Distress Signals

The government is finally going to reform the law on collecting rent arrears - replacing the ancient common law remedy of "distress" with a new process more compatible with contemporary principles of procedural fairness.

It's been a long time coming.

The government launched a consultation in February 2012 and on 25 January 2013 it issued its response, which includes a recommendation to replace distress with a new statutory process - Commercial Rent Arrears Recovery (CRAR) - by implementing Part 3 of the Tribunals, Courts and Enforcement Act, which received Royal Assent 6 years ago in 2007 but wasn't brought into force.

I wrote about distress in these posts from 2011 and 2012, but here's a quick recap.

The right to levy distress (or “distrain”) for unpaid rent is a self-help remedy allowing a certified bailiff, on behalf of a landlord, to enter 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.

Even the bailiff’s statutory fees are payable by the tenant.

The only redress a tenant has is to bring an action within 5 days (which can be extended to 15 days) - an obscure remedy called "replevin" - to recover goods that have been illegally seized.

Distress is a popular remedy for landlords, especially with struggling retail tenants who may nevertheless be carrying a load of valuable stock.

However, an ancient common law remedy that allows the landlord to be judge, jury and executioner all in one, doesn't sit well with the conventions enshrined in the Human Rights Act or modern principles of procedural fairness (and it was abolished long ago for residential property).

When it's introduced, CRAR will replace distress. CRAR will still allow a landlord to enter and seize goods, but only on the following conditions:

·         CRAR can only be used to recover “pure” rent arrears - this includes VAT and interest on rent, but not related costs such as service charges and insurance.

·         The landlord must first serve an enforcement notice on the defaulting tenant – crucially removing the element of surprise. Following the consultation, the government is now recommending a notice period of 7 clear days (the original proposal was 14 days), to reflect landlords' "concerns". Arguably however any notice period gives the debtor an opportunity to move the goods before the landlord can get hold of them.

·         Following the expiry of the notice period, only an enforcement agent can then enter the premises to remove goods.

·         CRAR will only be available where a minimum amount of rent remains unpaid. The current proposal is for this minimum amount to equal 7 days' rent arrears. However, most respondents to the consultation disagreed with this, and the government concedes there are "strong arguments" in favour of retaining the current minimum of one day, in particular where the tenant is on the verge of insolvency and a longer time period introduces delays into rental payments. The government is to consider this point further with creditors and the enforcement industry.

Many landlords would disagree with reforming the current law at all.

At a time when landlords are being hammered by large corporate tenants going into administration or other forms of insolvency, resulting in insolvency practitioners and successor businesses being able effectively to cherry-pick which properties they keep, the ancient remedy of distress could be seen as simply helping to redress the balance.

It's a hard one to justify philosophically though.

And landlords can  demand rent deposits and guarantees if they're unhappy with the new CRAR process.

The CRAR reforms are part of wider, more headline-grabbing, reforms being introduced at the same time to protect vulnerable people from aggressive bailiffs.

The government is seeking parliamentary time to amend the 2007 Act, and new CRAR regulations, with a fair wind, ought to be forthcoming later in the year.

It's been a long road so far though, so who knows?

Green Deal Launched Today - Will Interest Payments be a Deal-Breaker?

The Green Deal goes live today.

This is the government's energy saving initiative giving homes and businesses a new way of paying for energy efficient improvements such as insulation and new heating systems.

The official guide talks you through the process - although much of the literature is targeted at "homes", the scheme is also available to businesses.

Very briefly, it works like this:

·         You get your property assessed by an authorised assessor to see what improvements you could make and how much you'll save on energy bills. You have to pay for this initial assessment, and you won't get the money back if you decide not to go ahead.

·         You then contact Green Deal providers to quote for the work.

·         If you want to go ahead, you then sign your Green Deal Plan - a contract between you and the provider stating what work will be done and how much it will cost. The provider then arranges for an installer to do the work.

·         Once the work's done, you pay off the cost (including a fixed interest rate) in instalments added to your electricity bill.

The government advises that if you're a landlord, you must get your tenant's permission to sign up and likewise if you're a tenant you must get your landlord's permission. Arguably this depends on how you interpret the lease, but the government has made a blanket statement.

Will it work?

Much will depend on whether consumers think they'll see the benefits of having the work done through their bills.

Plans must adhere to the so-called “golden rule”, which says the expected financial savings must be equal to or greater than the costs attached to the energy bill (although that can’t be guaranteed).

The level of interest payable could be a deal-breaker.

This piece in Saturday's Guardian queries whether the maths adds up - with interest rates being set at around 7% it's going to be hard to meet the golden rule, and you might be able to get a better rate of interest with a simple loan - although to kick-start the scheme the government is offering cash-backs to sweeten the deal (for home-owners, not businesses).

In some cases, the cash-backs might tip the balance in favour of going ahead with the scheme.

The risk the golden rule isn't met however rests with the bill payer, as it's not underwritten by the government or the provider.

So the "golden rule" is more of a statement of intent or principle than something you can rely on, and a 25-year loan term at 7% is going to put a lot of people off (and there are early repayment penalties).

Questions have also been raised about the type of work that will qualify, especially in old properties.

In a business context, landlords may be able to make use of the Green Deal to fund improvements; although where the property is already let they would need to get the consent of the tenant (if the tenant is the bill payer) and would also need rights under the lease to access the premises in order to carry out the improvements.

The Green Deal charge would then attach to the bill and be payable over time by the tenant and its successors.

Tenants coming to the end of their lease will be reluctant to agree, as they won't see the benefit.

