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Commercial
Rent Arrears Recovery
 PainSmith
Solicitors Legal Update
1
April 2008
by
Gemma Hadlow of Pain Smith Solicitors*
For
commercial landlords with tenancies created under the Landlord
and Tenant Act 1954, the imminent introduction of the Tribunals,
Courts and Enforcement Act 2007 ("the Act") is set to have
an effect on the way in which they recover any rent arrears.
The new procedure which has been introduced in order to comply
with the European Convention on Human Rights can be found
under ss 71 to 87 of the Act and is known as Commercial Rent
Arrears Recovery (CRAR).
The
provisions are anticipated to come into force later this year
and they are firstly set to abolish the well recognised common
law right to distrain1 for arrears of rent. In its place will
be CRAR which replaces the traditional remedy with a clear
modern day system which will allow commercial landlords to
instruct enforcement officers (i.e bailiffs) to collect arrears
of rent. If a landlord seeks to utilise this statutory remedy
they will be required to follow a more stringent procedure
which involves the satisfying of some strict pre-requisites
including the service of notices and the obtaining of a Court
Order.
Definition
of Landlord
The
first pre-requisite for anyone seeking to implement the CRAR
procedure is to satisfy the definition of a landlord under
s73 (3) of the Act which requires him to be "entitled to the
immediate reversion" in the property comprised in the lease.
Joint landlords, mortgagees in possession and receivers also
fall under the definition. An important exclusion to the provisions
is found under s 74 (2) of the Act which states that for a
landlord to be able to utilise the CRAR remedy they must have
a written agreement. Verbal agreements will not be sufficient
in permitting a landlord to distrain goods via CRAR. A further
important exclusion affects mortgagees who may only utilise
CRAR where the lease has been created with their knowledge
and not contrary to the provisions of the mortgage.
Lease
Under
s 74 the provisions stipulate that they will not apply unless
there is a lease. Where circumstances can be interpreted to
have created a mere licence the CRAR procedure will not be
available. It entails that unless exclusive possession has
been granted with a clear landlord and tenant or lessor and
lessee relationship, alternative remedies will have to be
considered. Other forms of agreement can . give rise to CRAR,
such as a tenancy at will2; however, this is subject to certain
conditions. A tenancy at sufferance3 is excluded under s 74.
1 The common law remedy which can enable a commercial landlord
to seize or hold goods to compel payment of arrears.
Commercial
Premises
The
provisions do not apply where some part of the premises is
let as a dwelling and will only apply to premises used solely
for business purposes. If the premises are used as a dwelling,
the only way the CRAR procedure can be exercised is if the
lease or any superior lease prohibits this and therefore by
using the property for residential purposes the tenant has
committed a breach of the lease or superior lease.
This
particular condition which is found under s 75 is likely to
cause some landlords a problem with mixed use of a property
meaning that CRAR cannot be employed. Whilst this is not unfamiliar
when using distress, it is essential that landlords seek to
preserve the remedy of CRAR by inserting a strict user clause
in their lease. For example: "The Tenant must not use the
Premises for any purpose other than as offices connected with
the business of marketing, selling and letting residential
properties."
It
is important to note that the new Act prohibits any form of
variation or modification of the provisions which Landlords
may try and implement to extend their rights. Under s 85,
any clause within a lease which goes beyond that set out under
the Act, such as to allow the application of CRAR in premises
used partly for residential use, will not be enforceable.
Recovery
of Rent Only
The
provisions do not operate for recovery of anything else other
than rent. Unlike with distress, the definition of rent is
solely those sums payable, in advance or in arrears, for possession
and use of the demised premises. This definition under the
Act cannot be altered via the lease as is commonly done in
a commercial lease and so arrears of rates, service charges,
council tax, insurance, maintenance and repairs will not allow
use of the CRAR process. For these types of arrears, a landlord
will have to use court proceedings to recover their losses.
