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Abolition of distress for commercial landlords

As most landlords of commercial premises know, distress is a common law “self help” remedy allowing landlords to recover arrears of rent by seizing a defaulting tenant’s goods and selling them. If monies are outstanding in respect of rent, unlike other commercial debts it is not necessary to first of all issue proceedings and obtain a judgment before instructing a bailiff our High Court Enforcement Officer, a landlord can proceed to immediately distrain against a defaulting tenants goods as soon as the rent becomes due.

The common law power of distraint is a valuable weapon in the landlord’s armoury, it effectively enables the landlord to move far quicker than other trade creditors of a tenant.

Part 3 of the Tribunals, Courts and Enforcement Act 2007 (“the Act”), which is expected to be brought into force in April 2014, will abolish the common law remedy of distraint.

The Act creates a new statutory right for the landlord of a lease of commercial premises known as Commercial Rent Arrears Recovery (“CRAR”).

CRAR will apply to all leases of commercial premises (including tenancies at will), however, a lease must be in writing.

CRAR will not of course apply to licenses to occupy commercial premises, which by definition cannot be a lease.

Undoubtedly the most significant difference between the new CRAR procedure and the old Law of Distress is the requirement to serve a notice before seizing goods. Under the common law remedy of distress there is no requirement to serve a notice. From a landlord’s perspective this is an important tactical advantage of being able to take a tenant by surprise and thus attempt to maximise recovery. Under the CRAR procedure it is currently proposed that a minimum period of 7 days notice must be given of the intended seizure. There has been concern expressed by commercial landlords that tenants could use this period to dispose of goods which otherwise may have been seized.

Where a lease has ended, CRAR will only be exercisable where control of goods was taken before the lease was ended or in relation to rent due and payable before the lease ended, if all of the following conditions are satisfied:

  • The lease did not end by forfeiture;
  • Not more than 6 months had passed since the lease ended (or any continuation of it under statute or under rule of law);
  • The rent was due from the person who was the tenant at the end of the lease;
  • That person remains in possession of the part of the demised premises;
  • Any new lease under which that person remains in possession is a lease of commercial premises (even if the new lease is not in writing); and
  • The person who was landlord at the end of the lease remains entitled to the immediate reversion.

For the purposes of CRAR, “rent” is defined as the amount payable under the lease for the possession and use of the premises. Rent will not therefore include any sum in respect of rates, council tax, services, repairs, maintenance or insurance even if these amounts are reserved as rent in the lease. The aim of limiting recovery to basic rent only is designed to protect tenants, given that the CRAR procedure can be exercised without the landlord having to go to court.

Before CRAR can be exercised, the tenant must be in arrears of rent before notice of enforcement is given and the amount of arrears must be certain or capable of being calculated with certainty. The net unpaid rent must exceed a certain minimum threshold. Until the provisions of the Act are enacted it is difficult to know whether this requirement will have an impact on the availability of CRAR. The net unpaid rent is the amount of rent in respect of which CRAR is exercisable, less any interest or VAT included in the rent arrears and any deductions or set off that the tenant would be able to claim.

The Act will repeal the Law of Distress Amendment Act 1908 it will however preserve the effect of Sections 3 and 6 of this act to allow a superior landlord to recover rent from its new sub tenant provided the landlord has served its notice against the sub tenant.

The introduction of CRAR will undoubtedly result in changes in the world of commercial property. Are you ready for the changes?