UK: Key Changes To Commercial Rent Arrears Recovery

Last Updated: 18 June 2008
Article by Kenny Friday

The New Legislation

The Tribunals, Courts and Enforcement Act 2007 ("the Act") received Royal Assent on 19 July 2007. Part 3 intends to unify the existing law relating to enforcement by seizure and sale of goods. This will now be known generically as "taking control of goods", and intends to abolish the law of distress for rent completely, replacing it with a modified statutory procedure known as Commercial Rent Arrears Recovery ("CRAR"). As well as modernising the terminology, the intention is to clarify the law. Consequently we will see significant changes to the procedure for the recovery of commercial arrears and the seizure and sale of goods. Although the provisions have been on the statute books for nearly a year, there have been no announcements to date regarding precisely when Part 3 of the Act will be brought into force.

Recovery of Commercial Arrears

Much like the current system of distress, CRAR will not require the involvement of the courts but simply an instruction by the landlord to the bailiffs (who are to be renamed 'enforcement agents') to collect the rent or take control of goods. However, there will be scope for the courts to intervene on occasions where certain (as yet undetermined) grounds are met. The Ministry of Justice felt that it was important to include such a provision to prevent any abuse of the process and potential breach of human rights.

What can be recovered? Key Changes to 'Rent' and 'Premises'

One significant change proposed under the new system is that 'rent' will be defined strictly to include only the amount payable under the lease for "possession and use of the demised premises" (including any interest and VAT on that amount). All other sums will be excluded including rates, council tax and service charges regardless of whether these are defined as rent in the lease, meaning that landlords will have to consider alternative methods to recover such sums.

Under the proposed CRAR system, a landlord of commercial premises will only be permitted to recover rent if the net amount outstanding (i.e. excluding any interest, VAT and permitted deductions) exceeds a certain minimum limit - a limit which the Ministry of Justice has yet to fix.

Additionally, for CRAR to be exercisable, the rent must have become due and payable and the amount must be certain, or capable of being calculated with certainty. The net amount must also still exceed the statutory minimum at the time the enforcement agent takes control of the goods. It will be necessary, therefore, for a landlord to recalculate the net unpaid amount immediately before seizing any goods.

CRAR will also only be available to landlords of leases of commercial premises, and will not apply to residential premises or any commercial premises that may comprise any part let or occupied as a dwelling, including mixed-use premises.

The New Procedure in Brief

Under the new legislation there will be three types of "taking control of goods":-

  • by a controlled goods agreement (formerly walking possession);

  • by securing goods on the premises or on a public highway;

  • by removal from the premises.

A landlord must serve 14 days notice on a tenant before they can take action using CRAR, so that the tenant has an opportunity to seek legal advice. The notice must be in writing and must contain certain information prescribed by the Act.

The Act permits a landlord to dispense with notice if they are able to demonstrate that there is a reasonable chance that the debtor may try and dispose of or relocate any goods. However, a landlord will have to produce objective evidence to satisfy the Court, and this may prove difficult.

Seizure of goods must then take place within 3 months of the notice being served, but if a good reason can be demonstrated, an application can be made to the Court to extend this period, up to a maximum limit of 12 months.

Entry onto premises by the enforcement agent should be through normal methods of entry (e.g. doors). Reasonable force will be permitted under the Act, but only if ordered by the Court and is only intended to be available as a last resort. Consequently, permission will only be granted provided certain prescribed conditions (which have yet to be confirmed) are met.

The Act also includes detailed provisions covering a number of other areas including entry onto premises, information that must be provided to tenants, the storage, valuation and sale of goods, the distribution of sale proceeds, and the remedies available to landlords and tenants if the procedures are not properly complied with.

Although the Act is abolishing the law of distress, it will preserve an existing right permitting the landlord, in situations where the defaulting tenant has a subtenant, to serve notice requiring the subtenant to pay the rent owed under the sublease directly to the landlord, rather than to the defaulting tenant, until the amount of arrears is settled.

Conclusions

Although not yet in force, the abolition of distress for rent and an overhaul of the process of enforcement by way of seizure and sale of goods has been in the pipeline for some time and it seems inevitable that the changes will be introduced in the near future – a case of when, not if. Commercial landlords will, therefore, need to be prepared for the changes and ensure that they aware of the new procedural requirements before taking action.

Although the new provisions do set out the recovery procedure in detail and will update and clarify the law, it remains to be seen whether, once implemented, the changes will be of benefit to commercial landlords in practice or will simply overcomplicate and restrict their attempts to recover arrears from defaulting tenants, creating further disputes in the process.

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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