For landlords, there will be a difficulty with void periods, when responsibility for utilities bills reverts to the landlord. Normally that’s not such a problem where no one is using the building, but if there's a Green Deal charge, it will have to be picked up by the landlord until it finds another tenant.

For owner-occupiers, Green Deal plans are meant to be passed on to future buyers of the property.

Is that realistic? Or is it more likely that a prospective buyer will ask the seller to pay off the plan in full before they buy the property?

There's more general comment in the Telegraph, with Which advising people to shop around and warning that we don't know enough about the detail yet.

Here too is a guide from the British Property Federation for the private rented sector, which looks at the Green Deal and other alternatives.

In the meantime, an army of cold-callers is no doubt at the ready...

Lease Break Clauses – 10 Golden Rules

Last year saw some significant cases on break clauses.

The courts will tend to side with the landlord if the tenant hasn't complied strictly with the wording of a break clause.

Jonathan Seitler QC of Wilberforce Chambers writes a very interesting article in the Estates Gazette 12 January 2013 (£) in which he distils the lessons learned from recent cases into 10 rules summarising the current position left to us by those judgments.

1.     "There is no breach of the lease too small, too technical or too unfair on the tenant that it will not lose the tenant its right to break if the break is conditional on full compliance with tenant’s covenants."

2.   "The same goes for requirements under a lease that the break clause is served at a particular address, by a particular person, on a particular person, or by a particular mode of service. Every single word of the break clause relating to service must be strictly complied with."

3.   "Likewise for requirements under a lease that the break clause is to be served or payments are to be made or covenants are to be complied with or vacant possession is to be given, by a certain time or before a certain date."

4.     "The only reliable exception to the first rule occurs when the break clause is expressly conditional only on “substantial” or “material” compliance with tenant’s covenants."

5.     "The landlord’s motive for trying to defeat the break is irrelevant."

6.     "The presence in the lease of a liability to pay money “whether demanded or not” means that it will be the tenant who will have to calculate and pay the amount owing, if the break clause is conditional on all sums due under the lease having been paid."

7.     "Small errors in the wording of the break notice will not necessarily render it ineffective if the reasonable recipient would nevertheless be able correctly to ascertain what the tenant meant to write."

8.     "A tenant who believes that is has complied with the conditions attached to the break should tell its landlord of that belief and ask the landlord to confirm whether it agrees, and if not, why not."

9.     "Where the giving of VP is a condition of the break clause, strict compliance with the condition does not mean that the tenant has to leave the premises 100% pristine to satisfy the condition."

10.   "The workings of the above rules will always be subject to modification depending on the terms of the lease."

He concludes: "There are very few leases that will not provide ample opportunity for lucrative gain or catastrophic loss, if you are prepared to look at them long and hard enough."

There's more reasoning given in the article to explain the background to each rule further - well worth a read.

Some of the recent cases will be subject to appeal in 2013 and it will be interesting to see how any further arguments play out.

Will this continue to be an area of landlord and tenant law where pedantry outweighs commercial common sense?

UPDATE: There's a piece by me on break clauses in the February edition of the Property Law Journal (£).

Photo by doodlehedz via Flickr

Tenants in Administration

It's been a bleak start to the retail year, with Jessops, HMV and Blockbuster UK the latest high-profile companies being put into administration.

The administrators of Jessops have ceased trading altogether, resulting in the immediate closure of 187 stores in the UK, but for now the administrators of HMV (which has 223 stores) and Blockbuster UK (with 528 stores) are continuing to trade.

What does this mean for landlords?

The timing of administrations will determine how much rent might be paid in the short term.

Recent cases before the court have established that if the rent fell due before the administrators were appointed, then the administrators are not liable for the existing arrears.

Administrators do have to pay rent when it falls due after their appointment if they are continuing to use the property.

So for companies going into administration at the start of the year, if rents are paid quarterly in advance on the usual quarter days, the last payment will have fallen due on 25 December; if it wasn't paid, then no further rent will be payable by the administrators until the next quarter day (25 March), if they are still trading.

At that point, even though the company might still be in administration, if they are trading the administrators will have to pay the next quarter's rent as an expense of the administration.

I don't have any inside information on these well-publicised administrations, but what this is likely to mean is that where stores continue to trade, HMV’s and Blockbuster's landlords can claim rent from the administrators from the date that the next payment is due; whereas Jessops' landlords (because Jessops has ceased to trade) will be ordinary unsecured creditors and will be unable to claim rent as an expense of the administration.

Recent reports are hopeful of a buyer being found for HMV, and possibly retaining 50-100 of its high street stores. Some heavy hitters in the music and film industries appear to be throwing their weight behind a rescue in a bid to avoid being left short-changed by having to rely on the low-price regimes of supermarkets and internet distributors. [Stop Press - the administrators have done a U-turn on accepting gift vouchers - good news for many].

Plans were announced over the weekend to shut 129 of Blockbuster's 528 stores.

All landlords will rank as unsecured creditors so far as any unpaid arrears accruing before the administration are concerned, although realistically there's little chance of a landlord being able to recover all, or even any, of an unsecured claim.

If a landlord wants to get the premises back in these circumstances, it must ask the administrators or the court for consent to forfeit the lease.

Landlords are only likely to forfeit early in an administration where they are confident they can re-let the premises or already have someone lined up - otherwise they risk being left with empty premises and liability for business rates after the 3 month empty rates holiday expires.

UPDATE 4/2/13

Herbert Smith Freehills have produced a useful summary of a landlord's options when faced with a tenant in administration.