A Distressing Time For Landlords?
By Matt Leech, Associate at Gateley
On 6 April 2014, part 3 of the Tribunal Courts & Enforcement Act 2007 (TCEA) and the Taking Control of Goods Regulations 2013 (the Regulations) came into force and the common law right to distress for arrears of rent was formally abolished.
Distress had come under much criticism as being incompatible with modern law and practice (particularly human rights legislation) and as giving landlords an unfair priority over other creditors.
In its place, TCEA and the Regulations introduce the new Commercial Rent Arrears Recovery regime (CRAR). The intention of CRAR is to redress the balance between the rights of landlord and tenant and set out more clearly the actions landlords are legally entitled to undertake. CRAR cannot be contracted out of or amended – any attempt to do so will be unenforceable.
Commercial Rent Arrears Recovery
CRAR provides a more limited recovery remedy to landlords than distraint and there are some key terms to consider:-
TCEA catches all leases, providing they are evidenced in writing. It will not apply to licences or a tenancy at sufferance.
2. Commercial Premises
CRAR is limited to commercial premises only. CRAR will not apply if all or any part is lawfully let, underlet or used as a dwelling. This will include mixed-use premises let under a single lease, for example pubs, commercial premises with residential flats above and potentially any business with staff accommodation.
Under CRAR, only “the amount payable under the lease for possession and use of the demised premises” plus VAT and interest can be recovered. Any other payments which may be reserved as rent under a lease cannot be recovered.
The minimum arrears must be seven days net unpaid rent, less VAT, interest and “any permitted deductions”, i.e. any right of set-off or counterclaim which the tenant may have.
4. Notice in Writing
A landlord must give notice in writing to the tenant of its intention to exercise its CRAR rights. The notice length is “seven clear days”, excluding Sundays, Bank Holidays and Christmas Day. A landlord can apply to Court for an order reducing the notice period if he has concerns that assets may be removed from the property and a tenant can similarly challenge the notice.
The procedure for giving notice is set out in some detail in the Regulations. A prescribed form of notice must be served by an approved enforcement agent. At the expiry of the initial notice period a further notice must be served confirming the amount due, which must remain above the seven day net rent arrears threshold at the time of enforcement.
As before, certain goods are exempt from CRAR including those necessary for the tenant’s personal use or in connection with employment, business, trade, profession, study or education up to an aggregate value of £1,350.
Prior to CRAR, a landlord had the right to serve “diversion” notices on a sub-tenant requiring the sub-tenants rent to be paid directly to the landlord in discharge of the immediate tenant’s arrears. This remains under TCEA, with a new requirement of 14 days’ notice to be given to the sub-tenant before the diversion becomes enforceable.
Reaction to CRAR
Landlords have raised concerns that the notice requirement undermines CRAR’s effectiveness. That said, many trading tenants may not be able to remove assets from a property in seven days. Landlords will also have the right to apply to Court for a shorter notice period if they are concerned – we will see how popular this option becomes and how the Courts react.
It is also likely that landlords will more routinely grant separate leases of the commercial and residential elements of their buildings to ensure CRAR can apply to the commercial part.
Whilst this is intended to be an entirely new regime, given the extent of the case law that built up in relation to distress, it remains to be seen in these very early days how CRAR will be enforced and challenged.
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Written by: Richard Roe on Thursday 31/07/2014