March 20, 2014

Commercial Rent Arrears Recovery to be far harder, says Gordons

Commercial property landlords are being warned the chances of recovering payment of arrears from tenants will be greatly reduced.

Yorkshire law firm Gordons says the Taking Control of Goods Regulations, which came into force on 6 April, abolishes the ancient common law remedy of distress. This allowed the entering of tenants’ premises without warning to seize goods to the value of overdue rent and other payments, all without a court order.

Distress is being replaced by a much more restrictive statutory process called Commercial Rent Arrears Recovery (CRAR).

Graeme Davy, a solicitor in Gordons’ commercial litigation team, explained: “Distress is a very effective tool for recovering overdue money from tenants, either through its threat prompting payments or tenants’ goods being seized and sold. It gives landlords great flexibility, as it can be used whether written leases are in place or not.

“Distress can also be utilised to recover other monies due to landlords, such as service charges, insurance payments or rate refunds, when leases define these charges as rent. In addition, it can be exercised by landlords themselves or bailiffs acting for them and used in commercial areas of mixed use properties.”

Mr Davy said, in contrast, CRAR will only be available if leases are in writing. It can also be used to only recover pure rent arrears, even if leases classed other charges under this heading too. In addition, these rights can only be exercised by authorised enforcement agents, in properties which are wholly commercial, and after following a statutory procedure.  The procedure involves having to place the tenant on notice of the intention to seize goods, giving the tenant the opportunity to remove the goods before the agent arrives.

He said the changes raised new practical issues for landlords when entering in to leases, managing property portfolios and dealing with arrears.

Mr Davy said: “Landlords should now think about increased difficulties in collecting arrears when considering potential tenants’ financial strength – they should think carefully about requesting guarantors and considering higher deposits.  This will allow them to cover the potential missing payments other than rent, where appropriate.

“They should also avoid agreeing a single payment rental which includes not only the rent but the other charges that are traditionally passed to a tenant, such as service charge.  If they agree a single payment, this could result in being unable to use the new regime as a tenant could claim that the landlord is trying to use the regime for non-rental charges which isn’t allowed. Landlords should instead ensure pure rent payments are identified separately in leases.”

Mr Davy added landlords of mixed use sites should look to establish separate leases covering commercial areas – stating these are exclusively for business use – and residential accommodation.

He said landlords should also review their portfolios and ensure that they have written leases in place for all their tenants and if they don’t, take steps to do so.

Mr Davy said: “In summary, the new regime will drastically affect landlords’ and managing agents’ traditional and settled arrangements for recovering payment arrears. The days when a landlord’s recovery agent could turn up without warning, demanding immediate payment for rent and other charges, are about to become history.

“It’s important landlords and tenants know what they can and can’t do and adapt their procedures to reflect the new regime.”

Landlords and tenants, actual or potential, wanting to discuss how the new regulations may affect them, can contact Mr Davy on 01274 703918 or via graeme.davy@gordonsllp.com