How to deal with distress clauses in leases and contracts

Rachel Garton, 2nd June, 2014

Distress was a common law self-help remedy originating in medieval times. It allowed commercial landlords to ‘distrain’ by seizing a defaulting tenant’s goods and selling them to recover rent arrears. No court approval or prior notice to the tenant was required.

Distress was a common law self-help remedy originating in medieval times. It allowed commercial landlords to ‘distrain’ by seizing a defaulting tenant’s goods and selling them to recover rent arrears. No court approval or prior notice to the tenant was required.

Distress was abolished on 6th April this year by the Tribunals Courts and Enforcement Act 2007 (TCEA). It has been replaced with the new Commercial Rent Arrears Recovery (CRAR) process, which is one of the powers in Schedule 12 of TCEA.

For landlords, distress was a quick and cost-effective remedy which many will miss. But for tenants, distress was a draconian remedy, and was long considered by governments to be in need of reform. There was no prior notice of a bailiff’s visit, and no opportunity to dispute the debt claimed before the seizing of the goods. The new CRAR process still allows landlords to seize a tenant’s goods to pay rent arrears. But this is subject to new strict rules on notice, manner of entry, and the securing and removal of goods. (A solicitor or certified enforcement agent (bailiff) can help anyone considering using CRAR to recover rent arrears.)

The term “Distress” was also used when a Magistrates Court issued a “Warrant of Distress” following a liability order being made for unpaid Council Tax or Business Rates. Under TCEA Warrants of Distress are now “Warrants of Control” and enforcement agents working on behalf of local authorities are obliged to follow new recovery processes under Schedule 12 of TCEA.

Despite the abolition of distress it’s still referred to in countless documents already in existence at April 2014, such as contracts and leases. This has the potential to cause confusion. This article examines how to interpret and act on references to distress in those documents following the introduction of CRAR.

Where will references to distress be found and how should they be interpreted?

In some existing leases there might be a clause that purports to give the landlord a contractual right to seize/sell goods to recover rent or other monies due under the lease. Following CRAR, any such clauses will be void because they attempt to set up a contractual equivalent of the remedy of distress.

Some contracts refer to distress as a trigger for a particular event. For example, distress could be one of many acts of default referred to in a commercial contract upon which a lender can call-in a loan. Or upon which an option to break a lease expires. Or upon which the other party may terminate the agreement.

The effect of the TCEA on this type of reference to distress in a lease or a contract relating to commercial property is that any reference to “the power to distrain or to levy distress” should be read as a reference to the use of a power under Schedule 12 to the TCEA. This means that any reference to distress should be read as if it refers to CRAR.

The TCEA has foreseen the confusion that could arise in connection with pre-existing references to distress, and has dealt with it in a straightforward manner. The above rules of interpretation relate to documents entered into either before or after April 2014. So even if references to distress are put into new contracts, they must be interpreted as being references to CRAR. And they will still be effective, except where they purport to give a contractual right to the equivalent of distress.

Need advice? We can help you

Call Rachel Garton now on 01482 324252 or email rlg@gosschalks.co.uk.

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