As the economic landscape worsens, SIPPS could find they own leased-out properties where the tenants are in financial difficulties, says Caitlin Southall, senior marketing executive, Curtis Banks. So, what are the options open to both parties?
It’s no secret that the cost of living is rapidly increasing, with inflation continuing to rise and energy bills soaring. These problems also affect businesses, with many finding that their operating costs are increasing to the point that it has a knock-on effect on their ability to pay the rent on their leased business premises.
Some of these businesses will be tenants of properties held in pensions – potentially the business owners’ own pensions. The ability to have a connected company occupying a property held in a SIPP or SSAS is one of the main reasons why clients choose this investment option. This allows their business to pay rent into their pension: the rent is normally deductible from the trading profits of the company and received into the pension tax free.
However, what would happen if a tenant (connected or otherwise) is struggling and unable to pay the rent? How can clients look to safeguard their investments and maintain rental income into a pension?
It’s essential for all tenants, but perhaps most importantly for connected tenants, to engage with their provider as soon as a problem arises. Once aware of a potential problem, providers can work with the parties involved to find a solution that works for both the tenant and pension, while meeting all necessary regulations.
In terms of safeguarding a property pension income, there are a few things to consider:
- It’s essential that clients undertake their own due diligence on potential tenants before they grant a lease. Some estate agents will assist with this in terms of completing background or financial strength tests on tenants. If you proceed absent of this due diligence, then clients may be proceeding in granting a lease to a company that has a history of not paying rent, or who is unable to financially afford to pay for the lease.
Providers are likely to complete money laundering checks on potential tenants, however this isn’t due diligence, nor advice on the suitability of a tenant to occupy a client’s SIPP property.
- If an unconnected tenant is in financial difficulty and is unable to pay the agreed rent, taking a step back to consider the effects of all potential solutions (including those outlined below) is really important. The initial reaction may be to take steps to remove the tenant from the property; however this would mean paying to remove the tenant, searching for a new occupier and then paying the legal costs to put a new lease in place.
Additionally, whilst a property remains vacant, other costs such as business rates, utilities, insurance and security are all going to fall on the landlord. Taking a reduced rent for a period in order to secure long term income may be a more effective strategy. However, appropriate advice from professionals should be sought, and there is unlikely to be any guaranteed resolution in terms of payment of rent moving forward (especially noting the uncertain economy).
Points to consider:
Before addressing the potential solutions, there are a couple of important points to consider:
- If the tenant is connected, a qualified valuer is required to advise on whether the proposed course of action is considered fair and reasonable in the market. There are potential tax charges in HMRC regulations if a connected tenant fails to pay rent on a SIPP-owned property
- If the tenant is unconnected to the client(s), the client(s) can decide how they wish to proceed with the tenant’s proposed course of action.
- Tenants may need to provide evidence of their financial hardship in order to proceed with some of the below options.
Potential solutions
Rent-free periods:
A landlord grants a period of rent-free occupation to the tenant, after which time the tenant would be expected to restart rent payments as per the lease agreement.
A rent-free period wouldn’t alter the other terms of the occupational lease.
Rent Concession:
The term ‘rent concession’ refers to a reduced rent for a prescribed period.
A rent concession is temporary, and for a defined period. After this time, the terms of the occupational lease would be reinstated.
Lease surrender (re-grant):
A landlord may agree a more permanent solution with the tenant. Lease surrenders formally and legally bring the lease to an end for both the landlord and tenant. Unless there is an immediate re-grant of a new lease, then the tenant must vacate the premises and the landlord can source another tenant.
Payment Plan:
A payment plan is where the tenant continues to pay the annual rent as per the terms of the lease, but also settles any arrears in addition to this. They may make monthly or quarterly payments against the arrears.
Summary
With tenants and households alike facing financial challenges and an uncertain economy, rental difficulties are bound to increase. Open and early conversations between landlords, tenants and providers are the key to making progress towards a solution.
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