For hundreds of years landlords used to seize and sell the assets of their tenants who could not pay their rent using the process of distraint – imagine the lord of the manor turning up in the village in medieval times, taking the villagers chickens to the market to sell, leaving the peasants destitute, using the cash raised to pay themselves. It was a very blunt instrument.
Then in April 2014 two pieces of legislation came into place, the Tribunals, Courts and Enforcement Act 2007 and the Taking Control of Goods Regulations 2013, abolishing the common law right for a landlord of commercial premises to distrain for unpaid rent, replacing it with a new procedure ‘CRAR’. However, as with the old regime, this relatively new procedure does not involve the landlord going to court.
But the Insolvency Act 1986 places some restrictions on a landlord’s rights when the tenant company goes into liquidation
What are the rules in a Compulsory Liquidation?
Two sections apply…
Section 128 says that any CRAR put in force after commencement of a compulsory liquidation (typically the presentation of the petition) is void. But the court could give leave for any CRAR to continue.
Section 176 says that where a landlord has exercised CRAR against a company in the three months before its winding up order, the goods or sales proceeds are charged for the benefit of the company with the preferential debts, but only to the extent that the assets are insufficient for meeting those preferential debts.
The practical effect of this latter rule is that landlords who have used CRAR during those 3 months may be forced to surrender the cash / assets to the Official Receiver / Liquidator. The landlord will then rank as preferential creditor for the amount they have had to surrender / pay.
The purpose of these two sections is to catch any CRAR started off prior to the petition but not completed until after it.
What are the rules in a Creditors Voluntary Liquidation?
Sections 128 and 176 do not apply in a creditors voluntary liquidation.
There is therefore no restriction on CRAR in a voluntary liquidation but the liquidator will often either try to persuade the landlord to abandon the CRAR, say in return for a speedy disclaimer of the lease, or he will apply to court under s112 of the Insolvency Act 1986 – a provision that enables law applying solely to compulsory liquidations to be imported into a creditors voluntary liquidation – to halt the process.