What happens if a commercial landlord finds its tenant is not paying rent or service charge and the landlord wants to take strong legal action?

The remedy of "distress" has for decades enabled a landlord or bailiff to enter leased premises without notice in order to seize valuable tenant's goods and sell them to recover outstanding rent arrears.

Distress has formed an important part of a landlord's suite of remedies when a tenant is struggling to make payments due under its lease. Its use has, however, declined over recent years as landlords in the current climate prefer to keep tenants trading rather than face empty premises.

Disappearing act

The remedy of distress is about to disappear completely and a new procedure known as Commercial Rent Arrears Recovery ("CRAR") will come into force on 6 April 2014. The key aspects of CRAR will be as follows:

  • Lease must be in writing
  • Commercial premises only
  • Only applies to rent
  • Landlord must give 7 days' notice in writing before entering premises to seize goods;
  • Notices to sub-tenants to redirect rent will only take effect fourteen days after service.

CRAR will provide a considerably more limited remedy to landlords than the current rules on distress for rent. For example, landlords will no longer be able to recover service charge or insurance rent, even if these have been reserved as "rent". Landlords will not be able to use the remedy where the property or any part of it is being used for residential purposes, unless this use is in breach of the terms of the lease.

There will also be limits on the amount of rent outstanding but these limits are currently unconfirmed. The original proposal was that landlords would not be entitled to use CRAR against a tenant unless the outstanding amount was greater than seven days rent arrears. Confirmation is awaited as to the levels to be set from April 2014, but it is likely that it will be a higher threshold than the one day minimum that currently exists.

Current advice to landlords

The advice to commercial landlords in the light of this change is don't panic! There are other means of security that can be taken in order to protect against rent arrears e.g. rent deposits, parent company guarantors and bank guarantees.

From now on, the negotiation of inclusive rents should be carefully considered as it is not clear whether CRAR will cover this. The split between basic rent, service charge and insurance rent that make up an inclusive rent must be specified and ideally set out in the lease.

Landlords should also pay attention to the wording of permitted user clauses in leases of mixed-use premises. It is usually recommended that commercial and residential parts are let on separate leases, and this will be even more important in the light of use of CRAR.

A savvy landlord now has six months to get itself fully armed and prepared for a change of direction when dealing with tenants in difficulties. Be aware of these changes now and stay ahead of the game.

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.