Commercial landlords have traditionally been in a much stronger position when recovering rent arrears from their recalcitrant tenants than is the case for their residential landlord equivalents. Whereas residential tenants enjoy a considerable degree of legal protection when in arrears, these rights have never been enjoyed by commercial tenants, until now that is.
In a move to modernise the commercial sector rent recovery process, the ancient remedy of distress is likely to be abolished next year with the passing of the Tribunals Courts and Enforcement Act. This will abolish Distress for Rent, to be replaced by a new set of regulations known as Commercial Rent Arrears Recovery (CRAR). These new rules are likely to come into effect on the 6th of April 2014.
These changes were first proposed in the Tribunals, Courts and Enforcement Act in 2007 (TCEA 2007), and the UK Government has now (as of 30 July 2013) published the legislation necessary to change the process that bailiffs must follow when seizing goods to recover a debt and to set out a new procedure for the recovery of commercial rent when in arrears.
The Taking Control of Goods Regulations 2013 should also come into force on 6 April 2014. They will govern the procedure for taking control of goods, note, no longer referred to as seizing goods, and legal selling of them under statutory powers – Part 3 and Schedule 12 TCEA 2007.
The law which allowed commercial landlords (or more usually private bailiffs acting on their behalf) to levy distress for rent has, since mediaeval times, enabled them to recover rent arrears from their tenants easily and swiftly.
What Does Distress Mean in Practice?
Basically the process hinges on bailiffs entering the tenant’s premises, seizing goods belonging to the tenant, and holding them until the rent arrears are cleared. A change in the law as early as 1689 went even further and allowed landlords to sell a tenant’s goods and take the rent arrears from the proceeds of the sale.
Countless commercial landlords have found Distress to be a very useful method of rent arrears recovery as it puts tenant’s under pressure to pay up quickly, or face ceasing trading altogether. Very often when the threat of removal of goods is posed, the tenant will find the money somehow if they value their business and want to carry on trading with minimal disruption.
In some cases a Walking Possession Agreement is entered into which means that items on the tenant’s premises can be impounded until the rent is paid, but will still be left at the premises to allow the tenant to continue trading – after all, if the tenant stops trading there’s even less chance the arrears will get paid.
Although the remedy of distress is for rent arrears only, solicitors soon realised that by carefully wording a lease from the landlord’s perspective, it is possible for bailiffs to include and collect other outstanding charges such as service charges and insurance premiums.
With Distress, legal proceedings do not need to be issued, and no prior or formal notice need be given to a tenant. The element of surprise and the fact that business tenants are often embarrassed in front of their customers, when bailiffs turn up unannounced, has worked greatly in the landlord’s favour. Distress has been a very effective remedy to bring the defaulting tenant into line.
Currently, commercial landlords have a number of options open to them when their tenants are in arrears, they can:
– issue county court proceedings for the debt
– serve a statutory demand
– pursue a guarantor, if there is one
– levy Distress, or
– forfeit the lease.
Often landlords are unwilling to take the last option as forfeiting the lease, at least initially, is a step too far. When a landlord takes back the premises, which forfeiture allows (another advantage commercial landlord have) they will not only lose rent but will have insurance and business rates to pay until the premises are re-let – not an easy process in some locations right now.
Even if the rent remains unpaid, the tenant is still responsible to the council directly for business rates, and there’s always the chance the tenant can assign the lease to another business, whether the actual business itself is saleable or not.
What will the CRAR changes mean in practice?
CRAR will still allow a landlord of commercial premises to enter its leased premises and seize goods in certain circumstances:
1 There must be a written lease
2 Rent arrears must be for a minimum of seven days
3 The debt must be for rent only (includes any VAT and interest due on arrears) – the landlord cannot include other items such as service charges or insurance however cleverly the lease is worded.
4 The premises on lease must be purely commercial. If any part of the premises leased is used for residential purposes then CRAR cannot be used. This is common where a tenant has use of a flat above the shop they rent. For CRAR to be effective the landlord needs to let mixed use premises on separate leases – residential and commercial.
Any bailiff action must be preceded by formal notices. There’s no longer any element of surprise.
