Can a landlord seize goods in lieu of rent?

During the coming months of economic difficulty, more and more companies are likely to struggle. Within this environment, one of the debts which a business may find difficulty to maintain is the rent payments on their premises. Where this is the case landlords may try to take business assets or goods in lieu of rent owed.

Under the law, landlords do have a legal right to seize goods from a defaulting tenant in lieu of rent arrears. This process is called distrait. HM Revenue and Customs also has the right to distrain goods in this way. Seized goods can then be sold by the landlord normally at auction. A landlord can only distrain goods on the premises to which the arrears are due and they must have gained lawful entry to the premises i.e. they cannot force their way in. If entry is not lawful, then the distraint will not be valid.

Of course, if goods and assets are held and then sold by a landlord or HM Revenue and Customs in this way, this may make it very difficult for a business which is already struggling to continue to trade and may force it into insolvency. This will have serious effects on the other creditors of the business. The question is how to protect against this.

In reality there is very little protection against the risk of distraint against goods that you may have supplied to a customer. The only real protection is if you can prove that the title to the goods has not yet passed to that customer. Landlords cannot distrain against goods which are not legally owned by the business. For example, if the goods have not yet been paid for and there is a valid retention of title clause in the supply contract confirming that title does not pass until payment is received, distraint cannot take place. Any such goods would have to be clearly marked as the supplier's property and subject to retention of title. Unfortunately, if the goods have already been altered by the business, this rule may not apply.

Although they are not obliged to do so, a landlord should normally give notice to their tenant that they intend to distrain goods. Any agreement concerning the retention of title should therefore include a clause that in such an event, 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 a third party and cannot be distrained.

Interestingly, the law on distraint is due to be replaced. The Tribunals Courts and Enforcement Act 2007 provides a new procedure called Commercial Rent Arrears Recovery. This 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.

Derek Cooper - September 2009

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Derek Cooper is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK.

If your business is in financial trouble and facing goods being seized, get expert advice on a business turnaround solution for you http://coopermatthews.com/business-recovery-services-advice.html

Cooper Matthews specialise in Business Refinancing and Business Recovery Services Advice providing straight forward insolvency advice for businesses with financial problems to turn your business around. They have significant experience in working with small to medium sized businesses.

Derek's experience of both corporate insolvency and business management puts him in a position to be able to understand the challenges facing businesses in today's economic climate.