The utmost priority in commercial property management is ensuring a healthy cash flow. Occasionally, some tenants will pay the wrong amount; at random times; or not at all. It may be better to endure a vacancy and find a new tenant altogether than to deal with a problem tenant.
Strategic Property Management is a knowledgeable company which specializes in managing commercial tenants and collecting rents on a regular basis. We have encountered several scenarios where tenants stopped paying rent altogether or paid in piecemeal. The Commercial Tenancies Act plays a major role when dealing with defunct tenants. One wrong move by the Landlord and it could forfeit certain rights. This can be avoided by applying our useful tips.
Tip #1 - Decide on Lease Termination or Distraint
These are two mutually exclusive options - meaning it's one or the other. Terminating the lease means you lock the doors and take control of the unit. It is designed so that if the landlord wishes to recover any amounts owing, then it can be done through the external courts, ie. Small Claims Court or the Superior Court of Justice. Who knows - maybe the tenant suddenly gets their act together after the landlord changes the locks.
Distraint means you perform distress which is seizing and selling the tenant's inventory to recoup the losses in rental income (only). This is the more complicated and time-consuming choice. The tenant is permitted to continue operating their business while the distraint process occurs; and the lease is still in tact. To assign a dollar value to the tenant's equipment and chattels, it requires at least two separate appraisals, with the valuations often being a fraction of fair market value. It is important for the landlord not to exercise excessive force in the distraint process as a judge may deem it to be inappropriate or unlawful.
Tip #2 - Issue a Notice of Default
This sets up the pins for enforcing the lease. Don't have time to wait around? Send the default notice as early as the 5th day of the month that non-payment occurs. Be sure to check the lease documents for any guiding provisions on issuing default notices.
Draft the Notice properly as even the slightest mistake may void the document and restart the clock. Address the notice to all the legal names/companies listed in the lease documents. In the main paragraph, state that the tenant is in default of the lease due to non-payment of rent; state the amount of rent owing; and that payment is required in full by "x" date, or the landlord may exercise its rights per the lease. Please note that accepting any partial payment will void the default.
Send the notice to a corporate position, ie. President or CEO rather than an individual's name in case the person is no longer with the company. If the lease doesn't specifically state how notice shall be given, then deliver it by registered mail (Canada Post) and in-person delivery. Once it has been delivered, then the clock starts.
"The tenant is the most valuable asset of a building." – Dane Fader, Founder of Strategic Property Management
Tip #3 - Tailor your collections approach
Discover the reasons for the tenant's business struggles. Do they need an upgrade in security or exterior lighting to deter thieves from stealing their inventory? Are their operating hours inconsistent with the surrounding retail market? Perhaps the owner is undergoing personal struggles that are distracting them from running a business. Knowing your tenant's unique situation will allow you to propose a thoughtful approach to offering assistance.
Tip #4 - Offer advice
Once you understand the tenant's situation, try to give advice to help their business succeed. Use existing networks of contacts to put them in touch with an industry expert or a business consultant. If their company is at a tipping point and hope is dwindling, they might need to pack it in and rethink their business model.
A payment plan may be a last resort for collecting a medium to large sum of money. Some tenants want to stay in the building but don't have the cash flow to handle a lump sum payment so they require a multi-month arrangement. Any missed payments should trigger an automatic default of the lease.
Tip #5 - Engage the right bailiff
Hiring a bailiff can eliminate the stress of dealing with a dysfunctional tenant. A bailiff carries out the dirty work on behalf of the landlord. They review the notice of default paperwork; visit the unit; change the locks; post a notice on the door; and/or arrange for appraisals of inventory in the event of distraint. Most importantly, they adhere to the Commercial Tenancies Act and ensure the laws are being followed. A bailiff should be fairly compensated, but shouldn't charge exorbitant fees to a landlord in a precarious situation. We recommend contacting multiple bailiffs to find one that is fairly priced with a quick response time for tenant lockouts.
Trust a property manager to make the right decision
In summary, try to work with the tenant to ensure their long term tenancy at the property. If collecting rent requires constant chasing, or if the tenant's business is failing, then send a default letter and decide on whether to pursue lease termination or distraint. Better yet, contact Strategic Property Management to handle your tenants on your behalf.
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