Distressing Times Ahead…?
Scott Cable, Associate at Newcastle law firm Sintons, looks at the implications for tenants and landlords from the impending abolition of the Law of Distress.
After more than 100 years, the Law of Distress, best known as the process by which bailiffs can be sent in to seize a tenant’s goods to recover rent arrears, is to be abolished on April 6, 2014.
In its place will come Commercial Rent Arrears Recovery (CRAR) as an alternative method of recovering arrears from tenants who have failed to pay rent.
For tenants, this could well be seen as a welcome development, in that it prevents bailiffs turning up unannounced. For landlords however, it may not be so well received, as it is potentially a more complex process to recover what is owed.
While the new process comes into force in April, landlords in particular need to be aware of their position, and the new regulations that are coming into place, as soon as possible.
Some common questions on the topic include:
What is the process at present?
The Law of Distress, essentially, enables a landlord to seize a tenant’s goods in order to recover arrears of rent. It allows a landlord to take possession of these goods and either hold them until the outstanding arrears are settled, or else to sell them and keep the proceeds instead in lieu of the arrears being paid.
What is CRAR?
Commercial Rent Arrears Recovery (“CRAR”) gives commercial landlords (or their mortgagees) a statutory right to recover arrears using an enforcement procedure.
The main differences between Distress and CRAR are as follows:
- CRAR will only apply to “commercial premises”- so landlords will not be able to use the process to recover arrears of rent in respect of premises which are occupied or let as a living space.
- CRAR only applies when a tenancy is in writing, meaning it can only be used in relation to leases and written tenancies
- CRAR can only apply if the outstanding sums exceed a minimum of 7 days’ rent (following the deduction of interest, VAT and set-off);
- The CRAR procedure provides for the recovery arrears of “basic rent” only
- A minimum notice period of seven days must be given prior to the seizure of goods
- CRAR can only be carried out by an “enforcement agent” e.g. an authorised bailiff. Landlords will therefore no longer be able to levy ‘distress’ themselves.
What are the implications for tenants and landlords?
For tenants, this is likely to be favourable, particularly the notice period which will prevent bailiffs turning up at their premises unannounced.
However, for landlords this is likely to be unwelcome. The scope of CRAR is narrower than that of distress. Particularly, the definition of “basic rent” is strict and only covers the amount paid for “possession and use of the premises”. CRAR cannot be used to recover arrears of service charge, rates, insurance, etc.
Further, landlords may be concerned that the notice period will simply provide tenants with time to remove goods, which could therefore limit the usefulness of CRAR. While a Court will have the power to order a lesser notice period where it is likely that goods will be removed to avoid enforcement, such an order would first require an application to the Court.
While the legislation will widely reform distress as a remedy, landlords will keep their ability to recover arrears via a sub-tenant following notice stating that it should pay rent directly to its Superior Landlord. The sub-tenant may then deduct the amount paid from the rent which is due to its own Landlord.
It seems likely that, given the additional hurdles that landlords will have to overcome through the introduction of CRAR, they will seek additional ‘security’ from tenants, such as rent deposits and guarantees from tenants at the inception of the lease.
With the implementation of these changes now barely four months away, legal advice should be sought to clarify any uncertainty ahead of CRAR being introduced.
For advice on this or any other matter, contact Scott Cable, Associate in the Dispute Resolution department.
0191 226 7806