In
addition to the above, the rent recoverable must be "due and
payable"; it must be calculable with certainty; and net unpaid
rent must be no less than the minimum amount as dictated by
the regulations. It is this last condition which could have
a detrimental effect on whether the landlord may utilise CRAR
since to calculate the net amount interest, VAT and permitted
deductions must be considered. Consequently, this could mean
that set off for permitted deductions such as where a landlord
has breached a term of the lease or where compensation is
payable to the tenant for improvements this may result in
the landlord not satisfying the minimum amount and not being
able to use CRAR. Should this occur an alternative remedy
will have to be considered such as issuing court proceedings.
After
the end of lease
Subject
to exceptions, s 79 permits the use of CRAR after a lease
has ended. Some of the conditions under s79(4) which preclude
CRAR being used include where forfeiture has been utilised;
the tenancy has ended more than six months ago; and the tenant
has not given vacant possession. Landlords who have assigned
their interest in the let property are also not able to use
CRAR, nor are the assignees; because to allow this would be
inconsistent with the definition of a landlord.
2
A tenancy which permits the use of premises for a limited
period but where the tenant cannot assign their rights under
such an agreement and the landlord maintains the right to
re-occupy the property on limited notice. 3 Such a tenancy
is the equivalent to a periodic tenancy and it occurs after
a tenancy has expired but before a landlord has served notice
to recover possession.
Sub
Tenants
Much
like distress, under s 81 of the Act landlords can require
sub tenants to pay rent directly to them following service
of a Notice. In comparison with the preexisting common law
procedure, CRAR is far more restrictive in that it only applies
to commercial properties and, unlike the law of distress,
CRAR cannot be used where the premises are of mixed use or
purely residential.
In
summary, the introduction of the CRAR procedure will not have
too much of a unfavourable effect on Landlords. Aside from
the loss of some of the flexibility which has been introduced
via some strict requirements relating to rent and the use
of the premises, generally, Landlords will still have a valuable
remedy available to them. Whilst the requirement for a court
order is still not required in all cases, the service of notices
in some circumstances may encourage both landlords and tenants
to attempt to negotiate a settlement without the need for
heavy handed tactics to be implemented or, alternatively,
court costs to be incurred.
As
for tenants, the impetus for such reforms being a Human Rights
Act - compliant system clearly benefits tenants who have in
the past suffered abrupt and illegal attempts of enforcement.
The opportunity which is open to tenants to make applications
to the court following the service of a notice of enforcement
is something which has, to a degree, been there before; however,
the setting out of these provisions has leant clarification
to exactly what a tenant's rights and remedies are.
*Gemma
Hadlow is a solicitor with PainSmith Solicitors, a niche practice
specialising in residential landlord and tenant law.
PainSmith
Solicitors Legal Advisors are provided for information only
and are not legal advice. If you do have a legal problem,
you should talk to a lawyer or adviser before making a decision
about what to do.
You
may wish to use the CLS/CDS Directory (www.justask.org.uk/public/en/directory)
to locate an adviser. The information provided here is written
for people resident in, or affected by, the laws of England
and Wales only.
You
should note that date given in the update and be aware that
the information given may become inaccurate due to changes
in the law or its implementation.
________________________________
*See
also Section 13 Notices and Is the deal closed? The
use of the 'Subject to Contract' formula- For
full article Click
Here
________________________________
*See
also Safety Glass and Defective Premises Act - The
Information on a Court of Appeal decision (7th February 2007)
regarding the Defective Premises Act 1972 For full article
Click
Here
________________________________
*See
also Implementation of the Regulatory Reform (Fire Safety)
England & wales) Order 2005 Click
Here
________________________________
*See
also Understanding
Business Tenancies June 2007 Click
Here
________________________________
*See
also Going Smoke Free - England July
2007 Click
Here
________________________________
*See
also Energy Performance Certificates
in Let Property - 29
January 2008 Click
Here
________________________________
*
Articles
courtesy of PainSmith
Solicitors are a niche practice specialising in Landlord and
Tenant Law. Based in Medstead in Hampshire, they are ideally
situated to provide an efficient service to clients nationwide
as well as those based in Central London and the Home Counties.
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