Earlier this year, the Taking Control of Goods Regulations 2013 (“the Regulations”) came into force, which introduced a new procedure called commercial rent arrears recovery (“CRAR”).
CRAR’s main effect was to abolish the common law right of distress and address the perceived imbalance of power between tenants and landlords of commercial property. As a result, there are a number of provisions in the new Regulations which landlords have had to particularly consider when deciding whether to use CRAR.
Now that CRAR has been in force for a number of months, how well have you, as a commercial landlord, been able to deal with the change? This article looks at the major changes which have affected landlords in the new Regulations, what you need to be particularly aware of, and strategies that you can implement in order to prevent outstanding rent arrears from disrupting your business and affecting your cash flow.
Main Changes under the new Regulations
There are a number of significant changes under the Regulations:
- There is now a minimum amount of net unpaid rent required to trigger the Regulations. This is currently set at an amount equal to seven days’ rent. Some landlords have found that tenants will pay just enough to bring them below this amount, however, if there are substantial rent arrears then this has the effect that the majority of the rent is paid.
- Seven days’ notice is required before an Enforcement Agent can enter into the premises and take control of any of the tenant’s goods (unless the court orders otherwise). This is designed to give the tenants an opportunity to pay before any goods are taken control of and the relationship becomes hostile.
- The Enforcement Agent can now gain entry on any day, at a time between 6am and 9pm (or normal business hours, if they differ). This is an extension to the time allowed under the previous law.
- Goods required by the tenant for personal use in their employment, trade or business are now only exempt up to an aggregate value of £1,350. This can make a larger pool of goods available to the landlord for enforcement purposes.
- The often-used rights enabling rent from sub-tenants to be ‘re-directed’ to the landlord have been preserved.
Provisions you need to be aware of
Commercial landlords have raised a number of concerns with the new Regulations and you should bear these in mind when deciding whether to use CRAR:
- There is a pre-requirement of a written lease and that the premises are not of mixed-use (i.e. partly used for commercial purposes and partly used for residential purposes), unless the residential use is in breach of the lease.
- Only an Enforcement Agent can be used to take control of goods and they must be instructed in writing.
- As has been discussed in the section above, the tenant is given notice before the initial entry of the Enforcement Agent at nearly every stage of the process. Tenants might take this opportunity to move their goods out of the Enforcement Agent’s reach, e.g. to another property. Also, you need to consider the extra costs and time incurred by complying with the more convoluted notice procedures or in obtaining the court’s consent to vary from them.
- CRAR cannot be used to recover non-rent charges, such as service charges or insurance.
- Sale of the controlled goods can only be done by way of public auction.
Strategies to help best maximise rent recovery
In order to ensure that you address the new challenges to your business (and cash flow), you may wish to seek legal advice. This might be before entering into a tenancy with a new tenant or in developing an action plan when an existing tenant does not pay the rent owed.
There are a number of steps you can take when entering into a lease to help minimise the harm caused by a tenant in arrears:
- Your commercial leases should contain a right to terminate or forfeit.
- Look for guarantors for the rent.
- Increase the rent deposit sum to make sure you are covered if you ever need to recover rent or any other charges.
In the event of a tenant failing to pay rent, it may be that seeking possession or forfeiture might be a more successful means of dealing with the problem. This is particularly so given that CRAR will waive any right to forfeit that may have arisen. However, under these proceedings, you may not necessarily recover the arrears. Solicitors experienced in commercial property disputes will be able to assess your current situation and offer advice on the steps you should take so that you can reach the best possible outcome.
Article Courtesy of: Davis Blank Furniss is a full service legal firm with solicitors specialising in commercial property, who can provide help and support throughout the acquisition, selling, development or leasing of any commercial property and disputes with tenants.