The Taking Control of Goods Regulations 2013 was passed on 26 July 2013, bringing major changes to commercial landlords' ability to recover rent from defaulting tenants when the regulations come into force on 6 April 2014
The new Commercial Rent Arrears Recovery system (CRAR) will replace landlords' common law right of distress. Distress enables landlords to attend unannounced at their defaulting tenants' premises and take away goods to secure payment of rent arrears.
This current self-help remedy is a very effective and relatively inexpensive tool for commercial landlords, but the introduction of CRAR will abolish landlords' ability to exercise distress.
The new system for rent recovery requires a landlord to provide its defaulting tenant with seven clear days' notice, in writing, that a bailiff will be attending the premises to take control of goods for the purpose of securing the rent arrears.
Whilst this is good news for tenants, the concern for landlords is that the written notice provides the tenant with the opportunity to remove items from the premises in order to avoid having the goods seized, making the remedy much less effective.
There is provision for landlords to apply to the courts to request that a lesser period of notice be given where it is considered likely that the goods will be removed/disposed of prior to enforcement - but this makes the whole process more time consuming and costly.
Landlords should also note that CRAR can only be used in respect of written commercial tenancies and that only 'pure' rent (and interest/VAT chargeable on it) can be recovered. In contrast with distress, this means that landlords will no longer be able to recover any sums in respect of insurance, service charges and rates, even if they have been reserved as rent in the lease.
Landlords should also be aware that, in order to be entitled to exercise CRAR, the amount of rent must be certain. Landlords should try to ensure that the amount of rent is expressly stipulated in all leases and is distinguished from the rates, insurance, and service charges that are payable under the lease.
Fortunately for landlords, the regulations will preserve landlords' ability to recover rent from its sub-tenant. Rather than exercise CRAR against its immediate tenant, a superior landlord can serve a notice on its sub-tenant requiring it to pay its rent directly to the superior landlord until the tenant's arrears are paid off. Regulations have yet to be laid down in respect of the notice that is to be provided, however, the current proposal is that seven days' notice will be required.
The regulations are not yet in force and there are further regulations to be set later this year, but landlords should be considering the above points now - and the practical steps to take in any current or future lease negotiations.
Please contact us if you wish to discuss CRAR and how it might affect you.