The previously commonly used remedy of distress has now been replaced by Commercial Rent Arrears Recovery (CRAR) which ultimately favours the tenant and will make recovery of arrears more difficult for landlords. We consider the impact of the reforms on both landlords and tenants in the hospitality and leisure sector.
What impact does CRAR have on existing leases?
CRAR came into force on 6 April 2014 and will apply to existing leases without any need to review or amend them. However, it will only apply where the lease is in writing and the premises are let and used only for commercial purposes. If landlords have mixed use premises (i.e. a pub with a residence above) then they may not be able to utilise CRAR to recover arrears (although a lease may still be within the scope of CRAR if the residential occupation is in breach of the terms of the lease). In future, landlords will wish to consider granting separate leases of commercial and residential premises to avoid this problem arising.
What can be recovered under CRAR?
Only the principal rent, along with any interest and VAT on that rent, is recoverable under CRAR, so landlords cannot use the procedure to recover other sums due such as unpaid service charge, rates, insurance or damages for breach of the beer tie, even if those sums are reserved as rent in the lease. Of course, sums such as service charge may still be pursued by the issue of proceedings or, if over £750, by serving a statutory demand.
What can be seized under CRAR?
Only goods belonging to the tenant can be seized and so, for instance, items such as gaming machines in pubs which are leased from third parties will fall outside of CRAR. Importantly, items of equipment which are necessary for the tenant’s personal use in the tenant’s employment, business, trade or profession are exempt up to an aggregate value of £1,350.
What is the new procedure to recover rent arrears?
The new legislation sets out a detailed technical procedure which must be followed to exercise CRAR, the main points of which can be summarised as follows:
- The landlord must instruct an enforcement agent in writing;
- The enforcement agent must give 7 days’ clear notice to tenant before exercising CRAR;
- CRAR must be exercised within 12 months of the date of the enforcement notice;
- If the arrears remain unpaid, the enforcement agent can use reasonable force to enter the premises and can either:
- Secure goods on the premises;
- Remove the goods and secure them at a different location;
- Enter into a controlled goods agreement with the tenant (akin to taking “walking possession”).
- The enforcement agent must then provide the tenant with an inventory of the goods;
- Within seven clear days of taking control of the goods the enforcement agent must make/ obtain a valuation of the goods;
- Sale of the goods can take place after seven clear days of the removal of the controlled goods, via public auction, of which the tenant must have been given seven clear days’ notice. If the tenant pays the outstanding amount in full prior to the sale then the goods must be made available for collection by the tenant.
Whilst the law of distress was considered to be fairly draconian, it was nevertheless a useful tool for landlords. The new regime, and in particular the need for landlords to give the tenant seven days’ clear notice before they can take control of goods, will increase the costs of recovery for the landlord, and give the tenant ample opportunity to remove goods of worth from the premises or apply for insolvency. Many critics therefore argue that the legislation is now instead weighted in favour of the tenant.