Protective Distraint: How to Underpin Financial Arrangements

Protective distraint is a variation of the normal practice of levying distress, which has the effect of offering landlords a way of “ring-fencing” their concessional arrangements made with tenants.

An example illustrates how it works: John Smith is 4 years into a 20-year commercial lease of shop premises in a small shopping centre. The passing rent is £10,000 per Quarter. He is, or has been, in every way a model tenant. His rent is paid regularly and on time by standing order, and his FRI Covenants meticulously observed. With a fortnight to go to the June quarter day, Smith approaches his landlord and frankly confesses that business is bad, footfall in his shop is down by 25% and his cash flow is suffering. He has calculated that he cannot continue trading with a rent liability of £10,000 per quarter and will go out of business by Christmas. Will the landlord agree to a rent reduction of £3000 per Quarter until Christmas? i.e. £7000 per Quarter. This will allow him to continue trading and hopefully things will have improved by January. Let us assume the landlord agrees. Smith therefore says he will pay £5000 now by banker’s draft and offers two post dated cheques for £1000. The landlord agrees. If the tenant delivers, all is well. If not, the landlord can call in the bailiffs, but this may be too late.

The alternative is for the landlord to agree to the arrangement, but to insist that it be brokered through the bailiff’s office. The bailiff will call on the tenant at an agreed date and time – unlike his normal practice of arriving without warning – and proceed to levy distress in the normal way; compiling an inventory of goods/stock/chattels etc, sufficient to cover not just the agreed concessionary rent, but the actual covenanted rent of £10,000. He then obtains a signature on the Walking Possession Agreement for fifteen days and at the end of that period he returns and seeks a fresh signature for a further fifteen days. The process can be repeated ad infinitum until such time as the tenant returns to normal trading.

However, this time there are two advantages for the landlord. Assuming the same proffered payment scenario as before; if either of the post-dated cheques bounce, the bailiffs can return immediately to remove goods – the first advantage. Secondly, if Smith is in real trouble, there is every chance that other creditors e.g. Inland Revenue, or Customs & Excise may, send in bailiffs themselves to distrain. In which event, the tenant would produce the Walking Possession Agreement, which, in the ordinary way could cause the other bailiffs to back off.

All in all, a very useful way of underpinning financial management.

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