The UK government has finally taken its second legislative step towards reforming the law of distress and replacing it with the snappily named Commercial Rent Arrears Recovery (CRAR) which it originally mooted six years ago in the Tribunals Courts and Enforcement Act 2007. Despite uncertainty over the future of CRAR, the new regime is likely to take effect from April 2014 following the publication yesterday of the Taking Control of Goods Regulations 2013.
The Regulations flesh out the skeleton reforms set out in the 2007 Act and will substantially alter how landlords can seize tenants' goods for failure to pay rent. For centuries, the law of distress has remained broadly unchanged and landlords consider it a quick, cheap and easy means of encouraging tenants to pay overdue rent. However, tenants increasingly see the process as archaic and heavy handed and the new law seeks to redress the perceived imbalance as well as sweeping away some of the more archaic elements of the current regime.
- Landlords must give the tenant at least 7 clear days' notice in writing before using CRAR. The Regulations refer to the notice hearing to state the amount and circumstances of the "debt". The implication is that the rent must have fallen due, which would prevent notices being given in advance, although there remains some doubt about this point.
- The rules preventing the exercise of distress on a Sunday will be abolished, but CRAR can only be exercised between the hours of 6am and 9pm (although there is an exception where the premises are open for trade outside of those hours).
- CRAR may only be used for arrears of principal rent (plus VAT and interest). It will not be available for service charge and other sums even if reserved as rent in the lease. In addition, the minimum amount of unpaid rent for which CRAR can be exercised will be 7 days' worth.
- CRAR will not be available where part of the premises is lawfully used for residential purposes.
- CRAR may only be exercised against goods owned by the tenant and not goods owned by third parties, including sub-tenants.
- Certain goods including the tenant's "tools of its trade" will continue to be exempt from CRAR, but only up to a value of £1,350.
- The current procedure for taking "walking possession", where a bailiff takes control of goods whilst leaving them on the premises, will be replaced by far more rigorous "controlled goods agreements".
- The process for selling and dealing with goods once CRAR has been exercised will be fully detailed.
- Under current law, where a tenant has failed to pay rent, the landlord can serve notice on a sub-tenant, requiring it immediately to pay any rent it owes to the superior landlord instead of to its direct landlord. If the sub-tenant inadvertently pays its direct landlord, once it has received this notice, it will still be liable to pay the superior landlord. Under the reforms, the notice will only take effect 14 clear days after it has been served.
Whilst the changes will undoubtedly be welcomed by commercial occupiers, they create additional bureaucracy and are a substantial erosion of landlords' rights. Serving notice before exercising CRAR will potentially give tenants an opportunity to put goods out of the landlord's reach. Similarly, a notice served on a sub-tenant to redirect rent will be rendered far less effective if it is subject to a 14 day delay. In the majority of cases the sub-tenant will have already paid its rent to its direct landlord before the notice period has expired.
Whilst the regime is intended to strike a fair balance between landlords and tenants, it remains to be seen whether the consequence will be a rise in disputes as parties seek to work through the practical implications of the new rules.