Landlords of commercial property whose tenants default in paying rent currently have the ability to “levy distress” on assets of the tenant. This is an ancient remedy allowing landlords to recover rent by seizing goods from the premises and selling them. This raises money to cover the rent arrears relating to the premises, including any sums reserved as rent, such as service charge and insurance premiums. This has often been a very effective means of obtaining payment: it is quick; it avoids any need for court proceedings and the tenant has no warning of the arrival of bailiffs, whose appearance at the premises is often sufficient to persuade the tenant to pay up to avoid assets being taken to satisfy the debt.
However, changes are afoot and the remedy of distress is to be replaced. On 26th July 2013, the Taking Control of Goods Regulations 2013 were issued. These will come into force on 6th April 2014 as part of a number of reforms relating to seizure and sale of goods. The Government has concluded that the current rules are complex and confusing and the Regulations set out the new procedure that “enforcement agents” must follow when taking control of and selling goods to recover a debt. It is to be known as the procedure for commercial rent arrears recovery (“CRAR”).
Landlords are unlikely to welcome CRAR with open arms, as it takes away one of the greatest advantages of the remedy of distress – the element of surprise. A minimum of 7 days’ notice (excluding Sundays and Bank Holidays) must be given to the tenant to give him the opportunity to take legal advice before the enforcement agent is permitted to enter the premises. The notice must contain certain prescribed information. The cynics among us may wonder whether the tenant will in fact use the 7 days to consult his solicitor, or whether he may instead spend the time removing valuable items from the premises! In certain circumstances a shorter period of notice can be given, but this requires a court order. If any of the prescribed information is omitted, there is the possibility of the tenant challenging the notice and delaying the process further. There is also power for the court to intervene if the tenant applies for an order under the European Convention of Human Rights.
Hours of entry by the enforcement agent are generally limited to 6am to 9pm, with some specific exceptions. Unlike distress, CRAR can only be used for the recovery of pure rent, together with VAT and interest on that rent. There is a minimum amount, equivalent to 7 days’ unpaid rent, taking no account of VAT or interest. CRAR cannot be used for anything else, such as service charge, repair costs or insurance, even where they are reserved as rent under the lease. It is therefore important that, in the case of all-inclusive rents, it is possible to identify the rent element.
CRAR can only be used to recover rent due under a lease of commercial premises. No part of the premises must be used for residential purposes (unless such use is in breach of the terms of the lease). If, for example, the lease of a building allows the upper floor to be used as a flat, the Landlord cannot recover any part of the rent by CRAR. Landlords may wish to consider granting separate leases of the commercial and residential parts of the property, so that the remedy is available in respect of the commercial area, where there may well be stock available to seize and sell. This is likely to result in payment of arrears being received more speedily than court proceedings for recovery.
It is clear that landlords need to consider the implications of the new rules, both in respect of existing leases and when contemplating granting new leases, particularly of mixed use premises.
For further information, please contact Sylvia Goulding on 01234 270600 or email at firstname.lastname@example.org