UK: Commercial Rent Arrears Recovery - Distress Reforms To Come Into Force On 6 April 2014

Last Updated: 11 November 2013
Article by Dianne Adams

Following the Ministry of Justice's response to the consultation "Transforming Bailiff Action", the law on distress will be abolished and Commercial Rent Arrears Recovery (CRAR) will come into force on 6 April 2014.

Proposals to amend the law on distress have been threatened for several years as many consider the existing process to be somewhat draconian.  However, it has been a very useful tool for landlords, and perhaps due to the pressures of recession on landlords with increased numbers of defaulting tenants, implementation has been delayed.  A date was set previously for implementation of the provisions contained in the Tribunals Courts and Enforcement Act, and then postponed, so there is a chance this may happen again. We must, however, be prepared for the probability that this time CRAR will come into force.

In what circumstances can CRAR be used?

CRAR will allow a landlord of commercial premises to enter its leased premises and seize goods where the following applies:-

  • CRAR can only be used in respect of "pure" commercial rent arrears cases i.e. principal rent, VAT and interest.  It excludes sums which may be reserved as rent in the lease such as service charge and insurance;
  • The lease must be evidenced in writing;
  • There must be rent arrears of 7 or more days;
  • CRAR cannot be used in relation to mixed-use premises, e.g. where the lease comprises retail premises with a flat above used as a dwelling.  The premises must be purely commercial in nature.  The only exception to this is if the occupation of the flat as a dwelling is in breach of the terms of the lease.  It should be noted that a way of preserving the CRAR remedy is to let such premises on separate residential and commercial leases.

What is the procedure for engaging the CRAR process?

Step One

The process is initiated by the landlord serving an enforcement notice (containing specified information) on the defaulting tenant using an "enforcement agent".  At least 7 clear days' notice (excluding Sundays and bank holidays) must be given to the tenant. If it is "likely" that goods will be removed or disposed of in order to avoid recovery, the Court has the power to reduce the notice period to a period of less than 7 days.

Step Two

Once the notice period has expired, agents can enter the premises and remove goods. Goods may be removed between 6am and 9pm on any day of the week. If the business does not operate within these hours, the agents may enter the premises when the business is open. Goods may also be recovered from the highway e.g. by wheel clamping a vehicle on the highway.

Agents may enter the demised premises without a warrant. For entry to other specified premises, agents must apply to Court for a warrant.

The agents have a general power to use reasonable force (if necessary) to enter premises, but this power does not include using force against persons. Where circumstances fall outside of this limited scope, the agent must make an application to Court to allow them to use reasonable force to gain entry.

Step Three

"Walking possession" under distress is replaced with Controlled Goods Agreements (CGA). The effect is similar but if breached, 2 clear days' notice must be given before the enforcement agent re-enters the premises.  As above, the agent can apply to Court to reduce this period, if necessary.

The minimum period before the goods can be sold will be 7 days after they have been removed, unless the goods would become unsaleable or their value would be substantially reduced. The maximum period for taking control of the goods is 12 months, although applications for a further 12 month extension are allowed.

What does this mean for landlords?

The ability to take a tenant by surprise and seize goods to recover rent arrears has been a powerful tool for landlords, particularly when dealing with tenants at the risk of insolvency. Whilst the new CRAR is undoubtedly seen by many as a more modern, balanced process than distress, in reality it arguably simply takes power from the hands of landlords and puts it in the hands of tenants. Except for very limited circumstances, a tenant will now be given at least 7 days warning of the proposed seizure of goods, thereby giving the opportunity for the goods to be removed from the premises and effectively depriving the landlord of its remedy.

Landlords will no doubt seek to counter this e.g. requiring guarantors or (higher) rent deposits when leases are granted. However, the market may limit what landlords can successfully demand. 

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.

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