On 6 April 2014, regulations implementing the Commercial Rent Arrears Recovery (CRAR) provisions of the Tribunals, Courts and Enforcement Act 2007 will come into effect. This will mean major changes for commercial landlords in terms of rent arrears recovery by seizure of tenant goods.
Why the change?
CRAR will replace the ancient common law remedy of distress currently available to landlords. A landlord levies distress by entering the tenant's demise to seize goods to the value of outstanding rent arrears, either personally or by using an authorised bailiff. In the case of commercial premises, neither the court's permission nor prior notice to the tenant is needed.
This remedy has attracted criticism for potentially violating the human rights of the tenant, and for allowing the landlord to recover debts from the tenant ahead of other creditors.
What will be changing?
Under the new CRAR scheme, a landlord will still be able to seize and sell a tenant's goods and offset the sale proceeds against rent arrears, though in more limited circumstances. To use CRAR, the following conditions must be satisfied:
- The tenant must occupy the premises under a commercial lease only. Where the tenant lawfully occupies any part of the demise as a dwelling (e.g. a flat above a leased shop) or the lease requires any part to be so occupied, CRAR cannot be used.
- The lease must be evidenced in writing.
- Basic rent arrears plus VAT and interest only can be recovered under CRAR. It is not possible to recover additional sums in this way, such as insurance rents or service charges, even where these sums are reserved as rents in the lease.
- The landlord must give the tenant seven days' prior notice of an intention to enforce CRAR. This is done by serving a notice of enforcement on the tenant.
- Enforcement must be by authorised agent only and not by the landlord personally, between 6am and 9pm on any day of the week (if the tenant's trading hours are outside of these hours, the agent may enter during the tenant's trading hours).
- Agents are not permitted to seize tools of a trade up to the value of £1,350, nor any items in actual use where seizure is likely to cause a breach of the peace.
- The landlord must wait at least seven days before selling the goods seized, unless waiting would render the goods unsaleable or would substantially reduce their value.
What will this mean for you?
CRAR will give greater protection to tenants, making it more difficult for landlords to recover rent arrears. In particular, the requirement for the landlord to give the seven-day warning notice provides the tenant with an opportunity to remove goods from the premises, to abscond or to enter into insolvency ahead of seizure.
Accordingly, landlords will need to give greater consideration to the lease terms in order to counter this. For example:
- When letting mixed-use property (e.g. a shop with a residential flat above), consider creating two separate leases. This allows CRAR to be used in relation to the commercial element.
- If negotiating an "inclusive rent", where service charge/rates/insurance rents are included in the rental figure, ensure that a sum reflecting merely the possession and use of the premises can be identified. This allows the "basic rent" to be ascertained and recovered under CRAR.
- Where there is a sub-tenant, the landlord may consider serving a notice of enforcement on the sub-tenant. This will require the sub-tenant to pay its rent directly to the landlord rather than to the debtor tenant. If the sub-tenant fails to comply with this notice, the landlord may exercise enforcement under CRAR against it.
- Landlords will want to consider more carefully what security to take under the lease, given that CRAR will make unsecured recovery of rent arrears more difficult.
Despite being criticised by many, the law of distress has long served as a helpful tool to commercial landlords pursuing recovery of rent arrears. Unfortunately, these changes will undoubtedly make this process harder for landlords, particularly by alerting tenants to imminent enforcement.
It is possible that a landlord's notice of enforcement might encourage the tenant to pay. However, many believe it more likely that the CRAR formalities will instead dissuade landlords from employing this remedy to recover rent arrears.