What do you do about unpaid rent when dealing with limited companies who won't pay? It is common for landlords and letting agents to let residential properties to limited companies, for use by the company employees. Where such a lease is with a company tenant (rather than an individual) this form of lease cannot be a Short Assured Tenancy. The Housing (Scotland) Act 1988 states that for a Short Assured Tenancy to be created, the tenant must be an individual. Where you are leasing to a company, a differently worded commercial style lease should be used.
Where a limited company defaults on their rent, landlords and letting agents should be aware of certain issues when trying to recover their losses.
The legal status of a limited company has a direct bearing on how much and who a landlord can pursue for the debt. Unlike sole traders who can be sued personally, a limited company has a separate legal personality from those running it. Therefore, where a landlord has contracted with the company they cannot go after its members for unpaid rent, as legally the debt is incurred and owed by the company. This is still the case with small companies who may have only one director who is also the majority shareholder.
A director of a limited company can only be held liable for company debt in certain circumstances, such as where:
- the company is limited by guarantee
- the director is guilty of wrongful or fraudulent trading
The risk for landlords when contracting with a limited company can be high, particularly when the company has neither the assets nor capital to repay the debt.
Landlords should take precautions when leasing to limited companies, particularly small start-ups with limited assets. Landlords should carry out a credit check on the company and where possible leases should include a personal guarantee clause and a separately signed guarantor agreement to ensure that if the company defaults, the guarantor can be pursued personally.
When pursuing a company for unpaid rent there are various legal routes for recovering the debt. For example, as well as the usual payment action in the Sheriff Court, a statutory demand can be served and if unpaid/undisputed after 21 days, the landlord can petition for liquidation of the company.
If you would like any advice about how to pursue a limited company for unpaid rent, or further guidance on the type of lease you should be using, please contact us.
