The impending abolishment of the ancient common law self-help remedy of distress will affect landlords, tenants and insolvency practitioners.
What is Distress?
The ability of landlords to recover arrears of rent without going to Court, by instructing bailiffs to seize, impound and sell certain goods located at the premises and belonging to the tenant. This right will remain until 6 April 2014, but after that date distress will no longer be available and commercial landlords will instead have to rely on Commercial Rent Arrears Recovery (“CRAR”).
What is CRAR?
CRAR sets out a new procedure for commercial landlords to recover commercial rent arrears by permitting seizure of certain goods to the value of those arrears. As with current rules on distress, CRAR limits the types of goods which can be seized and sold.
The new procedure will only apply where the lease in question is in writing, and of commercial premises. Any element of residential occupation authorised by the lease will prohibit the exercise of CRAR by the landlord, so it will not be available in cases involving a mixture of residential and commercial premises under the same lease.
New Notice Periods and Requirements
Whereas the right to distrain can currently be exercised after only 1 day of rent arrears, there must be at least 7 days of arrears before CRAR can be exercised. This time constraint is exacerbated by the new requirement for landlords to serve a 7 day notice on their tenant that they intend to exercise their rights to CRAR, before actually doing so.
There are strict requirements as to the content and service of the Notice, with landlords required to instruct and indemnify a certificated enforcement officer to both serve the Notice and, after expiry of the Notice period, to call at the premises to seize goods.
Those enforcement officers will be able to seize goods (after expiry of the Notice) on any day of the week including Sundays and Bank holidays, between 6am and 9pm (or within longer business hours during which the premises are open). This differs from the enforcement times that apply to the right of distress, which permit enforcement officers to gain access through open windows, skylights and internal partitions: they will now only be able to exercise CRAR by door or other usual means of access.
Landlords are able to apply to court for an Order reducing the 7 day notice period, if they can show that the tenant is likely to relocate or dispose of goods currently on the premises.
Once the goods have been seized, the tenant must be given a further 7 clear days prior notice of the intended sale of the goods, which must take place by auction (unless a court order is obtained permitting another method), and a valuation must be provided to the tenant beforehand.
What do the changes mean for Landlords?
In addition to the issues detailed above, CRAR will restrict landlords to the recovery of rent arrears (and VAT and interest on those arrears). Landlords will not be entitled to use CRAR to recover service charges, insurance premiums, rates or any other sums that may have been reserved as rent within the lease. This will necessarily give rise to disputes in relation to all inclusive and turnover rents.
Landlords will remain entitled to recover rent from sub-tenants, but will need to ensure service of the appropriate notices. Indeed, the increased notice provisions before exercising CRAR are, ultimately, the principle difference and concern for Landlords, together with the increased time frames and requirement for a minimum level of rent arrears before CRAR can be exercised. These changes represent a substantial increase from the amounts and times applicable to distress.
Tenants’ position post CRAR
These changes give commercial tenants more certainty, and protection. Whereas a landlord exercising his right of distress can currently seize goods (without prior notice) and then sell them within 5 days, it will be at least 21 days before the sale can complete once CRAR comes into force (given the 7 day minimum period of arrears, the 7 day notice period of intention to exercise CRAR and the 7 day notice of sale).
Additionally, just as landlords will have the ability to apply to court to shorten the CRAR Notice period, tenants (and insolvency practitioners) will also be able to apply to court to have the Notice set aside, or for an order staying CRAR enforcement proceedings .
Not only will these changes reduce the chances of the landlord quickly recovering the rent arrears, but they will increase the occasions where landlords’ rights to CRAR are superseded as a result of the tenant company entering into an insolvency process.
Effect for Insolvency practitioners
Unfortunately, the entitlement to apply to court to shorten the notice period will not protect landlords from the risk that service of the Notice may prompt some tenants to enter an insolvency process, thereby preventing the landlord from exercising CRAR.
Indeed, where an administrator has been appointed, the landlord will need permission from the administrator or the Court to exercise CRAR. When combined with the recent case law regarding administrators’ liability for rent as an expense of the administration following their appointment, a further increase to the current trend of tactically timed administration appointments seems inevitable. Indeed, the recent recommendation by the British Property Federation that landlords take larger deposits probably reflects both of these issues.