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October 1, 2014

Commercial rent arrears recovery from 6 April 2014

On 6 April 2014, the government abolished the common law right known as “distress”, no longer allowing a landlord to seize a tenant’s goods and sell them to recover outstanding rent arrears.

The ancient law of distress has existed since before the Magna Carta, but a new statutory regime known as Commercial Rent Arrears Recovery (“CRAR”) is coming into place. Provided for by the Tribunal Courts and Enforcement Act 2007, the Regulations
(Taking Control of Goods 2013) have only recently come in.

Seizure of a tenant’s goods remains in principle, but Commercial Rent Arrears Recovery has some key changes, potentially affecting its usage and
effectiveness. The key changes are:

  • A requirement for a 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.

In addition, some other important points to note are:

The Lease

Distress only applied to commercial leases. That has not changed. However, CRAR has an additional requirement that the lease has to be in writing, so it cannot be exercised in relation to oral tenancies and nor can it be exercised in relation to licences (whether in writing or not).

The 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 breaches the lease terms.

Recoverable Rent: the use of distress, historically, was for all sums reserved as rent under the lease. CRAR has significantly limited this, and not all sums regarding service charges, rates, repairs or insurance are recoverable, even if reserved as rent under the lease. However, you can use CRAR to recover VAT and interest due on rent.

Notice of Enforcement

One of the Landlord’s positive features of distress was that there was no requirement to serve notice of the intention to seize goods. Many a Landlord managed to recoup goods in lieu of monies owing to them through a “midnight swoop”. Now, the enforcement agent must give the tenant written notice at least seven clear days before exercising CRAR. Commercial Rent Arrears Recoverymust be actioned within 12 months of the date of the notice, or if a repayment agreement is reached, which the tenant subsequently breaches, within 12  months of the breach date. This clearly gives some tenants the chance to remove the goods during this seven-day period and frustrate the Landlord’s recovery efforts. In those circumstances, the Court can shorten the period, but they would have to be satisfied that this is a likely risk.

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 exercising Commercial Rent Arrears Recovery. The most notable are:

  • You cannot exercise CRAR if the rent arrears are below the minimum amount, set at an amount equal to seven days’ rent. You can use CRAR to recover VAT and interest on rent but do not consider these amounts when calculating the minimum.
  • The tenant must be in arrears of rent equal to or exceeding the minimum level before giving notice of enforcement.
  • When taking control of any goods, the tenant must have been in arrears for at least the seven-day minimum (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 for a tenant to pay a proportion of the arrears, following receipt of an enforcement notice, to bring the outstanding amount below the statutory minimum, thereby preventing the landlord from taking control of the tenant’s goods.

Whether tenants utilise this potential and whether this will be a useful enforcement tool, who knows; speculation is that rent deposits will become more important, and their level may increase to balance this.

Contact Laura St-Gallay if you have any queries or wish to discuss wider landlord and tenant matters.

Note: This article is not legal advice; it provides information of general interest about current legal issues.

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