Changes to the law of distress – more red tape for landlords?

13 January 2014

Distress is an ancient remedy whereby a landlord can instruct bailiffs to enter the demised property to seize the tenant’s goods when the tenant is in arrears of rent. On 6 April 2014 this age old law will be abolished and following the implementation of Part 3 of the Tribunals Courts and Enforcement Act 2007, a new statutory regime for Commercial Rent Arrears Recovery (CRAR) will come into force.

This will make recovery of rent arrears more difficult for landlords and will restrict their ability to seize goods, but it will regularise and provide a standard procedure to follow affording tenants a level of protection which will of course be welcomed by them.

The Statutory Instrument introducing CRAR was finally made on 4 January 2014 and was laid before Parliament on 9 January 2014.
CRAR will be available where there is:

  • a WRITTEN tenancy of commercial premises.  Mixed use premises where part is used or has to be used as a dwelling do not fall under the remit of CRAR,  unless the use as a dwelling is in breach of the terms of the lease;
  • at least 7 days’ arrears of rent; and
  • for rent arrears in  their purest sense therefore, principal rent, VAT payable on that rent, and interest. Service charges and insurance sums will not be recoverable under CRAR even if they are reserved as rent. If the Rent amount is inclusive of these additional sums, reasonable apportionment will be necessary.

Notice requirements:

  • at least 7 clear days (excluding Sundays and Bank Holidays) notice is necessary before enforcement. The landlord must serve on a defaulting tenant an ‘enforcement notice’. This notice will be served by a certified ‘enforcement agent’.  The Courts have the power to reduce the notice period where the Court is satisfied that without such an order the goods are likely to be moved or disposed of, in order to avoid recovery.  Unlike distraint therefore the landlord will no longer have the element of surprise; and
  • upon expiry of the notice, the enforcement agent may enter the demised property and recover goods belonging to the debtor. The agent must only take control of goods which have a total value of up to the debt together with costs.

Enforcing CRAR – points to remember:

  • goods which are necessary for the debtor's personal use or in connection with employment, business, trade, profession, study or education are exempt up to the value of £1,350. Items in use by the debtor may not be taken control of if such action is likely to result in a breach of the peace;
  • entry to the premises must be between 6am and 9pm on any day of the week. If however, the business does not operate at those times, the agent may enter at any time the business is open;
  • following recovery, the agent must wait at least 7 clear days before sale can take place and at the same time also give (at least 7 clear days') notice of sale to the debtor unless the goods would otherwise become unsaleable or their value substantially reduced;
  • in a similar way to the current law, a landlord will be able to serve notice on a subtenant requiring the subtenant to pay its rent direct to it where the direct tenant is in arrears.   In default , CRAR will then be available against the subtenant;
  • where premises are mixed use it may be sensible for future lettings of  the residential and commercial parts to be on separate leases in order to allow CRAR to be exercised on the commercial part.  At the very least the user clauses should be reviewed to maximise the possibility of utilising CRAR if the residential parts are used for commercial purposes; and
  • where service charge and insurance make up a significant element of the monies payable by the tenant and with CRAR not permitted for these sums, the landlord may wish to review whether his current financial security arrangements are sufficient

Implications

Distress has been a very powerful tool and a widely used self-help remedy for landlords. Whilst these changes will be seen by landlords as another layer of tape which they have to pass through making it ever more difficult for them to recover rent arrears, it does regulate the practice and provide a standard procedure to be followed.

For tenants, this is a welcome development and removes the possibility of the landlord’s bailiffs turning up to their rented premises without notice to use its right to distrain and seize goods.  Essentially, CRAR affords the tenant notice, it buys the tenant time to take positive action and engage in conversation with their landlord.

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