Last orders for levying distress

Last orders for levying distress

‘Distress’ is a remedy available to a landlord who is owed rent. The landlord can instruct bailiffs to take possession (known as ‘levying’) of goods such as tables, chairs, paintings etc (‘the Inventory’) which are on the premises they have let.

The landlord can then hold the Inventory for a short period as security for rent. If the rent is still unpaid the landlord can sell the Inventory and use the proceeds to satisfy the rent arrears. In reality, the tenant usually pays and so the sale of the Inventory is uncommon.

Distress has proved popular with landlords because it does not involve court action and gives them an efficient way of:

A. Ensuring the tenant prioritises the payment of rent over other debts

B. Securing the Inventory against claims by third parties, such as Insolvency Practitioners

C. If necessary, selling the Inventory to help pay down the arrears

(I'll refer to these letters below when looking at which aspects the alternative remedies address.)

On 6 April 2014, distress will be abolished to be replaced by the Commercial Rent Arrears Recovery (‘CRAR’), which is a new procedure introduced by the Tribunals Courts and Enforcement Act 2007 (‘the 2007 Act’). The fact it has taken 7 years to implement the provisions of the 2007 Act indicate that the government were not wholeheartedly behind the measure.

This article concentrates on the effects that the abolition of distress and the introduction of CRAR will have on landlords of public houses.

CRAR will only be available for landlords of ‘commercial premises’. Section 75 of the 2007 Act says that premises are not commercial premises if they are either:

  1. Only used for occupation as a dwelling, or
  2. Used for another use combined with occupation as a dwelling

Therefore ‘mixed use premises’ which are let on a single lease are not classed as ‘commercial premises’ under the 2007 Act.  Therefore CRAR is not available to landlords of mixed use premises like pubs.

Landlords of public houses will lose a valuable method of collecting rent (distress) and not have any direct replacement. They will therefore have to look for other forms of security/enforcement to replace distress.  There are the following options:-

At the time of drafting the lease

  1. To let the pub as two separates units - with the residential and commercial separate.  CRAR can then be used over the purely commercial part. Granting two leases will be more complex and costly.  For instance, there will need to be detailed provisions as to rights of way and other shared amenities.  This option is not likely to be practical in most cases. (A, B & C)
  2. The landlord retains ownership of the Inventory - The landlord is under no obligation to transfer the Inventory at the start of the lease. They can keep ownership of them. This happens with short term leases such as Tenancies at Will.  However, in the long term it is not good for landlords to have capital tied up in Inventory at premises occupied by a third party, where they are outside their direct control.  On substantive long term leases, the Inventory owned by the landlord will be diluted with Inventory purchased by the tenant, which would lead to disputes at the end of the lease. (B)
  3. Options to purchase the Inventory - Many leases contain options for the landlord to purchase the Inventory on notice in the event of the tenant’s default in paying the rent or on the expiry of the lease.  These clauses are very useful because they usually provide that the landlord has the right to deduct any arrears from the price to be paid for the Inventory.  They can provide effective security as third party creditors. They don’t however provide for instant delivery up of the Inventory. I would certainly recommend that all new leases contain such an option to purchase. (B & C)

(A  prioritise rent payment. B securing the Inventory against third parties. C selling the Inventory to help pay down the arrears.)

Mid-Term and the tenant is co-operative

  1. Conditional Sale Agreements - These are relatively common in the pub industry where it is used to secure payment of the Inventory value. The ownership of the Inventory does not pass immediately and only on the payment of the final instalment does the tenant own the Inventory.  There are rights to seize the Inventory in the event of any default in payment of the amounts due under the Conditional Sale Agreement.  This helps with securing the Inventory against third parties. However it is only security for rent arrears if the tenant agrees to a transfer of the Inventory towards settlement of the rent arrears, and then agrees to buy back the Inventory on a Conditional Sale Agreement. (B, possibly A & C)
  2. Bills of Sale - These are effectively mortgages over the Inventory to secure payment of a fixed amount.  They are Victorian in origin and the formalities required are quite complex.  However they are potentially useful if there is a debt and the landlord and tenant want to agree a payment plan.  The Bill of Sale can be used as security for that payment plan and give the landlord more confidence that the amount will be paid.  If the tenant defaults on the payment plan, then the landlord would have the rights to seize the Inventory that are similar to distress.  In reality if the tenant is prepared to do a deal, transferring the Inventory and getting a Conditional Sale Agreement is more straightforward. (A, B & C)
  3. Floating Charge - This is only available in relation to a tenant who is a company. It is security in general over the assets of the company, but does not fix on any particular item.  On the happening of a triggering event such as administration or liquidation, the charge crystallises over the assets of the company at that time.  This is useful as security against other creditors but it does not give the landlord an immediate remedy in relation to non-payment of rent. (B & C)

(A  prioritise rent payment. B securing the Inventory against third parties. C selling the Inventory to help pay down the arrears.)

Mid term but the tenant is unco-operative

  1. Court Proceedings -  The above remedies require the tenant’s co-operation in one way or another. What if the tenant is hostile? The landlord can issue debt proceedings in the County Court, obtain judgment and then enforce the same either using County Court Bailiffs or High Court Enforcement Officers (‘HCEO’).  County Court Bailiffs are notoriously inefficient at collecting debt and therefore HCEO’s are the preferred option. The HCEO will hold the Inventory for a short time to allow the tenant a chance to pay. The problem with this method is that the tenant could try to defend the claim and it is far slower than distress. However, when a substantial debt has accrued it may be worth obtaining a county court judgment and keeping that judgment debt ring-fenced from ordinary payments; so that it is ready to use as and when the tenant defaults on a payment plan or is under threat from other creditors. Anticipating that this may be needed more frequently, Gosschalks has recently created a low cost debt collection team specialising in pubs. (A, B & C)
  2. Service of a Statutory Demand - This has the immediacy of distress in that an enquiry agent will personally serve the tenant with the Demand (which threatens bankruptcy if they do not pay the debt within 21 days).  It is also relatively cheap and quick compared to issuing Court proceedings.  It can have the effect of promoting the landlord above the other creditors, but does not give them any security over the Inventory. (A)

(A  prioritise rent payment. B securing the Inventory against third parties. C selling the Inventory to help pay down the arrears.)

Conclusion

None of the alternative remedies to distress are as good. Landlords should include Options to Purchase in new leases.  In relation to existing leases where the tenant is in arrears, the landlords could try to negotiate Conditional Sale Agreements as part of payment plans. The alternative with a hostile tenant is to apply for County Court Judgments at an earlier stage.

Need advice? We can help you

Call Rob Hastie now on 01482 324252 or email rdh@gosschalks.co.uk.

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