On 6 April 2014 the new statutory procedure for commercial rent arrears recovery (CRAR) came into force. This method of rent enforcement replaces the common law right of distress. It allows a landlord to instruct an enforcement agent to take and sell a tenant’s goods and to use the proceeds to pay off the rent arrears.
How is CRAR different from distress?
While CRAR is similar to distress, there are some important differences:
- Type of premises: CRAR may generally be exercised only at purely commercial premises; distress could be exercised at mixed use premises.
- Type of lease: CRAR can only be exercised if there is a written lease; distress was available whenever there was a relationship of landlord and tenant, regardless of whether a written lease was in place.
- Sums recoverable: CRAR is available only in respect of the principal rent plus VAT and interest and at least seven day’s rent must be outstanding. Distress was available in respect of all sums reserved as rent, with no minimum sum.
- Who can exercise: CRAR must be exercised by an enforcement agent who is instructed in writing; distress could be exercised by an individual landlord or by a certified bailiff on behalf of any landlord with no need for written instructions.
- Notice: Seven clear days’ notice (this excludes Sundays and bank holidays) must be given before exercising CRAR; no notice was required before entry was gained for distress.
- Timing: CRAR may be exercised between 6 am and 9 pm on any day of the week, and also during the tenant's business hours if outside of these times; distress could only be exercised between sunrise and sunset on any days other than Sunday.
- Sale: Goods taken through CRAR can only be sold after seven clear days’ notice and must usually be sold by public auction. Goods taken through distress could be sold by any means after five days.
When can CRAR be used?
Type of premises
CRAR is only available in respect of purely commercial premises. If any part of the property is let or occupied as a dwelling, the procedure cannot be used, unless the residential occupation is in breach of the terms of the lease. Landlords should consider this when granting leases of, for example, a shop with a flat above: if a landlord wants the option of exercising CRAR in respect of the shop premises, he will need to grant two separate leases.
Type of lease
CRAR is available in respect of all written tenancies, including tenancies at will. However, this means that it won’t apply where a tenant goes into occupation without any documentation in place, or when occupation is as a licensee rather than as a tenant (for example when a prospective tenant is allowed in under the terms of an agreement for lease, or a buyer is permitted to occupy before completion).
After the end of the lease
Where a fixed-term lease has come to an end and a tenant remains in occupation, CRAR is available only if rent was due and payable before the lease ended (and various conditions are met) or if control of the goods was taken before the lease ended. This means that where a tenant is permitted to remain in occupation without any written documentation, for example while a new lease is negotiated, CRAR will not be available in respect of any rent that is due following the end of the fixed term of the written lease. We would always recommend that a new written agreement – usually a tenancy at will – is put in place pending completion of a new lease.
What sums can be recovered using CRAR?
CRAR may only be used to recover sums which are payable for the possession and use of the premises (plus VAT and interest). It is not possible to recover any other amounts due, even if they are reserved as “rent” in the lease (eg service charge, insurance, rates). Nor is it possible to recover any interim rent payable under the Landlord and Tenant Act 1954.
Where the lease contains an inclusive rent, it is only possible to recover the proportion that is reasonably attributable to the possession and use of the premises. This is likely to cause difficulties for a landlord wishing to enforce so we would recommend that a “true rent” figure is negotiated and recorded when the lease is entered into.
CRAR may only be exercised where the sum outstanding is equal to at least seven days’ rent (not including sums due in respect of VAT or interest).
What goods are available for CRAR?
Any property other than land is potentially available for CRAR, but the goods must satisfy the following conditions:
- They must belong to the tenant (not held on a sale or return basis; co-owned goods are available, but the co-owner must be notified)
- They must not be in use at the time (though the agent may re-enter when they are not in use to take control of these goods)
- They must not fall into one of the exempt categories:
- Items necessary for tenant’s personal use (including computers and vehicles) up to £1,350 in value (items over this value may be taken)
- Clothing, furniture and household equipment that the tenant requires to satisfy its basic domestic needs (applicable where the property is being used for residential purposes in breach of the terms of the lease)
- Pets and working dogs
- Vehicles needed for use by disabled people, for health reasons or by the emergency services.
The CRAR Procedure
The actual exercise of CRAR must be carried out by an enforcement agent, authorised in writing on behalf of the landlord. The landlord must follow the correct procedure to appoint the agent, including providing specified information (such as details of premises and rent).
CRAR may only be exercised if the tenant has been given at least seven clear days’ notice. The form and content of the notice are prescribed: if the wrong form is used, or information is missing, the notice will be invalid (the same applies to all notices required as part of the CRAR procedure). The notice must be given by the enforcement agent and must be served either by post, fax, hand-delivery, or by affixing the notice where it is likely to come to the tenant’s attention.
CRAR must be exercised within 12 months of the date of the enforcement notice, though this can be extended by the court in some circumstances. If the tenant enters into a repayment agreement which is breached, the time starts to run from the date of breach.
Entry to the premises
Entry may take place on any day of the week, between 6am and 9pm, and also during the tenant’s business hours if they fall outside these times. Reasonable force can be used to obtain access to the premises but the enforcement agent must use a usual means of entry (eg a door, not a window). After entering, the enforcement agent must give the tenant written notice of what he’s doing, including details of any goods which he is taking control of and when the amount due must be paid to prevent the goods being sold. The premises must be left secure at the end of the entry.
