Memorandum submitted by the Royal Institution of Chartered Surveyors (RICS) (TRI 7)
Tribunals, Courts and Enforcement Bill: Part 3 Rent Arrears Recovery
1. The Royal Institution of Chartered Surveyors (RICS) is the world's leading professional body dealing with land, property and construction issues. It has over 120,000 members worldwide, working in both the public and private sectors. Under the terms of its Royal Charter, RICS is obliged to act in the public interest in all aspects of its work.
2. The RICS commercial property faculty has over 32,000 members involved in all areas of property used for business or leisure purposes. They deal with the letting and sale of land or buildings, commercial property management, rent reviews, lease renewals and landlord and tenant issues, as well as other issues arising from the occupation of non-residential property including corporate real estate, public sector property, health sector property and academic establishments.
3. Key points
· RICS are pleased that the Government has chosen to maintain a system for the recovery of rent arrears by taking control of goods.
· We also welcome the consolidation of existing statutes and secondary legislation that make up the current law in this area.
· However, the commercial rent arrears recovery procedure could be too complicated due to the numerous conditions that must be met before it can be exercised.
· The definition of rent should be expanded to at least include service charges.
· The notice period for Commercial Rent Arrears Recovery (CRAR) procedure should be as short as reasonably possible, preferably no more than one working day.
· Too many conditions are imposed on landlords by the Bill which could lead to limited recovery as a result of CRAR, potentially making the system unworkable.
4. RICS view
RICS are pleased that the Government has chosen to update the procedure that allows landlords to recover rent arrears. The idea of distress is an ancient remedy that enables landlords to recover rent arrears without going to court, by taking goods from the let premises and either holding them until the arrears are paid or selling them. Existing procedures need updating as they potentially do not comply with human rights legislation.
5. The new Commercial Rent Arrears Recovery (CRAR) procedure will have many of the hallmarks of distress, allowing a landlord of commercial property to recover rent arrears by taking control of the tenant's goods, selling them and recovering the arrears from the sale proceeds but there are some changes.
6. Definition of commercial property
The proposal to separate commercial and residential application of distress procedures is in principle a good idea but the lines of distinction will become blurred if leases are not worded properly. There is the potential for confusion and uncertainty as the Bill contains a complex definition of what counts as commercial premises. This is likely to lead to disputes and inconsistencies with too much reliance on the wording of individual leases.
7. If any part of the premises is occupied as a dwelling, or if part of it is required to be used as a dwelling under a lease, it will not be subject to the CRAR procedure. For example, a property comprising a shop and a flat are not defined as commercial premises if the flat is used as a dwelling. If, in the same property, the flat was used as an office or a storeroom it would be considered to be commercial premises and would be subject to the CRAR procedure.
8. The definition of commercial premises in Clause 70 of the Bill is too dependant on individual circumstances and it is imperative that landlords are informed of the change as soon as possible as they may be deprived of the right to recover arrears.
9. Definition of rent
One of the main changes under the new procedure is the very narrow definition of 'rent' under Clause 71. Under previous distress for rent rules, landlords could claim back arrears for other payments including services charges and insurance. The Bill specifically states that rent does not include rates, council tax, services, repairs and maintenance, even if they are described as rent in the lease. This will require landlords to accept greater levels of risk which can have serious consequences on the supply of commercial property.
10. This section of the Bill seems to be at odds with other parts of Government policy on commercial property. It will discourage the use of all inclusive rents, which make leases simpler, and is contrary to desire for increased flexibility and choice in the commercial property market which the Government backed Code for Commercial Leases has been striving to achieve. Although the explanatory notes to the Bill acknowledge the existence of rents merged with other sums, it will require a percentage to be taken that reflects the amount payable for the possession and use of premises. Again, this has the potential to cause disputes and uncertainty.
11. RICS would like to see at least service charges included in the definition of rent as this would allow arrears to be recovered under CRAR procedures. Doing this would allow service charge arrears to be more easily recovered as debt, rather than as damages for breach of covenant.
12. Notice Period
Under current distress for rent rules, a landlord is permitted to take action as soon as rent is overdue and without notice. The Bill will require the landlord to give the tenant notice that the enforcement action will commence if the arrears are not paid.
13. The minimum period and form of notice are not specifically included in the Bill and, according to Schedule 12 Clause 7, will be set down in future regulations. The provision of giving notice will put the landlord at a disadvantage as the tenant will be in a position to dispose of goods prior to the CRAR procedure being exercised. As such we believe that the period of notice should be no more than one working day.
14. Conditions prior to exercising CRAR
RICS believe that there are too many conditions imposed on landlords which will lead to a limited recovery of arrears and may potentially make the system unworkable. Clause 72 sets out the conditions that must be met before the CRAR procedure can be used. As well as the tenant being in arrears, the amount of arrears owed must be certain or capable of being calculated with certainty and the net unpaid rent must equal or exceed a set amount to be prescribed in regulations.
15. The unpaid rent must be at least the minimum amount, to be set down in regulations, at two stages. These stages are before the landlord gives notice of enforcement and also before he takes control of goods under Schedule 12 of the Bill. This could potentially be unfair to the landlord and cause the CRAR process to be prolonged or become unsuccessful. If at the second stage the net calculated unpaid rent is less than the minimum amount the landlord will have incurred costs from the first stage without effective remedy and with the potential of incurring further costs.
16. If a prescribed minimum amount is to be introduced it should be a reasonable amount where the landlord does not suffer hardship as a result of unpaid arrears. This is paramount as the non-recovery of quarterly payments, which are the norm in commercial leases, may lead to landlords defaulting on their own finance payments.
17. Commentary on key clauses
18. Clause 70: Commercial Premises
The definition of commercial premises is too dependant on individual leases and premises. There is particular potential for confusion over buildings that can have a mix of commercial and residential use.
19. Clause 71 subsection (1) Rent
The definition of rent as the "amount payable under a lease for possession and use of the demised premises" will have a harsh impact on landlords who will have to accept greater levels of risk due to potential limited recovery and enforcement rights.
20. Clause 71 subsection (2) Rent
This is a significant change from current distress laws which allow the process to be used to recover arrears for other payments including insurance and service charges. CRAR should apply to a wider variety of payments, in particular service charges.
21. Clause 72 The rent recoverable
There are too many conditions imposed on the landlord before CRAR can be organised which could lead to limited recovery of arrears and the system becoming unworkable in practice.
22. Clause 72 subsection (4) The rent recoverable
The minimum amount, to be calculated in accordance with regulations, should be a reasonable amount so a landlord does not suffer hardship as a result of unpaid arrears.
23. Schedule 12 clause 7 subsection (2) The procedure
Any minimum period of notice set out under regulations allowed for in this section must be as short as reasonably possible to prevent tenants disposing of goods and we would recommend no more than one working day.