The landlord must first serve an enforcement notice which contains prescribed information by using an “enforcement agent”. At least 7 clear days’ notice (working days excluding Sundays and bank holidays) must be given to the tenant. If it is thought likely that the tenant will peremptorily remove goods to avoid recovery, the landlord must apply to the Court to have the notice period reduced.
When the notice period has expired bailiffs are allowed to enter the premises and remove goods. This must occur between the hours of 6am and 9pm on any day of the week. Where a business operates outside these hours’ bailiffs may enter when the business is open. It will also be possible to recover a tenant’s possessions outside the premises, for example by clamping a vehicle on the public highway.
Bailiffs (agents) have a general power to use reasonable force (where necessary) to enter premises, but this does not include using force or violence against persons. They may enter the demised premises without a warrant but in certain circumstances outside of a limited scope the bailiff must make an application to Court to get a warrant to use reasonable force to gain entry.
Whereas under distress “Walking Possession” was allowed, this is to be replaced with what will be known as a “Controlled Goods Agreement” (CGA). The overall effect will be similar to
Distress but any breach will require two clear days’ notice before the bailiff can re-enter the premises. This notice period can be reduced with the court’s permission.
Seven days must elapse before goods can be sold after they have been removed from a tenant’s premise, that is unless the goods would become unsellable, or their value substantially reduced if their sale is delayed.
These new regulations clarify the rulings on categories of goods that are exempt from the CRAR process, which include tools of trade up to a specified value, items required for the basic domestic needs of the tenant, and goods belonging to third parties, including sub-tenants.
A notice served on a sub-tenant requiring rent to be paid directly to the head landlord, where an intermediate tenant is in arrears, must be for a minimum of fourteen days.
Finally, these new regulations set out detailed procedures that bailiffs must follow when entering and re-entering premises, on taking control of goods to be left with the tenant which replace existing rules on ‘Walking Possession’ arrangements, and for the selling of goods.
What does all this mean for landlords?
Distress for rent has long been seen as a very powerful tool in the armoury of the commercial landlord when they are dealing with tenants in arrears. Often the process has acted as a short sharp shock which has made the tenant realise the seriousness of getting into arrears. Sometimes it is sufficient to make a tenant “mend their ways” , to become more efficient in the way they run their business and become a reliable payer of rent.
In other situations the process is just another step on the way to insolvency for tenants who want to pay their rent but can’t because for the business or financial circumstances.
CRAR may be seen as a more modern, fairer and more balanced process than Distress, but in practical terms it could be argued it simply takes the initiative away from the landlord and gives it to the tenant. A tenant will now be given adequate warning and an opportunity to take evasive action, for example by removing goods from the premises and effectively depriving the landlord of this traditional remedy.
Tenants will no doubt welcome these changes which appear to decidedly tip the balance more in their favour, in particular removing the element of surprise that has made Distress so effective for landlords. It seems unlikely that landlords will see this as a step in the right direction and will not appreciate the erosion of the effectiveness of the traditional Distress self-help remedy.
How will this affect the commercial rental market?
There are several practical difficulties that can be foreseen, notwithstanding the increase in bureaucracy loaded onto an already overburdened county court system, the notices will mean that many tenants in arrears will “make arrangements” and put goods out of the reach of bailiffs, making this form of remedy largely redundant after April 2014.
The outcome is likely to be a more cautious approach from landlords when letting: more rigorous due diligence in the way they assess the prospects of a business and tenants, and the taking in of additional security such as high rent deposits and guarantors.
There is of course a limit to what the market will stand, and faced with an overriding imperative to have shops occupied, landlords must balance the risk of a poor tenant with the desire to have shops fully occupied. In a recession, and with a major structural change taking place in high street retailing, some landlords would no doubt prefer to have a shop occupied, even if rent is in arrears, because the tenant is responsible for business rates, which in some cases is equal to or even higher than the rent.
It will be interesting to see the reactions to this by commercial landlords when knowledge of this becomes more widespread, and the effect it will have on the commercial lettings market. This could be seen as yet more anti-business bureaucracy hitting the small business the hardest at a time when they need all the help they can get.
By Tom Entwistle
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