On 6 April 2014, the common law right for a landlord to seize a tenant’s goods and to sell them in order to recover outstanding rent arrears – a right known as “distress”, which has existed since before the Magna Carta - will be abolished. Instead, landlords will have to use a new statutory method of enforcement, known as Commercial Rent Arrears Recovery (“CRAR”), governed by the Tribunals Courts and Enforcement Act 2007 (“the Act”) and the Taking Control of Goods Regulations 2013 (“the Regulations”).
Whilst the basic premise remains the same, in that the tenant’s goods are seized and sold in order to recover an amount equivalent to the outstanding arrears, CRAR introduces several key changes, including:
- A requirement for notice to be served on the tenant before goods are seized;
- Removing the ability for a landlord to seize goods from mixed use premises; and
- Preventing a landlord from taking control of goods if the tenant’s arrears fall below a new minimum level.
This note will cover briefly some of the most important changes.
One of the few features shared by both systems is the fact that they each apply only to commercial leases. However, whereas the soon-to-be-defunct law of distress requires only a relationship of landlord and tenant to exist, CRAR contains an additional requirement for the lease to be in writing. CRAR may not be exercised in relation to oral tenancies, or to licences, whether written or not.
CRAR’s application to commercial premises is more limited in scope than its predecessor. Whereas a landlord could exercise distress over mixed use premises, CRAR applies only to premises let and used solely for commercial purposes. However, a lease will still fall within the scope of CRAR if the residential occupation is in breach of the terms of the lease.
Distress was viewed as being extremely landlord friendly, since it permitted the recovery of all sums reserved as rent under the lease. The Act has tempered this significantly, with the result that sums in respect of service charges, rates, repairs or insurance will not be recoverable even if those amounts are reserved as rent under the lease. CRAR may, however, be used to recover VAT and interest due on rent.
Notice of Enforcement
Under the law of distress, there was no requirement for a landlord to serve the tenant with notice of its intention to seize the tenant’s goods. In possibly the most significant change to the old regime, the tenant must now be given written notice by the enforcement agent at least seven clear days before CRAR is exercised. CRAR must then be carried out within 12 months of the date of the notice (or, if a repayment agreement is reached with, and subsequently breached by, the tenant, within 12 months of the date of that breach).
Clearly, there is scope for unscrupulous tenants to remove or otherwise dispose of goods during this seven day period to frustrate the landlord’s recovery efforts. In an attempt to level the playing field, the Regulations give the court power to order a shorter period of notice if it is satisfied that such actions by the tenant are likely in the circumstances.
Amount of Outstanding Rent
The Act has introduced a number of conditions relating to the level of arrears, each of which must be satisfied before CRAR may be exercised. The most notable are as follows:
- There will be a minimum amount of arrears below which CRAR may not be exercised. This minimum has been set at an amount equal to seven days’ rent and, although CRAR may be used to recover VAT and interest on rent, these sums should not be taken into account when calculating this minimum.
- The tenant must be in arrears of rent equal to or exceeding the minimum level before the notice of enforcement is given.
- The tenant must also be in arrears of at least the seven-day minimum when control of the goods is actually taken (meaning that the landlord will have to recalculate the level of arrears immediately before the enforcement agent takes control of the goods).
Note the potential here for a tenant, following receipt of an enforcement notice, to pay a proportion of the arrears to bring the outstanding amount below the statutory minimum, thereby preventing the landlord from proceeding to take control of the tenant’s goods.
CRAR arguably makes the process of seizing and selling a tenant’s goods to offset rent arrears more convoluted, and the likelihood of a successful recovery has certainly been diminished as a result of a number of tenant-friendly measures. As an alternative, many landlords are considering increasing their use of rent deposits to guard against tenant default, although market conditions and the level of deposit required to provide sufficient security may mean that this is not always a viable option. Therefore, both landlords and tenants should ensure that they are acquainted with the new rules in advance of next month’s changes.