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Landlords lose out again?

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You are juggling funds in a manner best suited to hold off creditors and to stop legal proceedings being instigated or continuing. Suddenly and without warning a colleague informs you an enforcement officer has arrived to seize goods under a landlord’s distraint for rent arrears. There have been no legal proceedings and the enforcing officer will not leave unless you pay the amount due under the distraint. An inventory is taken of your assets and these will be removed if the debt is not paid. Without the assets under threat of seizure the business is crippled and doomed to fail.

The above is a regular occurrence and because the landlord is not that regular supplier you need for daily operations rental arrears can often be overlooked when you are juggling cash. I cannot count the times a director has informed me of the company liabilities only to remember there are rental arrears (once I ask them) as an after thought.

Distraint is a powerful tool in the landlords’ armoury since mediaeval times but this weapon is about to be blunted. After 6 April 2014 commercial landlords will have to rely upon the provisions for Commercial Rent Arrears Recovery (“CRAR”) which lays down the policy and requirements before seizure of goods can be exercised.

CRAR will only apply to commercial premises where there is a lease in writing. This could give a landlord a headache because if the premises include a residence (e.g. a shop with a dwelling flat above) then exercising his rights under CRAR will be prohibited. Another restriction imposed by CRAR will be to limit a claim to rental arrears. While this may seem to be no different from the current procedure what if your rent is inclusive of utilities or service charges? I anticipate many commercial property solicitors are preparing for the obvious disputes that will arise where a landlord charges an all inclusive rent and apportionment between rent and other charges needs to be agreed before using CRAR.

The historic/current position requires a minimum of 1-day’s rent arrears whereas CRAR requires at least 7 days of arrears to have accrued. To be honest, I cannot think of any examples where the landlord has exercised distraint for such a short period of time, although readers may know differently. The key point is CRAR requires landlords to serve the tenant with a 7-day notice of intent to exercise their rights under CRAR. Upon expiry of this notice seizure may take place but a further 7 clear days’ notice must then be given to the tenant prior to the sale of those goods. Any sale must take place by auction (unless a court directs otherwise) and a valuation of the seized goods must be provided to the tenant before the sale.

An enforcement officer will be able to seize goods after expiry of the notice of intent on any day of the week, including Sundays and bank holidays, between 6.00 a.m. and 9.00 p.m. It will be permissible to seize outside of these hours if the business hours mean the premises are open, such as a casino or nightclub. In return for the differing hours available for seizure access to the target premises cannot be by any other means than the usual point of entry for that building and without forced access.

So, what does this mean for landlords and tenants? Well, for tenants there should be more certainty and more time in which to take advice and consider the most appropriate action required. For landlords and subject to court permission to curtail the notice period, they have a more regimented procedure to follow and cannot seize goods for at least 21 days. This period may provide a tenant with sufficient time in which to enter into an insolvency process, thus frustrating the intended action by the landlord. With this in mind tenants should not be surprised to see commercial landlords demanding higher rent bonds and, possibly being more inclined to seek personal guarantees.

 

Gary Pettit