December 2007

Commercial Rent Arrears Recovery

The New Legislation

On 19th July 2007, the Tribunals, Courts and Enforcement Act 2007 (“the Act”) received Royal Assent. Part 3 of the Act intends to unify the existing law relating to enforcement by seizure and sale of goods, which will be known generically as “taking control of goods”, and intends to abolish the law of distress for rent completely and replace it with a modified statutory procedure to be known as Commercial Rent Arrears Recovery (“CRAR”). Besides modernising the terminology, the reforms intend to make the law in this area more coherent and will significantly change the procedure for the recovery of commercial arrears and the seizure and sale of goods.

Although on the statute books, at present there have been no announcements about precisely when Part 3 of the Act will be brought into force.

Recovery of Commercial Arrears

Much like the current system of distress, CRAR will not require the involvement of the courts but will simply require an instruction by the landlord to the bailiffs (who are to be renamed ‘enforcement agents’) to collect the rent or take control of goods. However, there will be scope for the courts to intervene on certain occasions throughout the process, if necessary, where certain (as yet undetermined) grounds are met. The Ministry of Justice felt it was important to include such a provision to prevent any abuse of the process and potential breach of the ECHR.

What can be recovered? Key Changes to ‘Rent’ and ‘Premises’

One significant change proposed under the new system is that ‘rent’ will be defined strictly so as to include only the amount payable under the lease for “possession and use of the demised premises” (including any interest and VAT on that amount), and will exclude any other sums including rates, council tax and service charges regardless of whether these are defined as rent in the lease. Landlords will have to consider alternative methods to recover such sums.

Unlike at present, under the CRAR system, a landlord of commercial premises will only be permitted to recover rent if the net amount outstanding (i.e. excluding any interest, VAT and permitted deductions) exceeds a certain minimum limit. The Ministry of Justice has not yet fixed the minimum figure.

Aside from having to be above the statutory minimum, before CRAR is exercisable the rent must also have become due and payable before notice of enforcement is given and the amount must be certain, or capable of being calculated with certainty. The net amount must also still exceed the statutory minimum at the time the enforcement agent takes control of the goods, so it will be necessary for a landlord to recalculate the net unpaid amount immediately before seizing any goods.

CRAR will also only be available to landlords of leases of commercial premises, and will not apply to residential premises or any commercial premises that may comprise any part let or occupied as a dwelling, including mixed-use premises. 

The New Procedure in Brief

Under the new legislation there will be three types of “taking control of goods”:-

1. by a controlled goods agreement (formerly walking possession);
2. by securing goods on the premises or on a public highway; and
3. by removal from the premises.

Before a landlord can take action by way of CRAR, it will first be required to serve 14 days’ notice on the tenant, thereby giving them an opportunity to seek legal advice. The notice must be in writing and must contain certain information prescribed by the Act.

The Act does permit a landlord to dispense with notice if they are able to demonstrate to the Court that there is a reasonable chance that the debtor may try and dispose of or relocate any goods. However, a landlord will have to produce objective evidence to satisfy the Court, and it may well prove difficult to do so.

Seizure of goods must then take place within 3 months of service of the notice, but an application may be made to the Court to extend this, up to a maximum limit of 12 months, if a good reason for doing so can be demonstrated.

Entry onto premises by the enforcement agent should be through normal methods of entry (e.g. doors). Reasonable force will be permitted under the Act, but only if ordered by the Court. Such action is only intended to be available as a last resort and permission will only be granted provided certain prescribed conditions (which have yet to be confirmed) are met.

Aside from the above changes, the Act also includes detailed provisions dealing with entry onto premises, information that must be provided to tenants, the storage, valuation and sale of goods, the distribution of sale proceeds, and the remedies available to landlords and tenants. Although the Act is abolishing the law of distress, it will also preserve an existing right permitting the landlord, in situations where the defaulting tenant has a subtenant, to serve notice requiring the subtenant to pay the rent owed under the sublease directly to the landlord, rather than to the defaulting tenant, until the amount of arrears is settled.

Conclusions

Although not yet in force, the abolition of distress for rent and an overhaul of the process of enforcement by way of seizure and sale of goods has been in the pipeline for some time and it seems inevitable that the changes will be introduced in the near future. Commercial landlords will, therefore, need to be prepared for the changes and ensure that they are aware of the new procedural requirements before taking action.

Although the new provisions do set out the recovery procedure in detail and provide clarification of the law, it remains to be seen whether, once implemented, the changes will be of benefit to commercial landlords in practice or will simply hinder their attempts to recover arrears from defaulting tenants.

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