Commercial Rent Arrears Recovery (CRAR) – What it means for commercial landlords

From April 6th 2014 a landlord's right of distress against his tenant to recover arrears of rent will be abolished and for commercial premises it will be replaced by a new statutory regime for Commercial Rent Arrears Recovery (CRAR).

CRAR is a complex process which includes the requirement to serve prior notice to the tenant before goods are seized. This could cause significant problems for landlords, as this notice period gives tenants an opportunity to put the goods out of a landlord's reach. The changes also weaken a superior landlord's right to recover rent from sub-tenants, if a tenant of the superior landlord is in arrears. A summary is below:

Current position
Landlords currently have the common law remedy of distress, which enables them to quickly and effectively seize tenant's goods if the tenant fails to comply with its lease obligation to make a payment. An important part of distress is that it can take tenants by surprise (no prior notice or court order is required except in certain insolvency situations), meaning that the tenant does not have an opportunity to put its goods out of the landlord's reach. The very fact that bailiffs turn up and seize the goods can be sufficient encouragement for the tenant to pay the arrears without the goods having to be sold by the bailiff. Objections to distress, primarily based on interference with the tenant's human rights, led to CRAR to replace distress.

Position from 6 April 2014
There are a number of new pre-conditions that must be satisfied before CRAR can be utilised.

Minimum rent arrears period
There has to be a minimum amount of arrears before CRAR can be exercised, known as "net unpaid rent" equal to seven days rent. This is a significant departure from the distress for rent process, which permitted a landlord to attend for seizure immediately upon the rent falling into arrears under the lease.

What can be recovered?
Unlike distress, CRAR only applies to principal rent, VAT and interest. It does not apply to service charge, insurance premiums, rates or other payments reserved as rent. If there is an inclusive rent (including service charge etc), CRAR will only be available for that part of the rent "reasonably attributable" to possession and use of the premises. Landlords may need to look at alternative routes to recover these charges, e.g. obtaining judgment and enforcing using High Court Enforcement Officers. This is of course more costly and time consuming.

Which leases can CRAR be used for?
For the CRAR procedure to be applied, there must be a current and written lease in place, and it has to be solely for commercial use (not “mixed-use” premises).This includes a lease where the premises are let wholly or partly as a dwelling. However, CRAR can be used, potentially, where the letting under the sub-lease or occupation as a dwelling is in breach of lease terms.

Notice period prior to taking control of goods
CRAR requires at least seven clear days' prior notice, excluding Sundays, Bank Holidays, Good Friday and Christmas Day to be given to the tenant. This notice is known as a "notice of enforcement". This is one of the major disadvantages of CRAR, in that the surprise element found in distress is removed. The theory is that the notice period gives the tenant the opportunity to pay the arrears to prevent the "enforcement agent" (the equivalent of the bailiff under distress) turning up. There are detailed requirements for the form of the notice (where mistakes can occur, potentially, invalidating the notice) and the notice must be given by the enforcement agent or its office, not the landlord's solicitor. CRAR can be exercised between 6am and 9pm on any day of the week, or outside of those hours if the premises are open for trade.

What can be seized?
Under CRAR, goods that can be seized have to be owned by the tenant. Goods owned by a sub-tenant or other third party are not available. Tools of the tenant's trade are exempt from CRAR up to an aggregate value of £1,350 - beyond that, CRAR can apply to such tools.

Who can take control of goods under CRAR?
Only an enforcement agent may take control of goods and sell them under an enforcement power; an important adjustment from the distress procedure that allowed the landlord or his agent to distrain. With CRAR, to take control of goods the enforcement agent must secure the goods on the premises on which he finds them; remove them and secure them elsewhere; or enter into a controlled goods agreement (CGA) with the tenant, which effectively replaces the walking possession agreement under distress. Under a CGA the tenant is permitted to retain custody of the goods, acknowledges that the enforcement agent is taking control of them, and agrees not to remove or dispose of them, nor to permit anyone else to, before the debt is paid. If a CGA is breached at least two clear days' prior notice must be given before the enforcement agent can re-enter. This is in contrast to distress where no prior notice is required before re-entering the premises.

Notice of the sale of goods
In order to sell goods under CRAR at least seven clear days' notice must be given by the enforcement agent (up from 5 days under existing rights) of the date, time and place of the sale of the goods. There are certain exceptions where a shorter period applies, for example, where the goods may perish. If the seven days' notice is not given, the goods are deemed to be abandoned by the enforcement agent and they have to be returned to the tenant. It is worth noting that the notice periods can be dispensed with where the landlord or Enforcement Agent can satisfy the court that the goods are ‘at risk’ of being removed. It is not immediately clear what the procedure for this would look like or what evidence the court would be willing to accept.

If the tenant is in administration If the tenant is in administration, there is a moratorium on instituting or continuing legal process against the tenant or its property, without the court's permission or the administrator's consent.

Tenant’s right of appeal
The tenant has the right to apply to court for an order that no further step may be taken under CRAR, without further order of the court, in relation to the rent claimed. Conclusion The CRAR regime seeks to rebalance a landlord’s rights and put them back in to line with other creditors. While a tenant will no doubt welcome these changes, a landlord will be concerned by the erosion of its rights and the time, cost, and delay it will have to suffer when seeking to recover the rents that a tenant agreed to pay in its lease.

For more information please contact Robert Cherry.