If a tenant of commercial property does not pay its rent as it falls due one of the most effective remedies for a landlord has been to exercise Distress – the common law right to recover rent arrears by seizing and selling a tenant’s goods. That right is soon to be abolished and replaced with a new system of commercial rent arrears recovery (CRAR).
Exercising Distress has proved quick, cheap, and well practised – particularly by bailiffs. The threat of exercising Distress has often proved enough to convince a tenant to pay its rent, particularly before dealing with other creditors. To take a high street shop as an example, if a landlord sends in a bailiff to distrain over stock, word can get around. That word may reach a supplier, who may be reluctant to continue to supply or may wish to change terms requiring payment up front. Equally, that word may reach customers who may buy from another store so they can return or exchange those goods.
In the difficult market seen in recent years landlords have been unwilling to forfeit a lease for non-payment of rent, their view being it is better to have a tenant in occupation and running up a debt that could be pursued rather than having empty, unsecured, premises accruing business rates.
Tenants take the opposite view, and argue that an ancient right of Distress has no place in modern commerce, the right gives a landlord too much power, the exercise of the right can be heavy handed, and the threat of it has allowed unscrupulous landlords to adopt ‘bully boy’ tactics.
Those complaints have been extended to include challenges based on human rights legislation, as seen in the case of Fuller v Happy Shopper Markets Ltd . Happy Shopper had mistakenly overpaid their rent. When it found out, it decided to stop payments, to offset the overpayment. The landlord levied Distress. At trial, Mr Justice Lightman commented:
‘… the ancient (and perhaps an anachronistic) self help remedy of Distress involves a serious interference with the right of the tenant’.
In the circumstances he held that the tenant was entitled to ‘equitable set off’.
The implication of that case is that before levying Distress a landlord should make sure there is no possibility of any equitable set-off, or it might fall foul of the tenant’s human rights, including respect for privacy and home and the right to peaceful enjoyment of possessions.
Other views include those of insolvency practitioners who see distraint as a right which can put a landlord in a priority position, particularly over other creditors, or which may have an impact upon a tenant planning to invoke an insolvency procedure to allow it to trade its way out of trouble.
TRIBUNALS, COURTS AND ENFORCEMENT ACT (TCEA) 2007
These concerns were first considered by the Lord Chancellor’s Department in 1998. Since then there have been various consultations, eventually leading to a white paper in 2003 which set out a proposal to replace Distress with CRAR.
The Department of Constitutional Affairs published the draft Tribunals, Courts and Enforcement Bill in July 2006 which led to the TCEA, which received royal assent on 19 July 2007.
Despite the uncertainty since then, there has been a patchwork of statutory instruments and regulations all leading to the implementation of the CRAR regime. On 15 July 2013 Statutory Instrument 2013/1739 brought into force some of the provisions of the TCEA 2007, including Schedule 12, so as to enable the power for regulations to be determined, in advance of the wider commencement of the TCEA 2007.
On 26 July 2013, the Taking Control of Goods Regulations 2013 were published, which apply in relation to taking control of goods and selling them, in the exercise of the procedure in Schedule 12. Those regulations will come into force on 6 April 2014, which now seems likely to be the date for full implementation of the CRAR regime.
The TCEA 2007 creates a statutory right for a landlord of a lease of commercial premises to use the CRAR procedure detailed in Schedule 12, to take control of goods to recover rents payable under the lease from a tenant, and abolishes Distress.
KEY ELEMENTS OF THE RIGHT
- A landlord: being the person entitled to the immediate reversion of the property. That could include a joint landlord; a mortgagee, if notice to take possession or receive rents has been served, or a mortgagor.
- Lease: a legal or equitable tenancy, including a tenancy at will, but which must be evidenced in writing.
- Commercial premises: not premises which are occupied or let as a dwelling or which are mixed use.
- Rent: being the amount payable under a lease (in advance or arrears) for ‘possession and use’ (and interest and VAT if due under the lease) and over a minimum threshold.
- Rent recoverable: the rent must be certain or capable of being certain and must have become due and payable. Any amount of rent recoverable can be reduced by a permitted deduction.
The most controversial element of the right to use CRAR has proved to be rent. Only basic rent reasonably attributable to the ‘possession and use’ of the premises can be recovered. The argument has been that in exercising a self-help remedy there needs to be certainty about the arrears, which is best achieved by limiting recovery to the basic rent due.
Landlords are hindered from the start as CRAR can not be used to recover unpaid service charges, business rates, insurance charges etc, even if they are reserved as rent in the lease. Equally, there may be difficulties where a lease provides for an all-inclusive rent since a landlord may have to prove what proportion is properly attributable and so recoverable. Equally, there are no provisions for determining what proportion of a turnover rent might be caught.
