Property UPDATE

Issue No.9 May 2008

LANDLORDS – TAKE ACTION NOW TO RECOVER ARREARS BY DISTRESS?

Recent legislation will shortly mean that the highly useful and effective remedy of recovering arrears of rent and service charges by distress will disappear. Instead it will be replaced by a narrower and more highly regulated system of Commercial Rent Arrears Recovery (CRAR). The new provisions are expected to be brought into force later this year. If therefore you are a landlord of property where arrears have already accrued it may be helpful for you to recover these by distress now before the new rules come into force.

There are many similarities between the old and the new systems but for Landlords there are a number of disadvantages to CRAR:

• CRAR will apply to leases of commercial properties only. You will not be able to enforce by recovering goods in residential properties (including in some instances where a property is being used as a residence even if this is not expressly allowed) or even mixed use properties.
• It will only apply only to the rent element. CRAR cannot be used for service charges, insurance rent or administrative charges even if these are reserved as rent. In some cases not even the whole amount of the basic rent element may be recovered if the inclusive rent comprises both an occupational element and service charge element, or some turnover rents.
• Regrettably for Landlords, the “surprise” element of the old law of distress will be lost. CRAR requires a notice to be served on the tenant before goods are seized. This may allow the tenant time to clear the property of any valuable goods before possession is seized.
• Bailiffs will now be known as “Enforcement Officers”.
• Detailed regulations setting out minimum amounts that can be recovered under the new CRAR procedures and fine tuning other aspects of the new procedures are expected soon.

In view of these changes, in the future landlords may wish to think very carefully before agreeing to any change of use from commercial to residential use.

Finally, the very old but useful procedure under the Law of Distress Amendment Act 1908 for service of notices enabling the recovery of a tenant’s rent arrears from a sub-tenant are to be repealed. Fortunately this will be replaced by a new procedure which is expected to be substantially the same.

RICS CODE ON SERVICE CHARGES IN COMMERCIAL PROPERTY (NO 2)

This is a voluntary Code of best practice relating to the provision of services in commercial property. Following our introduction to this in our Newsletter No. 7 we now comment on the provisions relating to management, communication and transparency.

Management

The owner has a duty to manage the property and account for tax properly due on the service charge.

The owner and the manager should recognise that they owe a duty of care to occupiers. Managers should recognise that they owe a duty of care to investors – they are after all looking after their investment. Occupiers should have the right reasonably to challenge the propriety of expenditure.

The way services are provided and managed should be reviewed regularly to ensure they are cost effective. The occupier is entitled to value for money.

Written procedures should be established that set out the procurement, administration and management of services. These should be provided to the occupier on request to show what is being done.

Communication

Many disputes arise simply out of a lack of communication. The theory is that if you improve communication there is less likelihood of a dispute. The Code requires information to be provided on a timely and regular basis. There should be regular meetings and queries should be answered in the same spirit. Much of this is common sense. The Code sets out various specific requirements. For example where there are variances between estimated and actual expenditure these should be identified quarterly and the information communicated to the occupiers. When there are significant variances between actual and budgeted expenditure, the occupier should be told within the service charge year.

Transparency

This goes hand in hand with Communication. The Code sets out various principles and goes as far as to include standard forms in Appendix E, including service charge certificate, detailed expenditure report etc.

In particular the Code requires service charge payments to be kept in a separate account so that interest payments may be tracked.

We will comment on Service Charge Standards and Provision and Administration in our next Newsletter.

CHANGES TO EMPTY PROPERTY RELIEF – NON DOMESTIC PROPERTY

From April 1 2008, empty property relief for non-domestic property in England and Wales has changed. The change is retrospective in that properties that have already been vacant for 3 or 6 months at April 1 2008 will immediately attract the full rate. We set out below an overview of the previous provisions and the changes the Act introduces.

Provision		Pre 1 April 2008		From 1 April 2008
100% relief for first three months	Yes	Yes
50% relief after first three months	Yes	Full rates
Industrial buildings and listed buildings 100% relief at all times	Yes	Six months’ relief then full rates
Charities and Community Amateur Sports Clubs	10% rates or such lesser discretionary amount	100% relief provided it appears that the use wholly or mainly continues on the next occupation
Minimum period for temporary re-occupation to enable relief to re-apply	Six weeks	Remains at six weeks
Insolvency	Liquidation/bankruptcy: exempt Administration: full rates	Liquidation/bankruptcy: exempt Administration: a full exemption
Properties with rateable value below £2,200	Exempt	Exempt
Property not capable of beneficial occupation (e.g. where building in poor condition and cannot be economically repaired)	Property may be removed from Rating List	Property may be removed from Rating List (possible anti avoidance measures to be introduced)
Where occupation prevented by law or action by public authority	Exempt	Exempt
Part vacant properties	Discretionary relief for empty part where part of a property is unoccupied and for a short period only	Reduction available for vacant part for 3 or 6 months as above and thereafter continues if: when entirely empty there would be no payment (e.g. charities); or other relief continues to apply (e.g. small business rate relief)
Listed buildings	Exempt	Exempt

Note:

Please note that this newsletter is not intended to be a comprehensive statement of the law and should be used for guidance purposes only. If you require specific legal advice please contact Alastair McClean, Michael O’Shea, Sharon Rutter or Lisa Duke or by telephone 020 7493 2903.