Distress for Rent

It has long been thought that the law related to Distress for Rent should be modernised; notwithstanding, that it is used on a regular basis by some landlords and offers in some cases an effective, cheap and speedy method of recovering arrears of rent

Currently, the law enables a landlord to take steps to distrain for rent by entering the demised premises as soon as the rent is overdue. So, for example, if the rent was due on 25 December, the landlord could have the bailiffs in the property distraining for rent the following morning, on 26 December. There is no notice requirement, it is sufficient for the rent to be overdue. However, this is to change as from 6 April 2014

Under the new regime known as Commercial Rent Arrears Recovery (CRAR), implemented by the Taking Control of Goods Regulations 2013, distress will be know as ‘taking control of goods’ and bailiffs will be known as ‘Enforcement Agents’, who will be agent to be able to take action to recover arrears of commercial rent

By ‘rent’ CRAR means the amount payable under the lease (in advance of arrears) for possession and use of the demised premises together with any interest for late payment and VAT

If the insurance premium or service charges are payable as further rent under the terms of the lease, then the landlord can take control of goods for these sums also

(Rent does not include rates, council tax, services, repairs maintenance or any other ancillary matter, even if they are described as such in the lease)

However, the biggest single change to be introduced by CRAR will be the requirement that, before being able to take control of goods, a tenant will need to be given at least seven days’ advanced notice (“the Notice”)

Prior to the service of the Notice, the landlord will need to provide formal authorisation to the Enforcement Agent to exercise CRAR, which will require prescribed information, to include: sufficient details to identify the commercial premises; the amount of rent owed; and the period for which the rent is owed

The Notice to be given to the tenant must be in writing and given by an Enforcement Agent or their office. There is no requirement that the Notice has to be served at the demised premises; therefore, for limited companies, it will be possible to give notice at the company’s registered office

The Notice will need to include prescribed information, such as: the name and address of the tenant debtor; the enforcement powers of the Enforcement Agent; full details of the rent arrears and any interest and VAT; the amount of any enforcement costs; and the date and time by which the debt must be paid to avoid the goods being sold

It is possible to reduce the seven day advanced notice period to the tenant but only on application to the Court. To make such an order, the Court will need to be satisfied that there is a risk that the tenant’s goods would be placed out of reach of the Enforcement Agent, or disposed of

There are four ways in which the Enforcement Agent can take control of the goods:

  • Secure the goods within the demised premises;
  • If the goods are on the highway, secure the goods on the highway;
  • Remove them and secure them elsewhere;
  • Enter into a controlled goods agreement with the debtor (sometimes known as a ‘walking possession agreement’)

Under a controlled goods agreement, the tenant is permitted to retain custody of the goods, acknowledges that the Enforcement Agent is taking control of them and agrees not to remove or dispose of them, before the debt is paid
CRAR sets out further notice provisions before the tenant’s goods can be sold

The question is whether the requirement to provide the debtor tenant with seven days advanced notice of the taking of control of goods will delay the process and provide the tenant with an opportunity to remove the goods. The ‘element of surprise’ will be gone

Landlords will have to manage the new procedure and it is likely that an organised landlord will instruct an Enforcement Agent to service Notice as soon as the tenant falls into arrears. Having said this, there is a cost implication for the landlord of this approach but further regulations are expected in the coming months to deal with the recovery of costs, hopefully to include the landlord’s costs of serving the Notice

How do you deal with a tenant in administration?

Obtain legal advice!

A tenant normally starts the administration process by filing at Court a Notice of Intention to appoint an administrator; as soon as this is done, the tenant is protected by a moratorium which prevents creditors from taking enforcement action

In the case of a landlord, he/she is prevented from distraining for rent, or from forfeiting the lease, without the Court’s prior permission

In essence there is a two fold test as to whether the Court will give a landlord permission to forfeit (as always care must be taken not to waive the right to forfeit by, for example, demanding or accepting rent:

1. The purpose of the administration – permission will normally be given if the forfeiture is unlikely to impede the achievement of the purpose of the administration, such as:

(a). rescue the company;

(b). achieve a better result for creditors as a whole, than would be likely if the company were wound up; or

(c). realise property in order to make a distribution to secure or preferential creditors

If there is no prejudice to the administration, then there is no need to consider the second test

2. The balancing exercise – if there would be some prejudice to the administration, then the Court will balance the interests of the landlord, as against those of the creditors

Greater importance is normally placed on the landlord’s interests in such an application; if significant loss would be caused, then the right to forfeit would be granted

At the outset of an administration, the administrator will identify those parts of the business that are profitable from those that are not. A landlord should immediately contact the administrator to confirm whether the rent will be paid as an expense of the administration

If the demised premises are within the non-profitable part of the business, then the administrator will normally offer a surrender of the lease. In these circumstances, landlords normally accept the surrender until such time as a new tenant is found; to at least save on the business rates

If the demised premises are within the profitable part of the business, then the administrator will wish to continue to use the premises, however his/her obligation to pay the rent has now been complicated by the decision is Leisure (Norwich) II Limited v. Luminar Lava Ignite Limited (2012)

It should be noted that rents which fell due prior to the start of the administration are not payable as an expense of the administration, whereas the quarter’s rent that fall due during the administration (and the administrator is using the premises) is payable in full

The problem here for the landlord is one of timing; if the administration takes place the day after the quarter day, then the administrator can enjoy the premises rent-free for one quarter. (Landlords are of course at liberty to prove for the unpaid rent as an unsecured creditor but recovery of the sums in reality, unlikely).

Luminar is currently subject to appeal

(In the meantime, one tactic worth considering is to amend leases whereby a quarterly payment in advance is converted to a monthly or weekly payment, if an “insolvency event” occurs, or even prescribing for monthly rent from the outset. Doing so would minimise the potential losses of rent in the circumstances of an administration)

Often, in practice, administrators sell the assets of the business to a newly formed company and grant a licence to occupy the premises, pending the outcome of their application to the landlord for consent to assign the lease

(Landlords should ask for a copy of the sales contract and query the purpose of the administration, in order to be able to consider forfeiture)

The terms of which a landlord can refuse consent to assign are provided for in the lease and will typically include the financial position of the proposed assignee. Care needs to be taken, as reasons for refusal cannot be added to at a later date and an administrator may seek to argue that a landlord has unreasonably refused particularly where the premises are key to a profitable part of the business

Anthony Best
Prince Evans Solicitors LLP