CRAR. 
      Commercial Rent Arrears Recovery (CRAR) is a statutory procedure which allows landlords of commercial premises to recover rent arrears by taking control of the tenant's goods and selling them. CRAR came into force on 6 April 2014 and applied with immediate effect to all new and existing commercial leases from that date onwards.

    In order to use CRAR, a landlord must provide 7 days notice of enforcement. Once this period has expired, Certificated Enforcement Agents (as opposed to other types of bailiffs) may enter the property (through an open or unlocked door) in order to seize goods.
    CRAR applies whether or not reference is made to it in the lease.
    All cost will be borne by your tenant. 
    It’s £75 for the notice and about £300 if a visit to take control of goods is required. 

    They will pay up when they know you mean business. We use this format with late payers. They soon get the message. Give them a gentle warning first that you will use this. 

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    Thanks for the info, will keep that in mind

    I do want to maintain a good relationship with the tenant as they signed a 5 year lease so don't want to don't things between us, but similarly do not want to be chasing rent every month for the next 4.5 years
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    As above explain to them what you can do. But you obviously don’t want to. So please pay the rent As agreed. 

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    Daily interest is technically called actual//actual so it's as others have stated. My approach is that dialogue explaining your issues will be the best way forward.
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    Chartered Accountant, Tax Advisor and Mortgage broker

    (and BTL portfolio owner)

    stuart@johnsonsca.com

    02039077022

    You should see if you can get them onto a standing order. I would meet with them, explain the issue is causing problems and that you have options and that you want a standing order set up to keep things amicable. Take the forms with you.

    Ideally tenants should be put on a standing order at the start and this specified in the lease. Non payment means they have to actively cancel the SO.
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    Rural Practice Chartered Surveyor. Experienced in estate management, residential investments, planning and development and rights for utility apparatus. All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.

    Also ask the person who wrote the contract for you as to why they included such an ineffective clause as opposed to something with teeth.

    A specified admin fee + interest for every late payment would be more effective when it comes time to re-issue of said contract.

    Or mandate a direct debit.

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    agree with your points, the contract does seem far too flimsy in that respect

    the rent is late again this month and after discussing with the tenant they have explained they are having significant cashflow problems and have asked me to be understanding whilst they work through it. I have read through the lease which has a clause that reads:

    RE-ENTRY AND FORFEITURE

    36.1

    The Landlord may re-enter the Property (or any part of the Property in the name of the whole) at any time after any of the following occurs:

    (a) any rent is unpaid 21 days after becoming payable whether it has been

    formally demanded or not; (b) any breach of any condition of, or tenant covenant in, this lease; © an Act of Insolvency.

    36.2

    If the Landlord re-enters the Property (or any part of the Property in the name of the whole) pursuant to this clause, this lease shall immediately end, but without prejudice to any right or remedy of the Landlord in respect of any breach of covenant by the Tenant or any guarantor.

    I see my options are:

    - exercise this right after 21 days, enter the property and change the locks

    - be understanding and hope it gets paid

    Essentially, being understanding is asking me to dip into my pocket and pay the mortgage, I don't think it is unreasonable to ask the company directors to do the same?

    What would you do?

    Advice very greatly appreciated as always

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