Death of distress
In April 2014, the common law right of distress for both residential and commercial premises was abolished and a new statutory procedure called the Commercial Rent Arrears Recovery (CRAR) was introduced. CRAR entitles a landlord to recover unpaid rent for commercial premises only.
Unlike distress, which allowed a landlord to seize goods at the premises and retain them until rent arrears (as well as service charges, insurance premiums or other payments reclassified as rent) were paid or the seized goods were sold to off-set the rent arrears, CRAR is a regulated procedure but it is limited in that items such as contributions to insurance premiums or other costs cannot be collected even if they are described as rent in the lease.
The new regime
Before a landlord can use the CRAR procedure (1) the rent must have been outstanding for more than seven days (2) the landlord must give seven days’ notice (14 days’ notice to a subtenant) to the tenant of its intention to take enforcement action, and (3) the landlord must appoint an enforcement agent to act on its behalf. As well as unpaid rent, the landlord can recover VAT and interest on the unpaid rent.
Although it is reported that the introduction of CRAR has not distressed landlords as much as anticipated, in this blog we consider the impact on lenders.
Impact on a landlord’s lender
Due to the new requirements that a landlord must first satisfy, as well as the cost and delay it will incur before exercising its rights, CRAR reduces the value of this remedy available to a landlord. There was a concern in the market that the increased regulation for landlords in seizing its tenant’s goods would undermine the value of the CRAR procedure as a remedy. Whilst the new procedure has undoubtedly institutionalised the process, it nonetheless remains a popular remedy to recover unpaid rent, which in our experience is still regularly pursued by landlords.
Unlike distress, a lender with a mortgage over a property can exercise the landlord’s rights to recover rent arrears using the CRAR procedure provided it serves notice on the tenant and the lease is binding on the lender i.e. it was made before the mortgage was created or the lender has subsequently acknowledged it.
CRAR then provides a lender with a short-term solution to collecting rent arrears from a tenant before taking the drastic step of appointing a LPA receiver under a fixed charge.
Impact on a tenant’s lender
Where a lender has financed a borrower’s assets (e.g. inventory or plant and machinery) which are located in rented premises, it is standard market practice for the lender to require a waiver from the landlord under which it agrees not to distrain over or otherwise interfere with those assets at the premises. This provides the lender with comfort that it can seize the assets and sell them to recover its loan. The implementation of CRAR has not removed the need for such a waiver and lenders relying on such assets to secure debt should continue to seek one where possible.
Initially, landlords were concerned that the new requirement to serve notice on a tenant would limit the value of the remedy as it would give a tenant the opportunity to remove their assets from the premises to avoid their seizure by an enforcement agent. This has not been the reality since the implementation of CRAR as practically it is often not feasible for a tenant to cease its trading operations and ‘hide’ its assets to avoid paying its rent arrears.
A tenant’s lender will also benefit from the restrictions brought in by the CRAR regime as a landlord cannot exercise CRAR against its tenant after a lender has enforced its security and appointed an administrator to the tenant unless it is granted permission by the Court or administrator.
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