While VAT and interest can be recovered, for the right to apply there will be a threshold rent test – likely to be a minimum of seven days rent. The rent for the test is the ‘net unpaid rent’, being the rent relating to ‘possession and use’ excluding interest and VAT. Landlords must allow for any deductions and/or set-off that the tenant may be entitled to.
The rent test also has to be carried out twice, as CRAR will only be exercisable if the net unpaid rent meets that threshold both at the time when notice of enforcement is given and when goods are taken control of. If the tenant pays after receiving a notice but prior to enforcement, the ability to use CRAR will be lost. A real concern is that the tenant would only have to pay enough to reduce the rent below that minimum threshold to avoid any further action being taken.
While the aim was to offer a tenant protection from recovery of unduly small arrears, a landlord will no doubt resent the added time, cost, and delay of having to do a calculation twice, especially as a tenant can frustrate the process after the first calculation.
KEY ELEMENTS OF THE PROCEDURE
Schedule 13 to the TCEA 2007 amends any statutory reference to powers to distrain so they will now refer to the power to use the procedure set out in detail in Schedule 12, which will have to be used:
- to exercise the power conferred by a writ or warrant of control to recover a sum of money;
- to exercise any power conferred by a writ or warrant of possession or delivery to take control of goods and sell them to recover a sum of money.
Schedule 12 sets out the particulars of the enforcement procedure, including who can carry it out, what goods can be taken control of, the effect of carrying out enforcement on the goods, and provisions for the sale of those goods.
The detail of Schedule 12 is beyond the scope of this article but, as with the right, there are concerns about certain elements of the procedure.
THE REQUIREMENT TO SERVE NOTICE ON THE DEBTOR
Perhaps the most controversial aspect of the CRAR regime is the requirement to give ‘notice of enforcement’ to a tenant. An enforcement agent cannot take control of the debtor’s goods unless and until the debtor has been given notice. The reasoning being that a tenant should be warned of the consequences.
We are waiting on further regulations as to the specifics of the notice, including:
- the minimum notice period;
- the form of the notice – intended to be in writing;
- the information to be included in the notice – including the amount outstanding, and who and how to pay to avoid enforcement action;
- how the notice must be given; and
- who must give the notice.
Those specifics have triggered much debate. Latest indications from the Ministry of Justice are that the minimum notice period will be seven days before enforcement action can be taken – in all cases including CRAR. That notification period has been described as a ‘rogue’s charter’ since it will give an unscrupulous tenant a full week to move or dispose of their goods before enforcement.
A landlord, creditor, or enforcement agent may be entitled to apply to Court seeking an order to reduce the minimum notice period, if reasonable grounds can be shown that a tenant might move or dispose of their goods. There is no guidance as to what those grounds might be – even if a landlord has its suspicions how is it going to prove them?
The initial requirements envisaged service of the notice by post. However an enforcement agent is required to keep a record of the time when a notice of enforcement is given. The implication is that service of the notice in person may be acceptable. If so, it may be that an enforcement agent would look to take photographs or a video to record goods, either to dissuade a tenant from moving or disposing of them, or as evidence if a tenant chooses to interfere with ‘bound’ goods.
On receipt of a notice, a tenant can frustrate the process by making an application to Court for an order either setting aside the notice or to stop any further steps being taken under CRAR without further order.
The imposition of the notice procedure means that a landlord, having already suffered non-payment of rent, may face further costs and delay in enforcement until an application (by the landlord for short notice or by the tenant challenging the enforcement notice) is issued, considered, and disposed of.
Only an ‘enforcement agent’ will be able to take control of goods and sell them under the CRAR regime. An individual can act as an enforcement agent only if certified (including a certified bailiff), exempt (such as a revenue and customs officer), or if acting in the presence of one of those certified or exempt individuals.
The CRAR regime will be used to implement the wider revisions to bailiffs’ powers as provided for by the government’s consultation paper ‘Transforming bailiff action’, and the provisions contained in the Crime and Courts Bill. Under CRAR, gone are the days of unlicensed agents or landlords acting in person to take control of a tenant’s goods. There will also be limitations on how and when an enforcement officer can gain access to premises.
The use of the Schedule 12 procedure is expressly subject to certain provisions of the Insolvency Act 1986 including:
- References to Distress in the Insolvency Act will now refer to the Schedule 12 procedure;
- Where a creditor has issued execution against a company, and the company is subsequently wound up, the creditor is not entitled to retain the benefit of the execution or attachment as against the liquidator;
- Where a company’s goods are taken in execution but, before they are sold the enforcement officer is given notice that a provisional liquidator has been appointed or a winding up order has been made, or a resolution for winding up made, the enforcement officer must deliver the goods and any money seized to the liquidator; and
- Likewise where a bankruptcy order is made against a debtor after execution the creditor is not entitled to retain the benefit of execution as against the trustee in bankruptcy.
