Commercial Rent Arrears Recovery: A Briefing Note on the Changes to the Law

For hundreds of years, landlords have had the common law right to "levy distress" when a tenant failed to make payments due under a lease in time. "Distress" involved the landlord entering the tenanted premises to take control of and sell the tenant's goods in order to clear the arrears and was a commonly used method of enforcement by landlords. It was seen as a quick, easy and cheap way of recovering arrears. On 6 April 2014, however, the archaic law of distress was repealed and replaced by a new method of enforcement known as Commercial Rent Arrears Recovery (or "CRAR").

The relevant legislation that brought about these changes is the Tribunals Courts and Enforcement Act 2007 and the more recent Taking Control of Goods Regulations 2013.

The right for a landlord to enter the tenant's premises to seize certain goods, sell them and set the sale proceeds against a lease debt still exists. What has changed is the way in which that power can now be exercised. The changes mean that CRAR will be viewed by landlords as a much less powerful weapon than distress. We set out below the ten key changes that commercial landlords, tenants and their advisers should be aware of.

The debt must be owed under a written lease

One major change is that CRAR can only be exercised when the land is held under a lease, and the lease must be in writing. This means that CRAR applies to tenancies at will (so long as they are in writing), but not to licences or undocumented tenancies. CRAR cannot be exercised in relation to oral tenancies or licences (whether written or not).

It is also noteworthy that for the same breach CRAR is exercised, a landlord cannot forfeit the lease. CRAR will waive the landlord's right to forfeit in respect of the arrears which are enforced.

The debt owed must be rent

Prior to 6 April, landlords were able to levy distress in respect of any sum due under a lease which was 'reserved' as rent. This led to the practice of commercial leases referring to other monies due to be paid by the tenant under a lease (e.g. service charge, interest, and insurance contributions) as a 'rent'.

This will no longer work. From 6 April, CRAR can only be used to enforce non-payment of rent (i.e. the amount payable by the tenant for possession and use of the premises) and any VAT on the rent. Other sums such as service charges, rates, council tax, repairs, maintenance or insurance are outside the scope of CRAR even if the lease refers to such sums as 'rent'.

This is good news for tenants and bad news for landlords. Where a tenant is in default of rent and other sums such as service charge, the landlord will either have to use CRAR for the unpaid rent and another enforcement mechanism for the other unpaid sums, or decide not to use CRAR at all. It is likely that this change will discourage landlords from using CRAR in circumstances where the tenant is in default of rent and other sums.

CRAR is only available in respect of purely commercial premises

As with distress, CRAR can be exercised in respect of tenanted commercial premises. However, a number of changes mean that the precise scope of the new right is more limited than distress. Whereas a landlord could levy distress over mixed-use premises, CRAR can only be used in respect of premises that are let and used solely for commercial premises. Any use of the premises for residential purposes (unless such use is a breach of the lease) will prevent CRAR from being an option for the landlord.

Notice of intention to exercise CRAR

One of the main reasons why distress was an effective debt recovery tool was the element of surprise – the bailiffs could turn up at the premises unannounced, giving the tenant no time to move valuable assets away from the premises and out of the bailiffs' reach.

The most significant change introduced by the new law is that the landlord is now required to give at least 7 clear days' notice to the tenant of the intention to exercise CRAR. The court is able to order that a shorter period of notice is given to the tenant if the court is satisfied that the tenant is likely to move goods to other premises to escape the effect of CRAR. It remains to be seen how popular this will be as an option.

The landlord's notice must be served on the tenant by an enforcement agent (see below) and must contain certain prescribed information, including:

• Details of the power by virtue of which the debt is enforceable against the tenant;
• The amount of the debt owing including any interest;
• The amount of any enforcement costs incurred up to the date of notice;
• The possible additional enforcement costs that will be incurred if the outstanding sums are not paid;
• How payment of the arrears should be made;
• A contact telephone number and address for the enforcement agent; and
• The deadline by which the sum outstanding must be paid to prevent the tenant's goods being sold and additional costs being incurred.

The impact of the landlord's requirement to give the tenant notice of his intention to exercise CRAR will differ depending on the nature of the tenant. For tenants who have the means and intention to pay but have failed to do so for administrative reasons, the opportunity to have 7 days to pay before enforcement agents turn up at the premises will be very helpful. For tenants who do not intend to pay, the notice period is likely to achieve little more than to give the tenant an opportunity to relocate assets off site and frustrate the landlord.

Out with 'certificated bailiffs', in with 'enforcement agents'

Previously, distress was levied by "certificated bailiffs" who were bailiffs that had been certified as appropriate for the role by the local County Court. From 6 April 2014 onwards, there is now greater regulation over persons authorised to enter premises to take control over goods. CRAR must be carried out by an "enforcement agent". 

If you are faced with an enforcement agent trying to exercise CRAR on behalf of a landlord, you should ask to see the form of authorisation (which must contain certain prescribed information) to satisfy yourself that s/he is suitably authorised to exercise CRAR. If the authorisation has not come from the tenant's immediate landlord, the enforcement agent cannot exercise CRAR.

