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Landlords left in distress? New commercial rent arrears recovery scheme comes into force in April 2014.
The right of a landlord to distrain against tenant’s possessions for non payment of rent is an ancient common law remedy which arises from a landlord and tenant relationship. It allows a landlord to instruct a bailiff to enter the tenant’s premises and seize, impound and sell goods belonging to the tenant of an equivalent value to the rent arrears.
Although distress has been the subject of much criticism over the years, it is regarded by landlords as a highly effective process for recovery of commercial rent arrears and an important weapon in their armoury when dealing with defaulting tenants.
A commercial landlord’s right to exercise the right of distress will be abolished in April 2014 and replaced with a new statutory process namely Commercial Rent Arrears Recovery (CRAR).
Amongst the number of changes introduced by the new CRAR scheme, the most notable is the obligation for landlords to give tenants 7 clear days’ written notice prior to the bailiff entering the demised premises with a view to seizing the tenant’s goods.
One of the key criticisms of the CRAR scheme is the fact that the 7 day notice requirement would diminish the effectiveness of the remedy, as the tenant, having being given notice of the landlord’s intentions, will remove any goods of value from the premises during the notice period.
Of course there may be situations where it is simply not practical for tenants to remove goods from premises within 7 days. It is also anticipated that enforcement agents will develop practical ways to record, so far as they can, what goods are on site at the point of serving the notice. There is also an option for a landlord to apply for a court order to dispense with or reduce the notice period. However, the scheme does not specify, in what circumstances the court would grant such an order.
In addition to the introduction of the controversial notice requirement, there are a number of other new provisions in the CRAR scheme which include the following:
- Landlords will not be entitled to use CRAR against a tenant unless the outstanding amount is equal to, or greater than, seven days of arrears.
- Under the new CRAR regime, the definition of “rent” will be more restricted. Under the existing regime, “rent” covers a wide range of claims, since many commercial leases would reserve insurance, service charges and rates etc. as rent. Under the CRAR scheme, only rent is recoverable and “rent” is defined as the amount payable under the lease for possession and use of the premises.
- CRAR is confined to commercial premises, which means that (contrary to the current regime); it may not apply to mixed use premises such as pubs, shops with a residential flat above etc.
Although some commentators have argued that the CRAR scheme it is not all doom and gloom for landlords, many commercial landlords consider CRAR to be a watered down version of distress, which would ultimately make the recovery of arrears more difficult.
It is feasible that the new rules will result in landlords deploying alternative remedies, such as forfeiture, tenant insolvencies or pursuing Court proceedings. In addition, landlords may be forced to take protective steps such as taking larger rent deposits or granting separate leases of the commercial and residential elements of the premises.
The key message for landlords is to remain diligent, to watch for early warning signs of tenant financial difficulty and to take legal advice at an early stage, in order that all of the relevant options can be explored.