Trowers & Hamlins

New rules due to come into force will make it harder for landlords to recover debts from commercial tenants, and will mean landlords of commercial tenants in mixed use properties will in future have to obtain a court order to recover debts, says Trowers & Hamlins, the City law firm. (Tribunals, Courts & Enforcement Act 2007)

The new procedure called commercial rent arrears recovery ('CRAR') is due to replace the old ‘distress’ remedy, which permitted landlords to enter commercial premises without prior warning and seize property to reimburse payments ‘reserved as rent’ under a lease, which could include service charges, interest on late payments and VAT, in addition to rent itself.

The new CRAR procedure will mean landlords will have to give warning before entering premises and can only seize assets to cover rent, not other debts ‘reserved as rent’, such as service charges etc. Unpaid rent will have to exceed a set minimum amount (yet to be decided) before CRAR can be used.

Trowers & Hamlins says that the wording of the new legislation provides that landlords of mixed use properties that contain commercial and residential units will not be able to use the new CRAR powers against commercial tenants in these properties if the commercial and residential components are included in the same lease.

Nicholas Levy, Partner, Trowers & Hamlins, comments: "The new CRAR procedure represents a significant reduction in landlords’ rights and is more bureaucratic than the old ‘distress’ procedure."

"It moves commercial rent recovery closer to the very restrictive laws that govern residential properties, but you have to ask whether this will be an effective remedy for commercial landlords and whether there is a need to give commercial tenants this extra protection."

"The notice period will give commercial tenants room to frustrate the debt recovery process by disposing of assets before landlords can seize them, or simply by paying enough rent to bring the arrears below the minimum level while leaving the balance outstanding!"

He adds: "Whilst distress is only one remedy in the commercial landlord's armoury, another long-standing right (of forfeiture) may also be eroded if the draft Termination of Tenancies bill is passed.  This will limit the landlord’s ability to terminate the lease in the face of tenant default and will do away altogether with the landlord's right of peaceable re-entry*.  Once in force, these changes will dramatically alter the legal landscape for commercial landlords and tenants, and will do so very much in the tenants’ favour."

* Currently landlords can choose whether to forfeit by issuing court proceedings or by peaceable re-entry. With peaceable re-entry, the cost is minimal as the landlord need do little more than change the locks to bring the lease to an end.