UK: Modernising The Recovery Of Rent Arrears On Commercial Premises

Originally published August 2007

New legislation is going to sweep away the existing procedure for taking and selling a defaulting tenant's goods to recover rent arrears on commercial premises.

The Tribunals, Courts and Enforcement Act 2007

The Act received Royal Assent on 19 July 2007, but will not be brought into force until the start of 2008 at the earliest to enable landlords and enforcement agents (bailiffs) to be trained to operate the new procedures.

Both the common law and all previous statutory rights to sell a defaulting tenant's goods to recover rent arrears will be abolished and replaced by a new modern statutory procedure, which is designed to comply with human rights legislation. It will be known by the acronym "CRAR" (Commercial Rent Arrears Recovery).

The procedure will be restricted to wholly commercial premises and will not be available for mixed use premises, which include residential accommodation unless the residential occupation is in breach of restrictions in the lease. Purely residential leases already have their own procedures relating to the recovery of rent arrears.

The new procedure will be limited to rent only, and not arrears of service charge, insurance premiums, or any other sums due under the lease even if they are reserved as rent. Not only that, but if a lease reserves a single sum comprising rent and sums in respect of the other traditional heads of expenditure, then CRAR will only be available for the amount which is reasonably attributable to possession of the premises. Arrears of service charge etc. (and rent for that matter) will still be recoverable through court action, just not via the self-help route of selling the defaulting tenant’s goods.

The rent recoverable under CRAR will include VAT (if chargeable) and any interest for late payment, but minus any deductions that a tenant would be able to claim as a deduction in an action by the landlord to recover the rent. A novel feature of the procedure is that CRAR will be unavailable unless the unpaid rent equals or exceeds a minimum amount (which has not yet been set).

As is usual these days, the Act contains anti-avoidance provisions which say that any contract which seeks to permit the recovery of rent by seizure of goods outside CRAR will be void, likewise any contract which seeks to recover sums other than pure rent within CRAR. A contract which prevents or restricts CRAR, however, will be valid (presumably because it would be in favour of a tenant).

Taking and selling a defaulting tenant's goods will have to be effected by an enforcement agent with a certificate of authority issued by a court, such as a private bailiff.

A new feature of the procedure is that goods cannot be taken until a notice has been served on the defaulting tenant and a minimum period has passed. On receipt of such a notice, the tenant can apply to the court for an order that the notice be set aside or preventing the taking of any goods without further application to the court.

Once the minimum period has expired and the rent remains unpaid (tenants may tactically pay just enough of the outstanding sum to bring it below the minimum amount which triggers the availability of CRAR), the enforcement agent may take goods that are on relevant premises (the only relevant premises for a landlord's purposes are the demised premises in respect of which the arrears are owed) or on the public highway.

Only goods up to the value of the amount owed can be taken unless the only available goods exceed that value. As now, the enforcement agent will not be able to take control of certain goods of a personal nature or which are necessary for the trade of the defaulting tenant.

Before any sale of goods can actually take place, a further notice must be served on the defaulting tenant giving the date, time and place of the sale of the goods. There will once again be a minimum period of notice (to be prescribed) after which the goods can be sold, usually by public auction.

Once the dust has settled, landlords are likely to welcome a statutory procedure which is clear and therefore relatively easy to operate. The checks and balances required by human rights legislation are unlikely to inconvenience reputable landlords in any meaningful way, and they will be grateful that the availability of direct action to recover rent arrears has been preserved.

From the point of view of tenants, they will welcome the greater protection offered by the new procedure, but will know that the day of reckoning cannot be put off indefinitely.