Landlords to lose right of distress

Commercial landlords in England and Wales will lose the ancient right of distress against tenants to recover rent arrears from 6 April 2014.

Under the current regime, a landlord can enter premises, seize and sell a defaulting tenant’s goods without giving them any notice or going to court. This ancient right, which has been used for over 800 years, will now be replaced by Commercial Rent Arrears Recovery (CRAR), a statutory procedure which will impact the scope of actions taken by the landlords and ultimately provide the tenants with more protection.

What are the main changes?

The new statutory procedure will be available when a written lease of commercial premises is in place.  CRAR will not be in use if premises are let wholly or partly as a dwelling and if the premises are mixed use, the landlord will need to obtain a judgment to recover the arrears. However, a court order will not be required to exercise the right to use CRAR for purely commercial premises.

CRAR will also affect the amount recoverable by the landlords as it will be limited to rent owed up to the date of the notice, excluding any services charges and insurance. The net unpaid rent is calculated by deducting any interest, VAT and any permitted deduction, recoupment or set-off that the tenant would be entitled to claim in case the landlord takes rent arrears action.

In order to exercise CRAR, the landlord will have to give the debtor 7 days’ clear notice of enforcement, either by post, hand, fax or email, after the rent becomes overdue (not including Sundays, Good Friday, Christmas Day, or bank holidays). The rent must be unpaid at the time the notice is served, as well as immediately before any goods are seized. Once notice has been served, the tenant may apply to court to have a notice set aside or for delay of execution.

Issues are also likely to arise in relation to where a notice must be served. It would appear that it can be served at the demised premises, at a company’s registered office or a place where the debtor tenant carries out a trade or business. In case of sub tenants, the landlord can ask sub-tenants to pay him their rent directly, but must give them 14 days’ notice.

Only authorised enforcement agents (bailiffs) will be permitted to seize the defaulting tenant’s goods. They can enter through an open or unlocked door on any day of the week between the hours of 6am and 9pm, or at any time when the business is in operation. It’s worth noting that only goods belonging to the tenant on the demised premises may be seized. Bailiffs may not seize any goods with a value greater than the rent arrears and should provide the debtor with a valuation of items. Goods necessary for business/trade/study and personal use will be exempt up to the value of £1,350.

Should the seized items go to sale, they must be sold at public auction and the tenant must be given a seven clear days’ notice of the sale.

The old procedure was widely perceived as a quick and cost effective method of recovering rent arrears. Under CRAR, the scope of actions is definitely narrower and is less likely to be useful. One of the areas of concern is the prior notice requirement, which could afford the tenant the opportunity to move items of value to a secure location or to dispose of them, thereby restricting the usefulness of CRAR.

Posted Tuesday, April 1st, 2014

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