New minimum amount of rent owing

CRAR has introduced a number of conditions relating to the amount owed by the tenant, each of which must be satisfied before CRAR may be exercised. The main ones to note are as follows:

• There is now a minimum amount of rent that must be owing before the landlord can take action. This is an amount equal to 7 days' rent. Although CRAR may recover VAT and interest on rent, these sums cannot be taken into account when calculating this minimum amount;
• This minimum amount must be owed before notice of enforcement is given, and on the subsequent date when the enforcement agents attend at the premises to take control of the tenant's goods; and
• CRAR places greater restrictions on the type of goods that can be seized by an enforcement agent but limits the value of the tools of the trade over which CRAR cannot be exercised to £1,350.

This gives a tenant faced with an enforcement notice the option to pay a proportion of the arrears to bring the outstanding amount below the 7 day minimum, thereby preventing the landlord from proceeding to take control of its goods.

Changes to the practicalities for taking control of and selling goods

The new rules have introduced a number of minor practical changes to how enforcement agents can enter premises. These are:

• CRAR can only be exercised between 6am and 9pm on any day (or if the tenant's business opens at different times, at any time the tenant is open for business);
• The enforcement agent can only access the premises through a door or other usual means of access;
• If the tenant breaches a Controlled Goods Agreement (see below) the tenant must be given at least 2 clear days' notice before the enforcement agent can re-enter the premises to remove goods; and
• The minimum period between seizure of the goods and sale is extended from 5 days to 7 clear days, and 7 clear days' notice of the date, time and place of the sale must be given to the tenant.

Sanctions for a breach of the legal requirements for CRAR

Neither the landlord nor his enforcement agent will become a trespasser if the CRAR provisions are not strictly adhered to. However, if a tenant believes that the CRAR provisions have been breached the tenant could bring a legal claim against the landlord or the agent.

When dealing with any such claim, the court could order that any goods seized are given back to the tenant and/or that damages are paid for any loss suffered by the tenant because of the breach. A defence is available to an enforcement agent if s/he had a reasonable belief that the CRAR provisions were not being breached or that his/her written instruction from the landlord was not defective.

By the same token, it is open to a landlord to bring a claim against a tenant for obstructing an enforcement agent and/or interfering with controlled goods without lawful excuse. A tenant found guilty, could be liable to imprisonment of up to 51 weeks, a fine or both.

Recoverable costs

The new rules allow a landlord to levy charges against the tenant for the costs of exercising CRAR.  A fixed fee is permitted for each stage of the process (i.e. the compliance stage, enforcement stage and sale stage) and in some circumstances, a percentage of the value of the goods over which control has been taken can also be recovered.

New procedure for re-directing rent from sub-tenants

As an alternative to distress, landlords of sub-let premises have for over a century had the ability to serve notice on any sub-tenant requiring the sub-tenant to re-direct its sub-lease rent and pay it to the superior landlord and not to its immediate landlord. The superior landlord has this right when his immediate tenant is in default under the headlease.

This right survives under the new legislation. However, a new notice procedure is introduced. A notice to pay rents directly to the superior landlord only takes effect 14 days after it is served. This will give rise to timing considerations where rent payments under sub-leases are structured differently and/or made at different times to the headlease.

A table summarising the main differences between distress and CRAR can be found below:

	DISTRESS	CRAR
Basis of occupation	Tenancy	Must be a written tenancy
Type of premises	Commercial premises or the commercial part of mixed use premises	Commercial premises only
Nature of arrears	Any monies reserved as rent, e.g. principal rent, insurance rent, service charge, interest	Only principal rent plus VAT and any interest on principal rent   If tenant pays an inclusive rent, CRAR can only be exercised in respect of the proportion of the inclusive rent that relates to the sum payable for use and occupation of the premises
Minimum amount owing before landlord can take action	No minimum amount	Minimum 7 days' unpaid rent
Notice requirements	None	Landlord must also serve at least 7 clear days' notice of intention to exercise CRAR. Period can be reduced by court order
Service of notice	None	Notice must be served by a certified enforcement agent
Practicalities for entry	Landlord or certified bailiff could enter between sunrise on any day except Sunday	Enforcement agent can enter between 6am and 9pm on any day of the week. If the business does not operate between those times, the agent may enter at any time the business is open
Permitted means of access to the premises	Bailiff can gain access to premises through open windows, open skylights etc	Enforcement agent must only enter premises through a door or usual means of access
Exemption for tenant's tools of the trade	Tools of the trade exempt	Tools of the trade up to a value of £1,350 are exempt. Items above that amount can be seized/sold
Seizure of goods	"Walking Possession Agreement"	More rigorous "Controlled Goods Agreement" in prescribed form with prescribed content
Removal of goods following breach of Controlled Goods Agreement	No requirement to serve notice	At least 2 clear days' notice (excluding Sundays and Bank Holidays) required before agent can re-enter to remove goods
Sale of goods	Minimum of 5 days between removal of goods and sale	Agent must wait 7 clear days' before goods can be sold. Tenant must be given 7 clear days' notice of date, time and place of sale