Commerical Rent Arrears

Commercial property update

This first appeared in the Solicitors Journal in October 2013 as is reproduced with their permission

Magnus Hassett looks at the forthcoming changes to the rules on recovery of commercial rent arrears, the introduction of a period of temporary rates relief for empty new build commercial property, and HMRC’s recent clarification of last year’s VAT changes, affecting landlords who let out property for storage purposes

The common law remedy of distraint for arrears of rent will finally be abolished on 6 April 2014, when the commercial rent arrears recovery procedure, originally proposed by the Tribunal Courts and Enforcement Act 2007, is brought into effect by The Taking Control of Goods Regulations 2013.

The right of a landlord to instruct bailiffs to seize goods (and sell them after five days if rent arrears are not settled) has been criticised by occupiers for many years, given that there is no requirement to give notice to a defaulting tenant and that it allows landlords who suspect a tenant may become insolvent to seize goods, outflanking other creditors. Landlords, on the other hand, see distraint as a quick and effective remedy, available within 24 hours, often with the intention of ‘shaming’ tenants (particularly retail tenants) into settling arrears.

Commercial rent arrears recovery – abolition of the common law right to distrain

From 6 April 2014, landlords will be obliged to follow a statutory process if they want to seize goods to satisfy rent arrears. Some of the key points of this process are as follows:

 the process can only be used where the lease is of commercial property only – it cannot be used for properties held under a mixed-use lease;

 a landlord must give a tenant at least seven clear days’ notice of is intention to seize goods;

 the process applies only to arrears of principal rent, interest and VAT – not insurance, service charge and/or other sums due under the lease in question. In addition, the tenant must have at least seven days’ arrears of principal rent, calculated after setting off any sums the tenant is due;

 entry to commercial premises will be possible between 0600 and 2100 (unlike distraint, which was available only between sunrise and sunset) by authorised “enforcement agents”;

 goods must then be secured – either at the premises or at a place within a reasonable distance of the premises (where there is a significant risk they may be removed by the tenant) and cannot be sold until seven clear days following removal from the premises;

 a landlord can serve notice (a “section 6 notice”) on a subtenant of its tenant, requiring payment of rent directly to the landlord; but this will not be effective for 14 clear days . The effect is that a subtenant which has already paid rent to its landlord (e.g. by cheque) will not be required to reverse that payment.

The legislation contains some key practical issues for landlords and tenants:

 landlords will be concerned that tenants will use the notice period to remove all goods from the premises – particularly where a tenant operates from several locations;

 it is not clear how “inclusive” rents, including payment of service charge, insurance and rates (for instance) will be treated – it may be that the procedure cannot be used if it is not clear how the rent is split;

 tenants might be concerned that there is no requirement to serve notice at the premises – simply at one of the places where the tenant carries on business – so the immediate occupiers may not be aware of the landlord’s intention to seize goods;

It remains to be seen how the process plays out in practice and whether landlords will turn to other remedies, ending the seizure of goods from tenants’ premises.