There are a number of options available to commercial landlords where rent is in arrears:
- pursue a guarantor;
- serve a statutory demand;
- issue county court proceedings;
- forfeit the lease;
- levy distress.
When levying distress for rent, a landlord is entitled to enter their tenanted property and seize goods found at the property until rent is paid. If the rent is not paid then the landlord has the power to sell the goods and apply the proceeds to discharge the rent arrears.
Distress is almost always only levied where there are commercial tenancies. Distress is a remedy dating back to medieval times, which is governed by numerous complex requirements and rules. It is therefore important for landlords to take appropriate advice before levying distress.
In an effort to modernise the rent recovery process, distress is expected to be abolished and replaced instead with the Commercial Rent Arrears Recovery (commonly referred to as 'CRAR') procedure.
Whilst we await the introduction of CRAR (not expected until 2014 at the earliest), distress remains a useful remedy for landlords, and the Property Litigation department of Charles Russell LLP has recently acted on behalf of a landlord in a case which particularly emphasised the importance of distress where tenant companies become insolvent.
The Facts
In the case of Warrant Securities Ltd ("Warrant") v TFW Limited ("TFW")and Greatrix, Warrant let commercial shop premises in Southampton to TFW. In early 2011, TFW was experiencing financial difficulties and the quarterly rent payment due on 25 March 2011 was not made.
In April 2011 Warrant instructed a certificated bailiff to enter the property and levy distress. TFW had been operating as a furniture shop from the property and accordingly various items of furniture were seized. A Walking Possession Agreement was entered into (meaning that the items were impounded until the rent was paid but would be left at the property).
TFW's financial situation worsened and the company ceased trading from the propertyshortly after distress was levied. Mr Greatrix subsequently instructed the employees of TFW to clear the property and the furniture that was the subject of the distress was also removed.
A person or company who knowingly removes or disturbs distrained assets without permission of the distrainor may be guilty of poundbreach and liable to reimburse the distrainor in treble damages (three times the value of the goods under distraint). Warrant accordingly issued a claim for poundbreach against both TFW (which by this time had entered liquidation) and Mr Greatrix personally.
The Key Issues
The case was heard by the Southampton County Court in December 2012 who subsequently found in favour of Warrant. The Court held that TFW and Mr Greatrix were jointly liable to Warrant for treble damages as a result of the poundbreach claim being proved.
There were three key points in the Judgment handed down which will be of interest to commercial landlords:
1. Mr Greatrix (in his capacity as sole director and shareholder and therefore in the eyes of the Court the "controlling mind" of the company) was also liable personally for the removal of the furniture items as joint tortfeasor with TFW. Mr Greatrix was made aware that distress had been levied and which items were the subject of the Walking Possession Agreement. Despite this, Mr Greatrix instructed employees to remove the goods, and Mr Greatrix (despite having the items under his control) failed to return them. As TFW was now insolvent, Mr Greatrix's personal liability in this matter was particularly important to Warrant. The knowledge of the distress and the control of TFW were important elements in this regard. Mr Greatrix was accordingly Ordered to personally pay damages to Warrant (as well as interest and costs of the Court proceedings).
2. Prior to entering liquidation, TFW entered into a CVA with its creditors, one of whom was Warrant. In their joint Defence, TFW and Mr Greatrix sought to argue that Warrant was prevented from selling any of the impounded goods as it had agreed to the terms of the CVA, one of which was that "the creditors shall not commence or continue any steps, action, proceedings, execution or other legal proceedings...Furthermore, no distress may be levied by the creditors against the company...". However, the distraint had already been levied prior to the CVA and Warrant in effect became a secured creditor when the Walking Possession Agreement was entered into. As the term quoted above bound unsecured creditors, the goods were outside of the CVA and Warrant retained the right to sell them. It should be noted that this argument was raised in the Defence but no application to strike out the proceedings was made – had such an application been made on the basis that the poundbreach claim was a new claim being brought by Warrant against TFW then it may well have succeeded.
3. In this case, Warrant intended to sell the furniture items from the property (or its vacant adjoining unit). Warrant was aware that TFW was to vacate the property and as no inconvenience would therefore be caused to TFW by the items being left at the property. The Distress for Rent Act 1689 gives thetenant five days from the Distress Notice being served to make payment of the arrears and reclaim them, during which time the landlord cannot sell the goods (this period can be extended to fifteen days on written request but no such request had been made here).
Authorities suggest that at the end of this period, the landlord should either remove or sell the goods from the premises within a reasonable period of time, and if he does not do so, then the landlord may be deemed to be trespassing on the property.
In this matter, Warrant's managing agent gave evidence that he had not taken any steps to remove or sell the goods before they were removed (thought to be some three months after the goods were seized). Counsel for Mr Greatrix submitted at trial that allowing a period of three months to pass without taking any action to remove and/or sell the goods, coupled with Warrant's agreement to the CVA, meant that the distress had been abandoned.
Having considered written submissions from Counsel the Court held that "...where a landlord decides to sell the goods from the premises, the law allows him a reasonable period of time to do so. If he does not do so within a reasonable period of time the landlord may be liable for trespass because he is inconveniencing the tenant in his premises, and this may be actionable. It cannot in my view automatically follow that the landlord must be deemed to have abandoned the distraint if he fails to act within a reasonable period of time."
There is a warning here to landlords not to inconvenience tenants by leaving goods on the premises for an unreasonable period as this may result in a claim for trespass, but comfort is to be found in that this should not result in an automatic abandonment of the distress.
Practical Advice to Landlords
As can be seen, the ability to recover treble damages from an individual where a tenant company becomes insolvent and the goods distrained upon cannot be located can prove to be very valuable. This occurs more regularly than many may think, with commercial landlords reluctant to "throw good money after bad".
To maximise the prospect of holding any third party liable as joint tortfeasor in respect of any poundbreach claim, landlords and bailiffs should consider taking the following practical steps:
- Ensure a clear record of the goods distrained upon is kept with photographic evidence to show the condition of all the goods (in order to counter any subsequent claim that goods were damaged or of limited/no value).
- Send a copy of the Walking Possession Agreement to the tenant and any key individuals involved (such as directors or those with a "controlling mind") to ensure they are aware distress has been levied.
- Do not leave impounded goods on the premises for an extended period – to do so increases the risk of an argument that the distraint has been abandoned or a claim by the tenant in trespass.
Jeremy Stevens FRICS, Director of Warrant Securities Limited, comments:
"We were delighted with the outcome of these proceedings. We were unaware of the Poundbreach Act 1843 until Charles Russell brought to our attention the possibility of a potential damages claim against the Tenant Company/Director. The case demonstrates the importance of seeking good legal advice and is a forewarning to Directors of Tenant Companies to think twice before removing goods which have been impounded."
Note: The next edition of Enforcement Law by Peter Levaggi, Peter Mooney and David Marsden will be published by the Law Society in late 2013 or early 2014.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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