Bad timing for a halfway house
Landlords commiserate! The highly effective remedy of distress is to be abolished and “replaced” by a new statutory regime.
The remedy is a victim of its own success. The mere threat of its use can intimidate tenants into paying rent arrears. Long said to be a draconian historical throwback, critics say that the remedy is unfair not just to tenants but to other tenant creditors and third parties. That’s not surprising; levying distress can:-
- afford landlords priority over other creditors;
- place third party goods at risk;
- afford limited opportunity for challenge;
- raise the possibility of a tenant’s goods being sold at an undervalue;
- prevent a tenant from trading its way out of financial difficulty.
The Tribunals, Courts and Enforcement Act 2007 (2007 Act)
Section 71 of the 2007 Act will abolish the common law right to distrain for arrears of rent. Its replacement will be a statutory mechanism for commercial rent arrears recovery (CRAR). CRAR has yet to come into force as many key enforcement elements will be set out in “regulations to be made”.
CRAR will apply to leases of commercial premises and will allow a landlord to take control of goods to recover rent which is due. CRAR will only be exercisable if the unpaid rent exceeds a minimum amount yet to be decided upon (this may be set at the lower of £200 or one week’s rent).
The “landlord” is the person for the time being entitled to the immediate reversion in the property comprised in the lease. “Lease” is given a broad and practical meaning. It includes tenancies in law and in equity, as well as tenancies at will. That said, leases must be in writing. Similarly, the definition “commercial premises” is widely defined but excludes premises any part of which are occupied as a dwelling, whether lawfully under the relevant lease, under a sub-lease or otherwise. This may impact on the use of CRAR within the context of mixed use premises leases.
The definition of “rent” excludes any sum in respect of rates, council tax, services, repairs, maintenance, insurance or other ancillary matters whether or not such sums are categorised as “rent” in the lease. However, the landlord must subtract any “permitted deductions” (e.g. any set-off that the tenant would be entitled to claim in law or in equity in an action by the landlord for the rent in question).
- An enforcement agent (who must be certified) must be instructed under a warrant of control.
- A notice of enforcement must be served. The rent must be due and owing before that notice of enforcement is given. CRAR is only capable of being exercised if the net unpaid rent remains unpaid both at the time the notice of enforcement is given and the first time that goods are taken control of after that notice has been given. The regulations to be drafted will prescribe a notice period (Period) from the giving of notice to the first time that goods can be taken control of.
- The notice of enforcement will bind the property in the goods from the time it is served. The goods will remain bound until they are sold or arrears are paid in full (either out of goods, sale proceeds or otherwise).
- Control will only be capable of being taken if the goods are located at the relevant premises and certain goods may well be exempted from CRAR under the regulations.
- Once the Period expires, the enforcement agent will either secure the goods at the premises or remove them and provide the tenant with an inventory.
- The enforcement agent will have to obtain a valuation for the goods he has taken control of and if in a position to sell them (again within a timeframe to be specified), must obtain the best price that can reasonably be obtained.
- The tenant must be given notice of the time, place and date of the sale which must be by way of public auction (unless the court directs otherwise).
An enforcement notice will not bind third parties or a purchaser acting in good faith who is unaware of the notice. If a third party wishes to assert ownership of goods he has to apply to court and once the application is made the enforcement agent cannot sell without a court order.
If an enforcement agent breaches the 2007 Act the tenant can apply to court with a view to securing an order for the return of the goods or damages against the agent/landlord for loss. If the tenant wrongfully interferes with controlled goods the landlord may bring a claim for loss suffered as a result.
The court has power, on the application of the tenant, to make an order setting aside the enforcement notice or an order to the effect that no further steps may be taken under CRAR without further order. No guidance is given in the 2007 Act as to the court's exercise of these powers.
With low levels of liquidity, negative sentiment and concerns over the wider economy this is a bad time for landlords of commercial property to lose the remedy of distress. That said, the Law Commission recommended the abolition of distress without replacement, so tenants are not as well off as they could have been. We seem to have been left with a halfway house remedy. The critics of distress can take credit for achieving a change in the law but this comes at the price of uncertainty over what impact CRAR will have. Both landlords and tenants are at the mercy of those who will draft the regulations and the current financial climate will no doubt have a role to play in that task.