Siobhan Cross and Nick Vuckovic explain the implications for landlords and tenants of the proposed replacement for distress for rent
On 17 February 2012 the Ministry of Justice initiated the long-awaited consultation on the future of distress, “Transforming Bailiff Action”, which may have serious consequences for the ancient office of bailiff. The consultation is wide-ranging and covers greater regulation of bailiffs and protection of debtors. However, the crucial point for commercial landlords and tenants is the potential implementation of provisions in the Tribunals Courts and Enforcement Act 2007 to abolish distress for rent and replace it with a modified statutory procedure known as commercial rent arrears recovery (CRAR). The reforms will change the process for goods being seized and sold.
CRAR’s history
In March 1998 the Lord Chancellor’s Department reviewed civil judgments and considered whether distress for rent should be abolished, resulting in a post-consultation report in May 2002. CRAR was introduced in a White Paper in March 2003 and eventually became Part 3 of the Tribunals Courts and Enforcement Act 2007, although this lacked essential detail explaining how it would work.
Some 14 years after the initial review, Part 3 is still not in force, and the 2010 change in government was thought to be its death knell. However, the draft regulations in the latest consultation supply most of the missing detail and five years after it was initially hoped to be brought into force, CRAR could finally take shape in the planned October 2012 Ministry of Justice response.
Implication of the proposals
In addition to the key proposed changes set out in the table on the right, there are less significant changes which should not cause much consternation among landlords or tenants, as they generally represent an attempt to harmonise CRAR with the codification of recovery of other types of debt.
Proposals for structured training and certification for enforcement agents must also be in everyone’s interests, as poor behaviour by a minority of bailiffs risks bringing the profession into disrepute and causing headaches for landlords.
Landlords might be disappointed by the likely resurrection of the abolition of distress and its replacement with the less effective CRAR, but at least it seems that the proposed minimum sum will be set at a low level. However, most concerning to landlords should be the prospect of tenants utilising the 14 days’ notice to remove anything of value from their property.
The option of applying to court for a shorter period does not appear to be a satisfactory answer to this issue. It will be a criminal offence for a tenant to wrongfully interfere with “controlled goods”, which also gives rise to a claim for landlords, but this is of no use if a tenant removes goods before an enforcement agent has had the opportunity to take control over them at the end of the notice period.
Distress for rent has effectively given landlords preferential treatment over other unsecured creditors for hundreds of years, and the broad right to exercise distress for rent, notably an out-of-court remedy, arguably does not sit well with human rights legislation, for example the right to a fair hearing.
Conversely, distress for rent is a useful remedy for landlords, and prevents the justice system becoming clogged with many would-be claims for recovery of rent. The proposed changes, which affect debtors of all types, including individuals in non-commercial contexts, are intended to provide sufficient protection to those who require it. However, in the commercial arena, and in a market where landlords increasingly share the tribulations of their tenants, it is odd to redress the balance of power significantly in favour of the latter.
Distress for rent is one of a suite of remedies against tenants who breach their leases. If CRAR does turn out to be ineffectual, then we might expect to see increased use of rent deposits and an increased requirement for guarantees.
Of course, given the history of CRAR, it remains to be seen what changes, if any, might actually happen.
Key features of CRAR as currently proposed
Who can exercise?
Authorised “enforcement agents” who have undergone training and obtained certification from a county court.
What can be claimed?
Only rent proper (plus VAT and interest) and not other charges reserved as rent (eg, service charge/insurance, etc).
Which premises?
Purely commercial and not mixed-use premises (even if the residential part is not being used, or where this is a breach of the lease), so landlords may want to ensure that mixed-use premises are leased separately.
Minimum sum
The “net unpaid amount” (ie, rent less interest, VAT and permitted deductions) must meet the proposed minimum sum, which is equivalent to seven days’ arrears.
Notice to the tenant
Landlords must first serve a “notice of enforcement” upon the tenant giving 14 clear days (in contrast to seven clear days for other debts) before CRAR can be exercised, subject to a right to apply to court for a shorter period if it is likely goods will be removed.
Taking control of goods
This can be done by either removing and securing goods off the premises; entering a “controlled goods agreement” with the tenant or its authorised agent; or securing goods on the premises (including now securing the premises themselves).
Entry
Entry can only be via a door or usual means of entry, so open windows etc can no longer be used. Entry to the property can be on any day between 6am and 9pm, except for premises trading outside these hours.
? “Transforming Bailiff Action” is available at https://consult.justice.gov.uk/digital-communications/transforming-bailiff-action and closes on 14 May 2012.
Siobhan Cross is a partner and Nick Vuckovic is a solicitor in the property litigation team at Pinsent Masons LLP
