What does paid in arrears mean?
If a payment is stated to be ‘made in arrears’, this can mean one of two very different things. It can either mean that the payment is:
- Paid after the service period
In some contexts the two different usages may be differentiated through language. A payment ‘in arrear’ refers to a legitimate retrospective payment, whereas to be ‘in arrears’ refers to the more negative overdue payment.
Only recurring payments such as rent or wages can be described as ‘in arrears’. The term is not applicable to a one-off payment.
Paid in arrears: overdue payment
An overdue payment – known as a payment in arrears – occurs when a customer does not pay for a service or product during the time frame specified by the vendor.
Overdue payments can have consequences such as:
- A reduction in credit
- An increase in interest rate
- A reduction in payment terms
Businesses in particular should avoid making overdue payments where possible as this may establish a negative relationship that may impact later financial dealings.
In the first instance of an overdue payment, check to see that invoices are being received. Also clarify the payment terms on the invoices to ensure that there are no ambiguities regarding payment date.
It is also important to make sure that the accounting system is running smoothly and that it is correctly recording payments. Digital errors can cause financial setbacks and waste time.
Once an overdue payment is established as an error on the part of the person responsible for making the payment, penalties can be enforced such as charging interest after a certain amount of time without payment. This is often an effective way to prevent overdue payments in the future.
Paid in arrears: payment after the service period
Not all payments in arrears are cause for concern. If someone is billed in arrears, this simply means that the product or service provider has not charged the individual until after the end of the service period.
Therefore it is possible to consistently pay in arrears without those payments being considered late. Payments after the service period do not warrant a penalty or any further action.
Billing in arrears is unusual in the context of landlord-tenant relationships, as landlords normally request payment for rent at the beginning of the service period (i.e. for the following month), but it is a common procedure in businesses.
What to do if a commercial tenant is in arrears
How you proceed with a tenant who is in arrears will depend on your preferred outcome. You should consider factors including:
- Is the tenant in financial difficulty? – If they are struggling to the extent that they have an insolvency arrangement in place, or they may shortly enter into one, you may be further delayed in receiving any outstanding funds
- Do you want the tenant to remain in the property? – If you do, it’s worth discussing payment options with the tenant to help them pay the funds which are in arrears. Consider if you could allow the tenant to pay the funds in instalments, or offer a reduced rent for a fixed time until their financial situation improves
- Would you like the tenant to vacate the property? – If so, you could consider forfeiting the lease. Once the lease is forfeit, you can pursue the tenant for the arrears
At Martin Slowe we have more than 50 years of experience in commercial property services. Get in touch with us and our team will be only too pleased to provide you with specialist advice.