The threat of a landlord levying distress over goods owned by a tenant in financial difficulty – entering premises and seizing goods found therein – has always caused concern for insolvency practitioners seeking to provide business rescue solutions. It has often been one of the reasons for tenants to seek the protection of a moratorium. However, ever since the courts have interpreted a walking-possession agreement to grant security rights to a landlord, sometimes even a moratorium has proved to come too late to preserve the tenant’s assets for the benefit of the company’s general body of creditors.
On 6 April 2014, the UK’s remedy of distress for rent was replaced with a new statutory mechanism – Commercial Rent Arrears Recovery (CRAR).
KEY DIFFERENCES BETWEEN DISTRESS AND CRAR
The most significant change, from a business rescue perspective, is the introduction of a notice period which requires a landlord to give at least seven clear days’ notice before the landlord’s enforcement agent attends the premises to exercise CRAR.
Legislation from 1737 provided that where tenants ‘fraudulently or clandestinely’ removed goods from the premises to prevent them being distrained upon, landlords were entitled to seize the goods from wherever they had been relocated and, as a penalty, recover double the value of the goods removed. The new CRAR regime eliminates this remedy. Now, if landlords fear that the goods will be removed, they can apply to court for permission to give less than seven days’ notice; to recover goods from premises other than those demised, they will need to apply to court for a warrant entitling an enforcement agent to do so.
OTHER KEY CHANGES INCLUDE:
Landlords used to be able to levy distress at premises which comprised residential and commercial use. CRAR may only be exercised over goods at ‘commercial premises’ or over vehicles belonging to the tenant on the public highway.
Distress required a relationship of landlord and tenant to exist without the need for a written lease. For CRAR to apply, a tenancy must be evidenced in writing.
Level of arrears
Previously, there was no minimum level of arrears that was required in order to levy distress. Now, at least seven days’ rent must be outstanding.
Type of arrears
CRAR procedure restricts the recovery of arrears to ‘basic rent’ only (including interest and VAT), unlike the distress regime, which enabled landlords to recover any sums due under the lease that were defined as ‘rent’ (e.g. service charge, insurance payments and rates).
CRAR can be exercised between 6 am and 9 pm any day of the week or during the tenant’s business hours should these fall outside the permitted hours.
Sale of goods
Under CRAR, goods seized by an enforcement agent must be sold at a public auction after giving the tenant at least seven clear days’ notice. Under the old regime, seized goods could be sold by any method preferred by the landlord after five days of seizure.
Who can seize?
CRAR can only be carried out by an authorised ‘enforcement agent’ - this term now replaces ‘certificated bailiffs’. Landlords will therefore no longer be able to levy distress themselves. Enforcement agents cannot use force to enter premises or to gain access to a vehicle for the first time, without first obtaining a warrant permitting them to do so.
A landlord is no longer able to seize any goods found on the premises. CRAR can only be exercised over goods in which the tenant has an interest. Consequently goods owned by a third party should not now be taken in exercise of CRAR, but goods which the tenant owns jointly with another party can be seized. The co-owner will be entitled to receive an inventory of the goods seized.
Keeping goods on the premises
Walking possession agreements have been replaced by ‘controlled goods agreements’. By signing the agreement, the tenant is permitted to keep the goods in his possession, but undertakes not to remove or dispose of them, nor to permit anyone else to do so before the debt is paid.
Most insolvency practitioners were familiar with the rights of a landlord to serve a notice on sub-tenants, requiring them to pay rent directly to the landlord. Those rights have been replaced by similar ones under section 81 of the Tribunals Courts and Enforcement Act 2007, although the recipient sub-tenant now has 14 clear days before being obliged to start making payments directly to the landlord.
WHAT DOES THIS MEAN FOR LANDLORDS, TENANTS AND INSOLVENCY PRACTITIONERS?
Although the new CRAR regime still enables a landlord to seize a tenant’s goods, the seven-day notice period gives a potentially insolvent tenant important breathing space in which to seek professional advice. It seems likely that the courts will interpret the landlord’s rights under a controlled goods agreement in the same way as a walking possession agreement and thus capable of elevating a landlord from the position of unsecured creditor to one whose claim takes priority over other creditors. However, the question is likely to be of less relevance, provided tenants seek urgent advice and, where appropriate, use the breathing space to obtain a moratorium or to pass a winding-up resolution (landlords rarely bothered to distrain following notice of liquidation).
CRAR provides a better opportunity for solvent tenants to reach constructive agreements in relation to arrears without the potential interruption to their business imposed by the levying of distress. However, the requirement for landlords to give notice before exercising CRAR is likely to result in greater losses on their tenants’ insolvency; it seems likely that they will seek additional security from tenants at the outset of the lease in the form of rent deposits and guarantees.
From a business rescue perspective, it is to be hoped that the receipt of notice of impending CRAR will encourage financially distressed tenants, who have not already done so, to seek urgent advice, at a time when alternatives to liquidation or bankruptcy might still be possible.