The ancient remedy of distress has come under increasing criticism in recent years as being excessively draconian. Now, the government has listened to the critics and taken action.
There is no doubt that this remedy has sometimes been misused, but it has been regarded by commercial landlords as an important mechanism for protecting them from the tenant who can pay on time but who would prefer not to. However, The Tribunals, Courts and Enforcement Act 2007 will shortly abolish distress entirely in relation to residential tenancies. It will also disappear in relation to commercial tenancies, but will be replaced by a new remedy called commercial rent arrears recovery. Referred to in the Act as 'CRAR', this will be more tightly controlled than distress and will apply in fewer situations.
What is CRAR?
Like distress, CRAR is a mechanism allowing landlords to recover rent arrears by taking control of the tenant's goods and selling them. It is limited to the recovery of basic rent ie the amount payable under a lease for possession and use of the premises, together with interest and VAT. It will not apply to rates, service charge, insurance or other ancillary matters, even if they are reserved as rent in the lease.
When does CRAR apply?
CRAR can apply to any commercial lease or tenancy (including a tenancy at will) provided it is in writing. It will not apply to oral tenancies. It can be excluded by agreement, so a tenant with sufficient bargaining power may be able to contractually exclude the landlord's right to exercise CRAR. But where it does apply, the rules about its operation may not be relaxed by agreement.
CRAR usually ceases to apply to a lease when it comes to an end, but there are two exceptions:
- CRAR continues to be exercisable in relation to goods which the landlord had already taken control of before the lease ended;
- CRAR continues to be exercisable for up to six months in relation to rent which fell due before the lease ended, if certain conditions are satisfied. These include a requirement that the lease did not end by forfeiture, and that the tenant at the end of the lease stays in possession of the premises or part of them.
When can CRAR be exercised?
The tenant must be in arrears of rent which are certain or are capable of being calculated with certainty. The arrears must exceed a minimum threshold; this will be prescribed in regulations which have not yet been made.
How can CRAR be exercised?
Only an 'enforcement agent' may take control of goods and sell them. There will be a change to the certification of enforcement agents, although existing certified bailiffs will be authorised until their certificates expire.
An enforcement agent cannot take control of goods unless the debtor has been given notice. Regulations will prescribe the minimum notice period, the form of the notice, what information it must contain and how the notice must be given.
Taking control of the debtor's goods
An enforcement agent may only take control of goods which belong to the debtor. This is narrower than the current procedure which allows goods belonging to third parties to be taken in limited circumstances where they are under the apparent ownership of the tenant. Where retail tenants are supplied on a sale and return basis or the supplier retains ownership of stock until payment, there may be limited goods at the premises which can be seized by enforcement agents. Under the new procedure, a third party can apply to the court for relief if he believes that goods taken belong to him.
An enforcement agent can only take control of goods up to the value of the debt, except where there are insufficient 'lower value' goods available, in which case there is a limited right to take control of 'higher value' goods.
Control of goods can be taken by securing them on the premises or highway, by removing them, or by entering into a controlled goods agreement with the debtor (formerly know as a 'walking possession agreement') which allows the debtor to retain custody of them.
An enforcement agent may enter the premises without a warrant, and in limited circumstances may use reasonable force to do so. At present, a certified bailiff cannot force a locked door.
If a landlord fails to follow the correct procedure, the tenant can apply to court to set aside the notice of intention to seize goods and/or make a claim for damages.
Conclusion
CRAR will limit the rights of landlords to recover tenants' property in payment of arrears but will remain an important method of enforcement for commercial landlords. It will be interesting to see the effect on recovery of the new requirement to give notice. It may give debtors the opportunity to dissipate assets, particularly in the case of tenants who are ceasing trading.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.