UK: Looking Forward To 2014: Break Notices, Insolvency, Bailiffs And Law Reform

Last Updated: 2 January 2014
Article by Martin Garner

Summary and implications

The legal landscape is ever changing and developing with new legislation, decisions and appeals bringing new points of law to the forefront and overturning previous decisions.

This article gives you a taste of what to expect in 2014, when two important appeals will take place, distress will be replaced with Commercial Rent Arrears Recovery (CRAR) and the Law Commission will carry out a review of property law and consider reform.

M&S v BNP Paribas – rent apportionment

In this landmark case*, the court held that a landlord was under an obligation to pay back to a tenant rent, service charge and insurance moneys paid in advance in respect of a period after a break date, where the break date fell part way through a quarter.

Before this decision, it was widely accepted that, without an express lease provision, a tenant was not entitled to a refund of rent or service charge paid in advance that related to the period after the break date.

The main distinguishing factor in the court's decision was the presence of a break penalty as one of the pre-conditions of the break clause.

The judge said that the landlord had already been sufficiently compensated by the break penalty and it was implied that the parties would not have intended the landlord also to be able to keep the full quarter's rent, service charge and insurance.

Unsurprisingly, the landlord has appealed the decision, with the appeal set for March 2014. The landlord is likely to argue that obligations should not be implied into a lease and that the express and precise wording of the break clause and lease should stand i.e. that the tenant is only entitled to a refund of money paid in advance if the lease expressly provides for such a refund.

Games Station – payment of rent by administrators

The Games Station case** followed the decisions in Goldacre and Luminar, where the court decided when rent is payable as an expense of the administration.

When Game went into administration it held numerous stores across the country on commercial leases. Administrators were appointed the day after the rent fell due under most of their leases in the portfolio. They applied to court for directions following the administration.

Following Goldacre, the court ordered that the arrears which fell due before the administrators were appointed were not payable as an expense of the administration and amounted to an unsecured claim.

The landlords in this case have applied to challenge the ruling in Goldacre and have been given leave to appeal to the Court of Appeal. This point of law has been a major issue for landlords since the Goldacre decision back in 2009.

Commercial rent arrears recovery (CRAR)

Currently, a landlord can use the law of distress to recover rent, service charge, insurance and other sums reserved as rent in a lease by entering premises and seizing a tenant's goods.

A landlord can seize goods without warning and there is no minimum level of arrears required to trigger the right to distrain.

A landlord can also serve a section 6 notice, requiring a defaulting tenant's sub-tenant to pay any rent it owes direct to the head landlord.

From 6 April 2014 the right of distress will be removed and replaced with a new statutory procedure, known as CRAR . The major changes are:

  • CRAR will only apply to rent due under leases of commercial premises and cannot be used for premises that are occupied or let as a dwelling, which may include mixed-use premises;
  • CRAR only attaches to the principal rent and cannot be used to recover service charge arrears, insurance, or rates, even where those sums are reserved as rent in the lease;
  • the landlord must serve at least seven days' notice in writing of their intention to use CRAR. CRAR can only be exercised if the outstanding sum exceeds a minimum of seven days' rent; and
  • only an enforcement agent authorised in writing by the landlord can seize goods. Therefore landlords will not be able to use CRAR themselves.

For landlords the changes significantly reduce the effectiveness of the new procedure and are likely to result in further management costs in exercising the remedy. For tenants the changes will be a welcome restriction on what was seen as an archaic and heavy handed remedy.

On a positive note for landlords, they will still be able to serve a notice requiring a sub-tenant to pay rent direct to a head landlord. The notice will take effect 14 days after it has been served.

Law Commission reform

The Law Commission has recently consulted on a new programme of law reform. The Commission sought suggestions from practitioners on areas of law that ought to be considered for reform, where the law was unfair, overly complex or causing a negative economic impact.

The Law Commission has identified three areas of concern:

  • The use of authorised guarantee agreements (AGAs), repeat guarantees and sub-guarantees of AGAs under the Landlord and Tenant (Covenants) Act 1995 following the decision in K/S Victoria Street v House of Fraser (Stores Management Limited).
  • The problems surrounding the fact that a lease must have a certain term in light of the decision in Berrisford v Mexfield Housing Co-operative.
  • Amendments to the Landlord and Tenant Act 1954, to make the procedures on security of tenure for business leases more straightforward.

For more on the Law Commission's reforms, here is an article by Nick Lloyd (a Partner in our Real Estate Dispute Resolution team) with his proposed suggestions for reform to problematic areas of landlord and tenant law.

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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