A struggling company is likely to miss rent payments and build up rent arrears. If this happens a landlord may attempt to take assets or goods in lieu of rent owed.
- Can Company Assets be seized due to rent arrears?
- How to stop a landlord seizing goods
- Can a landlord take goods not owned by the company?
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Can Company Assets be seized in lieu of Rent Arrears?
Under UK law landlords do have a legal right to seize goods or other assets in lieu of rent arrears. This process is called distrait. The seized goods can then be sold by the landlord.
A landlord can only distrain goods on the premises against which the rent arrears are due. They must also have gained lawful entry to the premises. In other words they cannot force their way in. If entry is not lawful any subsequent distraint will not be valid and goods seized must be returned.
HMRC can use distraint to seize goods in lieu of Corporation Tax and VAT arrears.
If goods are taken and sold by a landlord it may make it difficult for a company to continue trading. If the business is already struggling the directors may then be forced to consider liquidation. This will have serious effects on all the creditors.
How to stop a Landlord seizing goods
Generally speaking landlords do not want to use distraint. It generally involves significant cost. In addition any funds raised from the sale of seized assets generally do not cover the rent arrears outstanding. As such most landlords will be open to consider a sensible debt repayment plan.
However if negotiations with the landlord fail there is little that a company can do to prevent a landlord using distraint. In these circumstances the directors should consider a rescue solution. A company can be protected from Landlord action using either a Company Voluntary Arrangement or Pre Pack.
A landlord should normally give notice to their tenant that they intend to distrain goods. However they are not obliged to do so. As such a threat of distraint must be taken seriously.
Can a Landlord take goods which a Company does not own?
Landlords cannot distrain against goods which are not legally owned by the company that owes them rent. However for this to be proved there must be a valid retention of title clause in the supply contract. In addition any such goods must be clearly marked as the supplier’s property and subject to retention of title.
The clause must confirm that title does not pass until payment is received. In addition it must state that if the landlord threatens distraint the company must immediately inform the supplier.
At this point the supplier would then have the opportunity to inform the landlord that the goods actually belong to them and cannot be distrained.
If goods have already been altered by the business which has rent arrears the retention of title rule may not apply.
The Tribunals Courts and Enforcement Act
In 2007 the law on distraint was updated by the Tribunals Courts and Enforcement Act (2007). This legislation provides a new procedure called Commercial Rent Arrears Recovery.
The procedure states that Landlords must obtain a warrant, use an enforcement agent and that they must serve notice on the debtor explaining the amount of debt and how the debtor should proceed should they wish to pay the debt.
It is hoped that this change in the law will give more opportunities for debtors to negotiate with landlords and therefore remain trading.