Contact: Sarah Connor; Clarkslegal LLP (Reading, England)
Commercial Rent Arrears Recovery (CRAR) is a method of enforcement to recover rent arrears relating to commercial property, which comes into force on 6 April 2014. From that date, it may only be used for commercial property and the common law right of distress is abolished. Prior to 6 April 2014 the remedy of distress is the correct procedure to use.
CRAR allows a landlord to instruct an enforcement agent to take control of a tenant’s goods and sell them in order to recover an equivalent value to the rent arrears. CRAR is similar to distress in many ways but there are some important differences. It is important to bear in mind that CRAR is only available to landlords who have written leases of commercial premises and will not apply to a residential dwelling. CRAR is restricted to the recovery of rent, VAT and interest only. Any other charges such as service charge and insurance, regardless of whether they are classed as “rents” within the lease cannot be recovered using CRAR.
The significant changes being introduced under CRAR include;
- The ability to use enforcement agents under CRAR will only be available on commercial premises – if the premises under the lease includes any area let or occupied for residential purposes, CRAR will not be permitted. For example, pubs or shops with management accommodation above, or over-riding leases with elements of residential within the demise will be excluded.
- CRAR will only be available as a remedy to recover rent plus VAT and interest on it, regardless of whether the lease reserves others sums as rent. To recover service charge, insurance and other non-rent charges after 6th April, the use of enforcement agents under CRAR will not be an available remedy. Importantly, where rents are inclusive of other sums or based on turnover, we understand it will only be the net or base rent to which CRAR can be applied. It will therefore be important to clearly identify these within the lease wording.
- Before CRAR is exercised, 7 days clear notice (excluding Sundays and Bank Holidays) must be given to the debtor in a prescribed form and it appears that it will have to be served by the enforcement agent which may have cost implications (see below). Landlords do have the opportunity to apply to court to have this notice period shortened where it can be shown to be likely that goods will be removed by the debtor. A further 7 days notice will then be required to sell any goods seized. Previously no notice was required.
- CRAR can be used to recover rent direct from sub-tenants, subject to 14 days’ notice to the sub-tenant.
- CRAR can only be used where the sum of the debt exceeds 7 days rent.
- The enforcement agent used (formerly bailiff) must be certified under CRAR.
- Goods must be sold at a public auction or such other means of sale ordered by the court, after giving the tenant at least seven clear days` notice.
Although much of the detail of the new regime is yet to be confirmed, there are a number of implications from the planned changes:
- landlords should agree with managing agents their strategy for issuing notices to tenants under CRAR. Although issuing the 7 day notice to all tenants in arrears the day after a due date would provide maximum flexibility to take action if the debt remains outstanding 7 days later, consideration should be given to the impact of this on tenant relations where regularly issuing enforcement notices to tenants who may only be paying rent 1-2 days late and would have paid anyway, may not be appropriate.
- the costs involved in collecting rent arrears are likely to rise. The costs for using enforcement agents to issue notices in a prescribed form and their recoverability are still to be clarified, but given the restrictions that CRAR introduces, other remedies such as statutory demands which were previously more costly are likely to become more prevalent.
- consideration should be given to the implications of CRAR within lease drafting, particularly to the extent of demised premises where residential elements are involved and the use of turnover and inclusive rents.
This is a brief overview of a new and complex subject. Please contact the Clarkslegal Real Estate team if you would like to discuss this further.