The notice procedure will alert a tenant to a landlord’s intentions. In response a tenant could serve a ‘notice of intention of appointing administrators’. Once filed at court, a moratorium is created, which could then frustrate the CRAR process.
In an insolvency procedure, a tenant’s goods are often the main asset and so the provisions relating to goods will likely be of most interest to insolvency practitioners.
The goods that can be taken control of are considerably narrower in scope. CRAR may be exercised only against goods owned by the tenant and not those owned by third parties, including sub-tenants. Under the CRAR regime the emphasis is on taking control of the goods by ‘securing’ them rather than ‘seizing’ them as was the case with Distress.
As to the goods that can be secured, there are changes there too. For example, an enforcement agent may take control of goods at a high value only to the extent it is necessary ie if there are not enough goods of a low value available. Equally, certain goods including the tenant’s ‘tools of the trade’ will continue to be exempt from CRAR, but only up to a value of £1,350. Once control of goods has been exercised there are detailed procedures for dealing with those goods and selling them.
THE STATUS OF GOODS
There is a distinction between goods becoming ‘bound goods’ and becoming ‘controlled goods’.
Goods are ‘bound’ by the enforcement notice as soon as it is served. Those goods remain bound until either sold, or, in the case of money used to pay the outstanding amount, until the outstanding arrears are otherwise satisfied. Title to those goods is not prejudiced where a purchaser for value without notice or an assignee or a transferee has an interest in those goods.
As to controlled goods, an enforcement agent cannot take control of a tenant’s goods until certain prescribed periods have passed and must do so within 12 months from service of the enforcement notice. When entitled to do so, to take control of the goods, an enforcement agent must:
- secure the goods on the premises or on a public highway; or
- remove the goods from the premises and secure them elsewhere; or
- enter into a controlled goods agreement (a more rigorous version of the walking possession agreement) whereby the tenant retains custody but acknowledges the enforcement officer has control and agrees not to dispose of them or move them, or let anyone else do so, until the rents are paid.
If the tenant interferes with the process or intentionally interferes with controlled goods without lawful excuse, they commit an offence. On summary conviction, that person would be liable to imprisonment for not more that 51 weeks or a fine currently up to £2,500, or both. However that offence only applies to controlled goods, it does not apply to the goods which are bound.
For commercial entities, if a tenant wrongly interferes with controlled goods, and the landlord suffers loss, a landlord can bring a claim for that loss. However, that is not particularly appealing if a tenant’s goods were the main asset and they have been disposed of.
It is not clear what the sanctions are if someone seeks to move or dispose of ‘bound goods’. The ambiguity in this area is a cause of real concern for implementing CRAR in practice. However, in the usual case of moving the goods next door or to another site, if the location of the goods is known, a landlord may be able to apply for a warrant to allow an enforcement agent to enter on to those premises, even though they are not the tenants’ premises under the lease.
The regulations will make provision for the recovery by any person from the tenant, of amounts incurred in respect of the costs of ‘enforcement-related services’. Schedule 12 appears to indicate costs will likely be provided for by the recovery, and can be challenged by referral to Court.
The CRAR regime seeks to rebalance a landlord’s rights and put them back in to line with other creditors. While a tenant will no doubt welcome these changes, a landlord will be concerned by the erosion of its rights and the time, cost, and delay it will have to suffer when seeking to recover the rents that a tenant agreed to pay in its lease.
The real question is what will be the wider impact of the new CRAR regime. Landlords retain their general contractual rights under the lease, including the right to forfeit, the right to sue for arrears under the lease as a contract, and any ancillary remedies they may have – deduction from a rent deposit or recovery from a guarantor. With the spectre of having to go through CRAR, a landlord may insist on a tenant providing further or other forms of security.
The real difficulty will be in situations where there are no other options for a landlord and the tenant’s goods are its main or only asset and the main target for recovery. With centuries of the practice and procedure of Distress being abolished, the stress of CRAR may be just beginning.
By Benjamin Lomer, senior associate, Druces LLP.
PRACTICAL POINTS FOR THE IN-HOUSE LAWYER
- Residential and commercial premises should be separated and held on separate leases.
- New leases should set out what part of the rent is attributable to possession and use.
- If all-inclusive or turnover rents are to be used, the parties should try and agree what rent is attributable to possession and use eg in heads of terms.
- For existing leases where the position on rent is not clear, the parties should try and agree what rents are attributable to possession and use eg at rent review.
- Further and other forms of security should be considered including rent deposits and/or guarantees.
- A landlord can still serve notice to recover from a sub-tenant. However, there are changes to timing, and only the amount that could be recovered under CRAR from the immediate tenant can be recovered from a sub-tenant.