The landlord in distress (no more): reform to recovery of rent arrears after 6 April 2014
From 6 April 2014, the ancient self-help remedy of "distress" available to landlords seeking to recover rent arrears will be replaced by a new procedure: Commercial Rent Arrears Recovery (CRAR).
We look here at what the introduction of CRAR means to landlords taking enforcement action against defaulting tenants under commercial leases from an insolvency perspective and the practical considerations for landlords, tenants and also insolvency practitioners appointed to act in relation to defaulting tenants.
Distress – the journey to reform
When a tenant doesn't pay sums due under a lease, landlords have been able to recover arrears without going to Court by using the law of distress. The roots of distress be traced back to the time of the Magna Carta and nowadays has represented a culmination of rights exercised by landlords derived from statute and case law.
The process was simple; as soon as any amount of rent and other sums reserved by the lease (such as insurance and service charge) fell due, the landlord could instruct bailiffs to enter the premises and seize the tenant's goods without warning and sell them to offset the proceeds against the lease sums owing. Landlords were also able to serve a notice requiring the sub-tenant of a tenant in default to pay rent it owes directly to them as head landlord.
In practise, the exercise of distress in relation to commercial leases has represented a cost-effective and powerful remedy for landlords compared with other lease enforcement options. Particularly in recent years, landlords have been empowered by distress in a market whereby landlords do not want to take back possession of commercial premises and be burdened with the uncertain prospect of re-letting and all associated liabilities.
Law reformers raised concerns landlords' abuse of the process to gain priority in recovering their debt without warning and leaving tenants and their businesses vulnerable. The Courts have even cited human rights legislation arguments in reaction to a landlord's exercise of distress [Fuller v Happy Shopper Market Ltd (2001)]
It was argued that reform was needed and consultations followed resulting in the new regime of Commercial Rent Arrears Recovery ("CRAR") reaching the statute books in 2007 when the Tribunal, Courts and Enforcement Act 2007 received royal assent. The Taking Control of Goods Regulations 2013 was then passed last year providing the much needed detail for the operation of the CRAR regime.
The procedure under CRAR from 6 April 2014
The CRAR regime sets out the new procedure for landlords of commercial premises to take control of a tenant's goods to recover rent payable under the lease. In comparison to the old law, CRAR prescribes a single specified process for the seizure of goods to the value of unpaid rent. Under CRAR, tenants are given notice of the intended action with more transparency as to information given to tenants, resulting in a fairer process. CRAR will only apply where there is a written lease of commercial premises and only for the recovery of principal rent. Where there are mixed used premises (e.g. a pub or shop) the exercise of CRAR may not be allowed because of the residential element.
Key aspects of the procedure are concisely summarised in a note produced by the Property Litigation Association.
What CRAR means….
Due to the new notice requirement under CRAR, there will be a significant delay from the point that the rent falls due and the enforcement agent selling the tenant's goods which could span 3 or more weeks. Landlords may find tenants with warning of CRAR taking steps to remove goods during the notice period. Such practical obstacles under CRAR will mean it is not likely to be a first choice enforcement option for landlords in comparison with the old law of distress. Some landlords and enforcement officers are already saying that the requirement to give notice to the tenant has all but rendered this form of enforcement useless.
If the tenant is already in financial difficulty, notice of the intended exercise of CRAR could lead them to take advice from insolvency practitioners as to the insolvency options available to them. This may result in the directors tactically initiating the appointment of administrators whereby a statutory moratorium would automatically apply to prevent the landlord from completing the exercise of CRAR (without first obtaining the consent of the tenant or the permission of the Court).
The limitations of CRAR will undoubtedly result in landlords looking at other blunter enforcement options. CRAR represents a comparatively diluted threat to defaulting tenants. Landlords should consider the use of winding-up petitions (or at least the threat of such action through statutory demands) or County Court proceedings to quickly focus a tenant's attention to payment. Although winding-up petitions won't be appropriate in terms of disputed amounts (e.g. turnover rents), they ought to be considered in more and more circumstances by landlords where other enforcement remedies lack teeth.
Furthermore, landlords will probably need consider other ways of protect their contractual position at the outset of a lease and should consider obtaining larger rent deposits and guarantees where appropriate. Landlords should be mindful when permitting residential occupation of commercial premises so that the lease remains within the scope of CRAR. A review of enforcement rights under existing leases should be considered by landlords, particularly those with larger portfolios.
Certain insolvency procedures will limit and frustrate certain enforcement options (including CRAR) and landlords should always consider the wider picture (including anticipating the tenant's insolvency options if they have a track record of non-payment) before formulating a strategy for dealing with a defaulting commercial tenant. Please see our "guide to tenant insolvency" ([insert weblink]) comparing the different enforcement options available to landlords on a tenant's insolvency.
Most commercial tenants ought to regard CRAR as a fairer process. However, CRAR doesn't change the fact that the tenant's goods will be subject to the control of the landlord's enforcement agent for sale. CRAR does buy the tenant more time to consider their options and try to negotiate a short-term commercial solution with the landlord. The pitfalls of CRAR for landlords ought to result in them being more receptive to a tenant's proposals for payment of rent arrears.
CRAR will undoubtedly put tenants in a better position since they will have the warning time to either settle the debt or if they are unable to (and are in financial difficulty) take advice as to restructuring options which may involve the commencement of an insolvency procedure with a view to rescuing the business and put the landlord back on a level footing with other creditors.
For Insolvency Practitioners
Insolvency Practitioners appointed or engaged in relation to insolvent tenants (and their staff and agents) should familiarise themselves with the new process under CRAR.
Given the view held by some landlords and enforcement agents that CRAR is been rendered almost useless, landlords will be relying more heavily on other methods of enforcement. We predict that this will generate more activity for insolvency practitioners as landlords and tenants alike are more likely to require advice on how to deal with the tenant's arrears. Insolvency Practitioners advising tenant companies in anticipation of strategically timed appointments will need to have a good understanding of the CRAR process and timetable in order to protect the company's assets for the general body of creditors.
As with distress, under CRAR it will be an offence for anyone to obstruct an agent exercising CRAR or interfering with controlled goods and this could in extreme cases, be punishable by imprisonment or a fine. There could also potentially be personal liability to any administrators of a defaulting tenant who do not promptly deal with landlord's requests for permission to exercise CRAR.
CRAR and beyond
The general consensus is that CRAR will better protect tenants and hinder landlords. The key is for all parties in the leasehold relationship to know what CRAR could mean to them and how best to utilise the process to safeguard their business.
This note is intended to provide general guidance on the topic of CRAR and it is no substitute for taking specific legal advice.
For more information or assistance, please contact Melia Hirst