The enforcement agent can repeat entry if at the first visit there were insufficient goods available to satisfy the sum due (or the goods were in use) and he believes that further goods are now available. Notice of this re-entry must be given at least two clear days in advance, though the court can order a shorter period if it is likely that the goods will be removed in the interim.
Method of exercise
CRAR is exercised by securing the goods on the premises, removing the goods from the premises and securing them at a different location or entering into a controlled goods agreement with the tenant. A controlled goods agreement (CGA) is like a walking possession agreement under the law of distress. The tenants retains custody of the goods but is not permitted to remove or dispose of them before the debt is paid. The CGA must be in writing and must be signed by the enforcement agent and the tenant (or someone on the tenant’s behalf). If the enforcement agent removes goods he must take reasonable care of them, keeping them in a similar condition and moving them to secure storage until they are sold. The tenant must be given an inventory of items taken as soon as possible.
Valuation of goods
The goods must be valued within seven clear days of taking control of them. This must be in writing, give separate values for each item and a copy must be provided to the tenant. The valuation may be done by the enforcement agent or by a suitably qualified third party.
Sale of goods
The goods must be sold for the best price that can be reasonably obtained, which will presumably be connected to the valuation obtained; they should not just be sold at whatever price is bid for them. They must be sold at public auction (including online auction), unless the court orders otherwise.
There must usually be a period of seven clear days between the removal of the goods and the sale, though sale can take place on the day after the removal of the goods if they would become unsaleable, or their value would be extinguished or substantially reduced following a seven day wait. The tenant, plus any co-owner of the goods, must usually be given at least seven clear days’ notice of the sale; however, where the sale is taking place the next day the notice can be given the day before the sale (ie the day on which the goods are taken).
If the goods are not sold, a further attempt at sale can be made, with a fresh seven-day notice to the tenant. The sale must take place within 12 months of CRAR being exercised.
Following sale, the tenant must be provided with a list of the goods sold, a statement of sums received and paid out and copies of receipts for all sums paid out. The proceeds must be used to pay the amount of the debt owed to the landlord and the fixed recoverable costs of exercising CRAR (the fixed recoverable costs are capped for each stage of enforcement, together with a percentage fee recoverable for goods over a specified value). Any surplus must be given to the tenant. Where goods are co-owned, the co-owner must be paid his share before any payment is made to the landlord.
If the enforcement agent does not give the tenant a notice of sale within 12 months of CRAR being exercised, or the goods remain unsold and no notice of a further sale is given, the tenant must be given the opportunity to collect them. The tenant then has 28 days to do so, after which the enforcement agent can apply to the court for an order of what to do with them (the order may be to continue to make them available for a further period, to donate to charity or to destroy them).
Third party claims to controlled goods
When taking control of goods at the tenant’s premises there is always a risk that the tenant is not in fact the owner of these goods. The enforcement agent should not take control of any goods that he is aware do not belong to the tenant. If after control has been taken a third party believes that he owns or has an interest in the controlled goods, he must make an application to the court. After receiving notice of this application the enforcement agent may not sell the controlled goods unless directed by the court to do so. The third party is required to make payments into court to prevent an order for the sale of the goods.
A purchaser of goods belonging to a third party will nonetheless acquire good title to the controlled goods unless either a lawful claimant has made an application to court claiming an interest in the goods; or the purchaser, the landlord, the enforcement agent or a related party has notice that the goods do not in fact belong to the tenant.
Payment of arrears by the tenant
The goal of the CRAR procedure is to get the tenant to pay up without the need for sale. If the tenant pays the outstanding amount in full after control of goods has been taken, but before the goods have been sold, they must be made available for collection to the tenant as soon as reasonably practicable.
Recovery of rent from undertenants
Where a superior landlord would have the right to exercise CRAR against a tenant and there is an underlease in place, the superior landlord may serve a notice on the undertenant requiring that the undertenant pays its rent directly to the superior landlord (this extends to any sub-underleases). This is known as a section 81 notice and is similar to the old section 6 notice. The notice must be in writing, contain prescribed information – including the amount of arrears owed – and must be served correctly. The notice takes effect 14 clear days after service.
Only one notice will be able to have effect at any one time in relation to any one amount of arrears, so if a second notice is served which relates to the same arrears, the first notice must be withdrawn. It must also be withdrawn if the arrears are subsequently paid by someone else. The only exception to this rule is that where there is more than one direct undertenant (for example, the property has been underlet in two parts) a valid notice may be served on each of the subtenants.
If the undertenant fails to pay the amount claimed the superior landlord will be able to use the CRAR procedure against the undertenant.
While CRAR is intended to replace distress, its value to landlords has been significantly reduced by the requirements and limitations. The main issues for a landlord wishing to exercise CRAR will be:
- The requirement that seven days’ notice must be given before exercising CRAR: any tenant who receives and understands this notice will ensure that his goods are removed before the enforcement agent shows up.
- Limitation to purely commercial premises: mixed use leases are common for high street stores – and these are the types of premises where distress was often most valuable. CRAR is unavailable for these premises.
- Limitation to the principal rent: tenants will be able to specify that sums paid are in respect of the principal rent, and keep these up-to-date, while accruing significant arrears of service charge and insurance rent, without exposing themselves to the CRAR procedure.