Commercial Rent Arrears Recovery

09 February 2014 Written by Ware & Kay Solicitors Category: Commercial property

Landlords have for a long time used the common law remedy of distress, which enables them to seize the goods of their tenant at the leased premises and sell those goods at auction, in order to recover any rent arrears. However, distress for commercial rent arrears will be abolished by the Tribunals Courts and Enforcement Act 2007 via the Taking Control of Goods Regulations 2013, which were published last month. These reforms create a new process called Commercial Rent Arrears Recovery (CRAR) which landlords must abide by when seizing a tenant's goods for failure to pay rent. The changes are due to come into effect in April 2014.

Executive summary

Distress is an invaluable and frequently used remedy for the recovery of arrears. Its replacement by commercial rent arrears recovery ("CRAR") from 6 April 2014 causes a significant problem for landlords. The requirement with CRAR to serve prior notice gives tenants an opportunity to put goods out of landlords' reach and undermines the remedy. Whilst seeking to protect tenants' human rights and create a more level playing field between landlord and tenant, many landlords will perceive that CRAR has gone too far in helping tenants. The changes also weaken a superior landlord's right to recover rent from sub-tenants, if a tenant of the superior landlord is in arrears.

The new procedure is highly technical and this note summarizes the key points.

Current position - distress or distraint

Landlords, currently, have the common law self-help remedy of distress, which enables them to seize tenant's goods, if the tenant fails to comply with its lease obligation to make a payment reserved as rent, provided it is for a certain amount. So distress not only applies to principal rent, but also to any other payment reserved as rent, which usually includes insurance premiums, VAT and any service charge.

Distress is a cheap and effective way of recovering rent arrears. It is widely used by landlords for payments, large or small. An important part of distress is that it can take tenants by surprise (no prior notice or court order is required except in certain insolvency situations), meaning that the tenant does not have an opportunity to put its goods out of the landlord's reach. The very fact that bailiffs turn up and seize the goods can be sufficient encouragement for the tenant to pay the arrears without the goods having to be sold by the bailiff.

Distress is often a trigger event in a forfeiture clause for a landlord's forfeiture of a lease by peaceable re-entry, although if a tenant breach has occurred which would otherwise allow the landlord to forfeit, subsequent "distraining" will waive the landlord's right to forfeit for that breach. If forfeiture has taken place, the distress remedy cannot be used. So landlords cannot both forfeit and distrain for a tenant's breach.

Objections to distress, primarily based on interference with the tenant's human rights, led to the Tribunals Courts and Enforcement Act 2007. This introduced the concept of "commercial rent arrears recovery" (or CRAR) to replace distress. However, while the 2007 Act received Royal Assent in 2007, it will not be until 6 April 2014 that the CRAR regime will come into force (as a result of the Taking Control of Goods Regulations 2013) and distress will be abolished.

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Position from 6 April 2014 - "commercial rent arrears recovery" (or CRAR)

Does there have to be a minimum amount of arrears before CRAR can be exercised?

Does CRAR apply to any payment reserved as rent?

Can CRAR be used if the lease is of mixed-use (commercial and residential) premises?

Does CRAR require advance notice to be given to the tenant?

At what times can CRAR be exercised?Which goods can be seized under CRAR?

How does the CRAR procedure for securing the tenant's goods for the landlord compare to distress?

Can the enforcement agent immediately re-enter if the CGA is breached?

Is any further notice required to sell the goods under CRAR?

Right to recover rent from sub-tenant