An End to Tenant’s Distress

Faiza Ahmad discusses recent changes to the law concerning commerical rent arrears.

Sunday, 6 April 2014, marked a significant change to the ways in which landlords can recover commercial rent arrears from a defaulting tenant. The change has brought to an end a self-help remedy that has been available to landlords for almost 325 years.

Before the changes a landlord was able to recover arrears reserved as rent under a lease from a commercial tenant by instructing a certificated bailiff to levy distress under Common Law. The bailiff could go on to the tenant’s premises without notice, seize and remove the tenant’s goods to be sold to pay off the arrears. This method provided landlords with a quick and cost effective way of recovering rent arrears from a defaulting tenant.

The process was increasingly criticised over the years for being draconian in nature, not in keeping with Human Rights legislation or modern times, damaging to landlord and tenant relations and generally harsh on tenants. Pressure mounted for these concerns to be dealt with in a modern and refreshed form of recovery and that change arrived on 6 April 2014 in the form of a process called Commercial Rent Arrears Recovery (CRAR). This was brought into force by the Tribunals, Courts and Enforcement Act 2007.

Landlords and tenants need to be aware of the changes. Landlords in particular need to ensure they are prepared and that their internal record keeping systems are reviewed and monitored regularly.

Key Differences

One of the most striking differences of CRAR is the requirement for a landlord to serve notice on a tenant before seizing goods. A landlord who previously had the power to instruct a bailiff to arrive unannounced at a tenant’s premises will now have to put the tenant on notice of the landlord’s agent’s impending visit.

CRAR restricts what arrears the landlord can recover and makes the process more difficult, lengthy and expensive by requiring certain conditions to be met before goods can be seized.

A landlord still has the right to seek payment of rent directly from a sub-tenant and, like before, will need to serve notice on the sub-tenant of this. This type of notice was commonly known as a “Section 6 notice” but is now a “Section 81 notice”. Whereas a sub-tenant became immediately liable to pay rent directly to the head landlord after service of a Section 6 notice it will not now be liable to do this until 14 days after service of the Section 81 notice.

The Procedure/Conditions in Brief

A landlord of commercial premises still has the power to enter premises to seize goods but on certain conditions including:-

1. The lease must be evidenced in writing and be continuing.

2. CRAR is exercisable where rent due under the lease is outstanding. Rent for this purpose is principal rent, VAT and interest on the outstanding amount. Any other amounts due under the lease such as service charge, rates, council tax, repairs, maintenance and insurance, even if they are reserved as rent under the lease, are not rent for the purposes of CRAR.

3. The amount of the arrears must be certain or capable of being calculated with certainty so an all inclusive rent cannot be recovered, only that proportion applicable to the tenant’s use and possession of the premises can.

4. The minimum amount of rent outstanding must be equal to 7 days’ rent.

5. The procedure does not apply to residential or mixed-use premises so landlords of commercial premises with residential upper parts held on one lease will not be able to use CRAR unless the premises are unlawfully being used for dwelling purposes.

6. Before taking steps to seize goods the landlord must serve notice on the tenant, through a certificated enforcement agent, giving the tenant at least 7 clear days notice (not including the day the notice is served, Sundays, bank holidays, Good Friday and Christmas Day) of the landlord’s proposed action to take the tenant’s goods. The court will have power to allow a landlord to serve a shorter period of notice if it finds it is “likely” that the tenant is going to remove the goods to prevent recovery by the landlord. The landlord must then wait at least 7 days before selling the goods by public auction (unless waiting this long will make the goods unsaleable or substantially reduce their value) with a maximum holding period of 12 months, subject to a further 12 month extension period being granted by the court.

The form and content of the notice is as follows:-

(a) the name and address of the tenant;

(b) the reference number or numbers;

(c) the date of notice;

(d) details of the court judgment or order or enforcement power by virtue of which the debt is enforceable against the tenant;

(e) the following information about the debt—

(i) sufficient details of the debt to enable the tenant to identify the debt correctly;

(ii) the amount of the debt including any interest due as at the date of the notice;

(iii) the amount of any enforcement costs incurred up to the date of notice; and

(iv) the possible additional costs of enforcement if the sum outstanding should remain unpaid as at the date mentioned in paragraph (h) below;

(f) how and between which hours and on which days payment of the sum outstanding may be made;

(g) a contact telephone number and address at which, and the days on which and the hours between which, the enforcement agent or the enforcement agent’s office may be contacted; and

(h) the date and time by which the sum outstanding must be paid to prevent goods of the tenant being taken control of and sold and the debtor incurring additional costs.

7. The goods can be recovered by the landlord’s enforcement agent on any day between the hours of 6am to 9pm unless the tenant’s business operates outside these hours in which case the goods can be recovered during the operating hours of the business.

8. Certain goods are exempt such as items or equipment (for example, tools, books, telephones, computer equipment and vehicles) which are necessary for use personally by the tenant in the tenant’s employment, business, trade, profession, study or education, except that in any case the aggregate value of the items or equipment to which this exemption is applied shall not exceed £1,350. A full list of exempt goods can be found in The Taking Control of Goods Regulations 2013.

9. Walking possession is replaced by Controlled Goods Agreements and a notice by an enforcement agent to re-attend the premises must be served giving the tenant 2 days’ notice of re-attendance.

10. CRAR allows a tenant’s goods on the highway to be recovered such as vehicles.

11. Following expiry of a lease the landlord can still exercise CRAR in respect of any rent payable before the lease came to an end save for in circumstances where a lease came to an end by forfeiture, the lease came to an end not more than 6 months prior to enforcement, the rent was due from a person who was the tenant at the end of the lease, any new lease pursuant to which the tenant continues to occupy the premises is a lease of commercial premises and the person who was the landlord at the end of the lease remains entitled to the immediate reversion.

12. In relation to sub-tenants a landlord who is entitled to exercise CRAR against its immediate tenant can serve 14 days’ notice on the sub-tenant requiring it to make payment of rent direct to the landlord. The notice must state what rent arrears are due from the immediate tenant to the landlord known as the “notified amount” and will remain in effect until the notified amount has been paid by the immediate tenant to the landlord or the notice has been replaced or withdrawn.

13. CRAR is not available to a landlord for the recovery of rent due from a tenant who remains in occupation following the expiry of its lease where the landlord has not confirmed whether it is authorised to be in occupation (tenant at sufferance).

The Future

We expect there to be plenty of commentary on the effect of the changes in the future. The practical effects are yet unknown but it is commonly accepted that the changes have made seizure of a tenant’s goods a much less attractive option in recovering rent arrears.

It remains to be seen what the practical effect service of the 7 day notice on the tenant will have. Will the notice put enough pressure on a tenant that it makes payment of arrears to avoid its goods being seized and sold? Perhaps tenants will come up with more innovative ways of making CRAR an even less attractive option for landlords by using the 7 day notice period to remove goods and assets from premises to get them out of the reach of landlords or pay a proportion of the arrears so that they remain above the 7 day minimum level after service of the notice. Depending on what tenants do CRAR may well become a somewhat redundant procedure for landlords who will be left with more limited rent recovery armoury.

If you want to read all the changes in further detail they can be found in Part 3 of the Tribunal, Courts and Enforcement Act 2007, which deals with the issue of enforcement by taking control of goods, and The Taking Control of Goods Regulations 2013 which sets out the CRAR procedure.

If you want to discuss the changes, CRAR procedure and, if you are a landlord, how best to recover arrears from your tenant, please contact the Hamlins Property Litigation Team.

To see our FAQ’s on recovering commerical rent arrears, please click here