Commercial rent arrears recovery: Practical steps for commercial landlords to consider

Commercial rent arrears recovery: Practical steps for commercial landlords to consider

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Author: Paul Knight

Commercial landlords will be familiar with the common law remedy of levying distress for rent.

It's the self-help remedy that entitles a landlord to seize the goods of its tenant at the leased premises, to sell those goods at auction and deduct the proceeds of sale from arrears of rent.

Distress is an extremely effective means by which a landlord can secure payment from a defaulting tenant. A tenant, taken by surprise at the landlord's action, will often be under pressure to negotiate a global deal or to settle the arrears in full.

A tenant who has a genuine dispute with its landlord can apply for an injunction to restrain the landlord from completing the distraint.

However, the Tribunals, Courts and Enforcement Act 2007 (TCEA) will abolish the landlord's common law right to levy distress for rent. The TCEA 2007 received Royal Assent on 19 July 2007, but may be brought into force later this year.

The new procedure 
TCEA 2007 will introduce a statutory procedure - Commercial Rent Arrears Recovery (CRAR) - which will need to be followed by landlords prior to them taking bailiff action.

Only the landlords of commercial premises that have granted written leases will be entitled to use CRAR.

CRAR cannot be used where a property, or any part of it, is lawfully let as a dwelling.

CRAR will only be available to 'landlords' meaning the person or persons entitled to the immediate reversion to the lease.

Prior to a landlord being entitled to exercise CRAR:
. the tenant must be in arrears of rent
. the amount of rent must be certain or capable of being calculated with certainty
. the arrears must be over a minimum amount (as yet undefined)

The rent that can be recovered under CRAR is the amount payable under the lease for possession and use of the premises (together with any interest on that amount and any VAT).

Under CRAR rent does not include any sum in respect of rates, service charge, repairs, maintenance or insurance even if these amounts are reserved as rent. This is a significant change to the current position where a landlord is entitled to levy distress for all sums which are reserved as rent under a lease.

Another fundamental change is that a landlord will have to serve notice of enforcement on the tenant before exercising CRAR. It seems that the current thinking is to require the landlord to give the tenant not less than 14 days' notice of the intention to proceed with CRAR (subject to any reduction in this period which may be allowed by the court).

The landlord thereby loses the ability to institute a pre-emptive strike on the tenant's assets - it is quite possible that on receipt of a notice a tenant may remove items from the premises in order to frustrate the landlord's endeavours to recover the arrears of rent. On receipt of a notice a tenant is able to apply to set aside or stay enforcement.

Preparing for CRAR
There are a number of steps a commercial landlord may consider implementing to prepare for CRAR:
. ensure that a lease clearly expresses the rent which is payable by the tenant for possession and use of the premises - if the rent has to be inclusive, record the amount of rent which is payable for possession and use
. consider having separate leases of the residential element of premises and the commercial element of premises to ensure the availability of CRAR should the tenant default
. consider a deeds audit to refresh information regarding the current address and credit worthiness of any sub-tenants - notice can still be served on sub-tenants to pay rent direct to the landlord should the tenant fall into arrears