The Death of Distress? CRAR

Commercial Landlords have traditionally had the ability to rely on the ancient common-law right of distraining, otherwise known as the remedy of distress. In short, to rely on the remedy, the Tenant needed to be in default with their rent and the Landlord could simply complete a Notice of Distress and then send it together with a Bailiff to the demised premises to seize the defaulting Tenant’s goods, which they could then sell to settle the outstanding rent.

The Tribunal Courts and Enforcement Act 2007 sought to reform this process. From 6 April 2014, distress is abolished and the new statutory procedure to take control of and sell a defaulting Tenant’s goods will come into force. The new procedure is called Commercial Rent Arrears Recovery which is abbreviated and known as CRAR.

In these enlightened times, the heavy handed nature of distress was often seen as archaic. As a property litigator, it was often, however, seen as a godsend. Details of the differences between the old and the new procedures are set out in the table below.

Comparison of Distress CRAR
Notice Notice
A Landlord can enter and seize goods without notice A Landlord must give a Tenant at least 7 days clear notice in writing of his intention to rely on CRAR.
Arrears Arrears
This is available to satisfy arrears of all sums reserved as rent in the Lease. Often rent includes business rates, service charges and insurance. This is available only for principal rent.
Threshold Threshold
No minimum amount to trigger this remedy. There is a minimum of 7 days outstanding rent required before a Landlord can use CRAR. This is calculated after deducting any setoff the Tenant has.
Sub-Tenants Sub-Tenants
A Landlord can serve a Section 6 Notice on a sub-Tenant requiring him to immediately pay the Landlord their rent and not the Tenant. This is available as before, but only takes effect after the Sub-Tenant has been given 14 clear days notice by the Landlord.
Who can exercise under distress Who can exercise under distress
The Landlord or a Bailiff Only an authorised enforcement agent.

 

The changes raise a number of issues:

  • The requirement of notice will give the Tenant the opportunity to move any items of value out of harm’s way, reducing CRAR’s effectiveness;
  • The fact CRAR only applies to principal rent means that, again, its effectiveness is compromised. Tenants may prioritise the principal rent, leaving anything else unpaid;
  • The 7 day arrears threshold coupled with the right of setoff may lead to uncertainty. It is likely that a Tenant will seek to set off anything and everything to reduce the, amount of arrears;
  • Because of the immediacy of any call on a Sub-Tenant, situations often arose where the Sub-Tenant had already paid the Tenant but would have to pay ‘again’ to the Landlord. The 14 day notice now gives the Sub-Tenant the opportunity to cancel any cheque or standing order to the Tenant, his immediate Landlord. This is fairer to the Sub-Tenant but less effective for the Landlord.
  • Issues are also likely to arise in relation to where a notice must be served. It would appear that the 7 day notice can be served at the demised premises, or at a company’s registered office or a place where the debtor Tenant carries out a trade or business. Tactically, it may be better to serve the notice at a registered office, rather than the demised premises, in the hope that it is overlooked or the occupiers of the demised store are not notified of the enforcement officer’s forthcoming visit;
  • Can a Landlord serve notice on any Sub-Tenant immediately after serving their 7 day notice on the Tenant? Must the Landlord wait until the 7 day notice is ‘effective’ after the 7 day period of notice? The regulations are unclear, however the first option would seem sensible.

Conclusions
We will have to wait and see what effect CRAR has, but first impressions are that it will be less effective than distress and may not be the Landlord’s first weapon of choice in recovering outstanding rent.