Introduction

  • Commercial Rent Arrears Recovery (CRAR) is a new statutory procedure that comes into force on 6 April 2014.
  • It allows a landlord of commercial premises to recover rent arrears by taking control of the tenant’s goods and selling them.
  • CRAR replaces the law of distress and applies to new and existing leases.
  • A landlord of commercial premises has the right to exercise CRAR without the lease saying so.
  • There is also a new procedure for recovering rent arrears by diverting rents from a sub-tenant.

CRAR v. distress: what is the difference?

Distress is a common law right that permits a landlord to recover rent arrears by seizing the tenant’s goods and holding or selling them. Distress may be used to recover any sum reserved as rent in the lease and is available for commercial and mixed use premises.

Distress is abolished when Part 3 of the Tribunals, Courts and Enforcement Act 2007 (2007 Act) comes into force on 6 April 2014. CRAR, also an out-of-court regime, is introduced in its place. While similar in some respects, there are significant differences between the two:

  • CRAR can only be exercised in relation to premises that are wholly commercial in use. It is not available for mixed-use or residential leases unless the use as a dwelling is unauthorised.
  • CRAR can only be used to recover principal rent for “possession and use” together with any VAT and interest due on that rent. It cannot be used to recover other sums overdue from the tenant, such as service charges, insurance premiums and other outgoings, even if they are reserved as rent in the lease. In the case of an all-inclusive rent, a reasonable apportionment will need to be made.

CRAR can also only be used to recover arrears that are certain, or capable of being calculated with certainty. This should be borne in mind in the context of, for example, turnover rents.

The recoverable rent is reduced by any “permitted deductions” such as any set-off that the tenant would be entitled to claim.

  • The CRAR procedure is more prescriptive and controlled than distress. For example:
  • It can only be exercised by certified enforcement agents following the statutory procedure set out in schedule 12 of the 2007 Act. A landlord must therefore authorise an enforcement agent to exercise CRAR on its behalf.
  • A notice of enforcement containing prescribed information must be given to the tenant at least 7 clear days before goods are taken – distress requires no advance notice. This may reduce the value of CRAR as it gives the tenant time to remove goods from the premises or to enter into insolvency before the end of the notice period. If that is a risk, the court can be asked to reduce the 7- day notice period.
  • There must be a net unpaid rent equivalent to at least 7 days’ principal rent, both at the time that a notice of enforcement is given to the tenant and when goods are first taken.
  • CRAR can only be exercised at the demised premises (without court authorisation) and cannot be exercised over “exempt goods” – the list of these is longer than that for distress.

Who can exercise CRAR?

The immediate landlord……

  • Where the landlord comprises joint tenants, any of them can do so to recover the amount due to all of them.
  • A landlord’s mortgagee can do so if it has given notice of its intention to take possession or to receive rents and profits – and provided that it is bound by the lease.

….under a lease…..

  • The lease may be legal or equitable but must be in writing.
  • It includes a tenancy at will and a lease continuing under the Landlord and Tenant Act 1954 Part 2.
  • It does not include a mere contractual licence to occupy.

……of commercial premises.

  • Premises are “commercial” if they are not let or occupied in whole or part as a dwelling - but disregarding occupation as a dwelling that is in breach of the terms of the lease or superior lease.

What happens when the lease comes to an end?

CRAR cannot be exercised after the end of the lease unless:

  • Goods were taken under CRAR before it ended; or
  • All the following conditions are met: the lease was not forfeited; no more than six months have elapsed since it ended; the tenant in arrears is still in possession; the landlord is the same as at the end of the lease; any new lease granted to the tenant is a commercial lease.

The lease is not treated as at an end if the tenant is holding over after the contractual term under the Landlord and Tenant Act 1954.

Can a landlord recover its tenant's rent arrears from a sub-tenant?

Yes, a landlord can still require a sub-tenant to pay rent directly to it to clear its immediate tenant's rent arrears, but the process for doing so has changed.

The current regime, set out in the Law of Distress Amendment Act 1908, is replaced by a new statutory procedure. This mirrors CRAR, for example it can only be used to recover arrears of principal rent due in relation to commercial premises.

The form and content of the notice to be served on a sub-tenant are prescribed, as is the method of service. Unlike the current regime, the notice only takes effect 14 clear days after it is served.

Can we draft around CRAR?

No. There is a wide anti-avoidance section. Any contractual provision intended to give the landlord a right to seize goods to recover arrears other than through CRAR, or to modify the CRAR procedure, is void. But the parties can agree to prevent or restrict the exercise of CRAR.

Any tactical tips for landlords?

CRAR is available to landlords in addition to its other remedies (such as forfeiture, a claim for debt) and any negotiated protection (such as guarantees and rent deposits). But it is important to bear in mind that a landlord in exercising CRAR will waive any right to forfeit that may have arisen.