The end of distress

The End of Distress

For hundreds of years commercial landlords have relied on their right to levy distress by “bailiffing” tenants in arrears and seizing goods to sell if the tenant did not clear its arrears. This is a popular remedy for landlords being relatively cheap, quick and easy. However, the law of distress will be abolished from 6 April 2014 and replaced with the Commercial Rent Arrears Recovery (CRAR) scheme. Victoria Khandker, Associate in the Property Litigation team, looks at how CRAR substantially alters the way that tenants’ goods may be seized and shifts the balance in favour of the tenant.

Victoria explains that there are numerous changes to the procedure. The key changes are as follows:

  • The most significant change is that tenants must be provided with at least seven clear days’ notice before an enforcement agent can enter to seize their goods. Clear days do not include Sundays or bank holidays. In practice this will mean that tenants have plenty of opportunity to remove any items of value from the premises rendering the remedy practically useless.
  • It will be possible to apply to the Court for a reduced notice period where it is likely that goods will be disposed of to avoid seizure. However, with the current delays in the Court system, the fact that it is unclear whether notice will need to be given to a tenant of that application (thus negating the point of the application itself), and the expense of making such an application, it is unlikely that this will be attractive to landlords. In any event only reduced notice can be given – it will not dispose of the need to give notice altogether.
  • As suggested by the name, CRAR may only be used on solely commercial premises. It cannot be exercised on mixed use premises at all. This may lead landlords to let out different parts of their properties separately – i.e. one commercial lease for a shop, and a residential lease for the flat above, so that they can benefit from the use of CRAR. It should be noted that if there is unlawful residential use not permitted by the lease this does not prevent the exercise of CRAR.
  • Only principal rent, VAT and interest may be recovered unlike with distress which could be levied for anything reserved as rent under the lease such as insurance and service charge. There must also be at least seven days’ rent unpaid before the CRAR procedure can be commenced although this is unlikely to affect most landlords where rent is due monthly or quarterly.
  • Only an enforcement agent can exercise the right but this is essentially only a change in terminology from a bailiff. However, they must now be instructed in writing and given certain prescribed information before action can commence.
  • The permitted hours to enter premises to remove goods will be between 6am and 9pm on any day of the week, or during the period when the premises are open for trade, if not within this timescale. This is actually helpful to landlords who can currently only enter between sunrise and sunset and not on Sundays.
  • Another positive change is that tools of the trade over the value of £1,350 may be seized whereas previously no such items could be seized. No item in actual use, the removal of which may result in a breach of the peace, can be seized either.
  • Controlled Goods Agreements (CGA) replace walking possession agreements. However, if the CGA is breached, an agent must give at least two days’ clear notice before seizing the goods. In practice this means a tenant will have a second opportunity to remove the goods before seizure.
  • The old procedure of serving notices on sub-tenants which requires them to pay rent directly to the superior landlord, still exists, but notice will not take effect for 14 days, i.e. rent falling due, or paid, during that 14 day period will still be payable to their immediate landlord being the defaulting tenant. Many sub-tenants will contact their immediate landlord after receiving such a notice. Practically what this means is that a superior landlord will be left out of pocket until the following rent date.

In the future seizing assets from commercial tenants who have failed to pay rent will be a much less attractive option for landlords. Tenants will have time to remove valuable items in advance of the enforcement agent visiting the premises rendering the process pointless. Many landlords who are owed rent will be more likely to consider other options to recover the amounts owed to them such as Court proceedings, forfeiture or insolvency action.

If, however, landlords do opt to use the new procedure, they should give some thought to how they exercise it. Despite the technical requirements of the new regime and the requirement to give prescribed information to tenants and comply with service requirements, failing which the process may be invalid requiring return of the goods to a tenant, notice must be served by the enforcement agent, not by solicitors or the landlord itself. If landlords want to be certain that the process is followed correctly, it may be prudent to seek advice from solicitors first, and ensure their agents understand the steps to be taken. It may even be sensible for solicitors to draft the notices.

The above is simply an overview of the new regime. The Property Litigation Team can advise in more detail on the changes and what the best options for a landlord seeking to recover rent may be. If you would like further advice on any of the various recovery procedures please do not hesitate to contact Victoria Khandker or Carl Csukas.