Protecting Your Interests If A Commercial Tenant Goes Bust

Lets talk about the issue of the insolvent tenant and protecting your rights as a commercial landlord. In 2014, the Commercial Rent Arrears Recovery (CRAR) came into force, replacing the ancient remedy of distress. Dating back to the time of Henry III and contained in the Statute of Marlborough, distraint or distress as it is sometimes known, was a common law right which allowed a landlord who was owed rent to recover arrears by seizing the tenant’s goods and holding or selling them.

Generally, under the doctrine of distress, a landlord could instruct bailiffs without the need to obtain permission from the court. Exceptions occurred if the premise was used as living quarters as well as commercial use (as bailiffs marching in and taking goods in the middle of a family supper is largely frowned upon by civilised society) and if the tenant was insolvent.

If this doctrine seems Dickensian in nature, that is because it was. By the time the CRAR came into force, it considered draconian, contrary to human rights law, anti-commercial and unduly harsh on tenants, especially those struggling to stay afloat following the 2008 financial crash.

Similar to distress, CRAR allows the allows a commercial property landlord to instruct a bailiff to enter a property of a tenant who is in arrears on rent and seize goods in order to sell and recover monies owned.

However, CRAR is more limited than distress, bringing the remedy of seizing goods to cover rent arrears into line with 21st-century laws and customs.

One of the key differences is that the CRAR only applies to written commercial tenancy agreements. If the tenancy is a mix of residential and commercial, CRAR cannot be used. Additionally, seven days’ notice must be given before an enforcement agent can show up on the premises and start taking goods. If landlords are concerned that the tenant will simply hide goods if given a week’s notice, they can apply to the court for a shorter notice period, but this will incur greater fees.

Only rent can be recovered; the remedy does not allow landlords to seize goods to recover unpaid rates, service charges or insurance and interest cannot be charged on the unpaid rent. The remedy is only available if more than seven days’ rent is owing.

Only Certified Enforcement Agents are permitted to enter commercial premises on a landlord’s instruction and seize goods. An enforcement agent does not need to provide a warrant, but they cannot use force when carrying out their duties. They are entitled to enter the property between 9 am and 6 pm, seven days a week or at any other time provided it is within the tenant’s business hours. Any items taken must be owned by the tenant and can include IT equipment and vehicles. Trade goods are exempt up to the value of £1,350.

The goods taken must be sold at auction and seven days’ notice should be provided to the tenant before the goods are auctioned. The landlord must obtain the best possible price for the property seized.

Forfeiture may allow a landlord to terminate a lease if the tenant fails on their obligations under the tenancy agreement. If a landlord decides to exercise their rights under the CRAR, they waive their right to forfeit the lease in relation to the unpaid rent that the CRAR procedure is being utilised to recover.

If the tenant has paid a rent deposit, this can provide immediate cash to the landlord to cover rent and other charges. Landlords will need to check if permission to withdraw some or all of the deposit funds is required. They should also consider whether or not it is better to leave the deposit as it is, so there is money to cover any future liabilities such as dilapidations when the tenancy agreement ends or is renewed.

It is crucial that commercial landlords, many of whom are servicing large mortgages, have a process by which they can seize a commercial tenant’s goods, sell them and recover lost monies. The CRAR provides a less draconian method of doing this than the old remedy of distress, but as time passes it may come to light that the new procedure is weighted too far in favour of the tenant. If too many unscrupulous tenants simply hide high-value assets during the seven-day notice period to ensure their landlord, who may be desperate for funds, cannot seize and sell them, the notice period may have to be modified. After all, the beauty of the doctrine of distress was it created an element of surprise. And sometimes, when large amounts of rent arrears are involved, surprise is a necessary weapon for frustrated landlords. Where the arrears are significant, it is important to seek urgent legal advice. Delay can often be detrimental to recovery of any arrears.

Saracens Solicitors is a multi-service law firm based in London’s West End. Our team of dedicated and highly experienced commercial property solicitors will assist you in understanding the ARCR procedure. For more information, please call our office on 020 3588 3500.