Government to introduce "fairer" system for collecting rent arrears

The new process, called Commercial Rent Arrears Recovery (CRAR), will only be available in 'pure' rent arrears cases and will replace the common law right to 'distress for rent'. Distress allows a certified bailiff to enter leased commercial premises, occupied by a defaulting tenant, and remove and sell goods owned by that tenant up to the value of the rent arrears without initiating legal proceedings.

CRAR will be introduced alongside new laws to protect "vulnerable people" from aggressive bailiffs, Justice Minister Helen Grant said. Changes will include mandatory training and certification, the introduction of set costs for the industry and regulations restricting behaviour. They will also be prevented from using force against people who own money.

Grant said that a "small minority" in the poorly regulated industry had given bailiffs "a bad name".

"Too many people in debt have had the additional stress of dealing with aggressive bailiffs who often charge extortionate fees," she said. "These new laws will clean up the industry and ensure bailiffs play by the rules or face being prevented from practising. They will also make sure businesses and public bodies can collect their debts fairly."

Responding to its consultation on reforms to the bailiff industry, issued in February 2012, the Government said that it planned to implement the delayed Part 3 of the Tribunals, Courts and Enforcement Act, which received Royal Assent in 2007. It would seek Parliamentary time to address certain "inadequacies" in the Act, such as the current provision allowing 'enforcement agents' to use force against a person. According to the response (72-page / 418KB PDF), a final set of regulations setting out the fee structure and enhanced certification procedure for bailiffs will be prepared by Summer 2013.

"As currently worded [the Act] provides enforcement agents with the power to use force against a person, removes existing powers to use of reasonable force on entry or re-entry to a property without prior specific judicial authority and creates an overly restrictive definition of abandonment," the response document said.

"Without resolving these inadequacies, we would be introducing the opportunity for commercial debtors to avoid enforcement action, undermining the effectiveness of the system, and may discourage bailiffs from negotiating agreements with any debtor leading to the possibility of increased aggressive behaviour," it said.

The new system will introduce a requirement for the landlord to serve a "notice of enforcement" on the tenant, giving a notice period before sending in enforcement agents. The Government originally proposed that the notice period for CRAR cases should extend to 14 clear days, with notice for all other types of debt amounting to seven clear days. The notice period will now be harmonised for all types of debt at seven clear days. According to the consultation response, the reduction in the notice period for CRAR reflects "concerns" from landlords that the notice period provides time for debtors to "abscond or remove goods and that it may contravene provisions in tenancy agreements".

Property law expert Nicholas Vuckovic of Pinsent Masons, the law firm behind Out-Law.com, said that the introduction of a 'notice of enforcement' could nevertheless prove "controversial".

"It is intended to give debtors due warning before enforcement agents turn up, but although the notice period is now shorter, this still has the regrettable consequence of giving debtors the time to remove goods, potentially rendering CRAR ineffectual," he said. "Creditors will have the ability to go to court to shorten the period where they believe that there is a risk of debtors removing goods, but this would increase the burden on landlords and it remains to be seen whether this will be an adequate solution."

Some responses from stakeholders to the February consultation also disagreed with the proposed minimum sum that must be due before CRAR could be used. The majority of respondents did not agree with the proposed minimum equal to seven days rent arrears, while some raised "strong arguments" for retaining the one day minimum that currently exists, such as where the debtor is on the verge of insolvency. The Government will carry out further work with creditors and the enforcement industry to establish an appropriate minimum sum, it said.

CRAR will otherwise be broadly similar to the current remedy; however, it will only be available in cases of 'pure' rent arrears. This includes VAT and interest on rent, but not related costs such as service charges and insurance. Landlords will not be able to use the new remedy if part of the property is being used for residential purposes, even where this is in breach of the lease.

Property law expert Siobhan Cross of Pinsent Masons said that both the new CRAR procedure and the previous remedy had their advantages. However, she said that "other, less attractive remedies" were always available to landlords if the new regime turned out not to be as effective as the existing one.

"Distress for rent has effectively given landlords preferential treatment over other unsecured creditors for hundreds of years, and the broad right to exercise distress for rent, notably an out-of-court remedy, arguably does not sit well with human rights legislation," she said. "However, in the commercial arena, and in a market where landlords increasingly share the tribulations of their tenants, it is odd to redress the balance of power significantly in favour of the latter."

"Distress for rent is one of a suite of remedies against tenants who breach their leases. If CRAR does turn out to be ineffectual, then we might expect to see increased use of rent deposits and an increased requirement for guarantees," she said.