Distraint is a common law remedy available to landlords, whereby the landlord is entitled to instruct a bailiff to seize goods to sell to raise money to cover arrears of rent. From 6 April this year distraint will be abolished and will be replaced by the Commercial Rent Arrears Recovery (CRAR) process. The main differences between the existing remedy of distraint, and recovery under CRAR, will be that under CRAR:
- the lease must be in writing;
- only the annual rent will be recoverable, together with any interest and VAT payable on that sum. Other "rents" cannot be recovered by CRAR even if they are reserved as rent. Landlords will have to seek payment by other means;
- the landlord must serve notice on the tenant that it intends to recover the rent in arrears;
- the net unpaid rent must be outstanding for a minimum period of seven days.
Landlords will naturally be concerned that tenants will use the notice period to dispose of the goods or stock that might be recovered or to remove them from the premises. Tenants might also use the interval to commence the insolvency process. It is quite possible that tenants might respond to the notice by finding sufficient cash to pay the outstanding rent, so as to continue trading or to enable a sale of the tenant's business as a going concern.
We have set out below some frequently asked questions about the changes that will be brought about by CRAR.
I own a building which consists of a commercial unit plus residential accommodation. The tenant has not paid the last month's rent. What can I do?
Until 6 April, distraint is still available as an option. However, from 6 April, CRAR will only be exercisable in relation to commercial premises, the definition of which does not include premises that are partly commercial and partly residential. Therefore, you will not be able to use CRAR.
There is a view that some landlords may choose to grant separate leases of the commercial and residential parts of a property. However, the complexity of doing this (for example the alienation, forfeiture and rent review provisions in the leases would need to be linked) and the issues that could arise, make it an impractical solution.
I always ensure that "rent" under the leases that I grant includes sums payable for insurance and service charge. As these are within the definition of "rent", I assume that I will be able to recover them under CRAR?
Rent under CRAR only includes the sums payable for the occupation and use of the premises (and any VAT and interest on that sum). It is immaterial what the definition of "rent" in the lease includes.
Landlords should also bear in mind that:
My tenant's rent was due two days ago, but it remains unpaid. I am going to send the bailiffs round today.
- where a lease provides for an inclusive rent, only the proportion that is reasonably attributable to the tenant's possession and use of the premises is recoverable under CRAR. To avoid uncertainty when negotiating the lease a record of how the inclusive rent has been calculated would assist.
- CRAR does not make any special provision for leases with a turnover rent so that arrears of turnover rent will only be recoverable under CRAR to the extent that they relate to the possession and use of the premises.
Whilst you can do this under the current system, when CRAR replaces distraint on 6 April, the following conditions must be satisfied:
I often use Walking Possession Orders. Is there going to be an equivalent under CRAR?
- a sum equivalent to 7 days' unpaid rent must be unpaid;
- only an enforcement agent can exercise CRAR on behalf of a landlord;
- an enforcement agent can only exercise CRAR if the tenant has been given at least 7 clear days' notice.
An enforcement agent will be able to enter into a Controlled Goods Order, which will be the equivalent of the existing Walking Possession Order.
What does this mean?
A landlord will have to look to the other remedies available to it. Most modern commercial leases contain a right to terminate the lease for breach (known as forfeiture), but taking this action ultimately brings the lease to an end and so is unattractive unless the landlord is certain that it wants to take the premises back, or has confidence that it should be able to re-let with relative ease. Landlords may also be able to call upon guarantors or former tenants if the tenant is in arrears.
It may be that landlords will seek a rent deposit from new tenants or will look to increase the rent deposit sum when the new rules come into effect. Similarly landlords may look for guarantors more frequently and tenants will have to consider this when seeking to rent premises.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2014. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.
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