UK: CRAR: A New System For The Recovery Of Commercial Property Rent Arrears Is Now In Force

Last Updated: 28 April 2014
Article by Deborah Rider

Background

As of 6 April 2014 and as part of wider reforms introduced by the Government the ancient common law right of distress for rent has now been abolished and replaced by a new statutory procedure known as Commercial Rent Arrears Recovery or CRAR.

The common law regime of distress was a self-help remedy previously available to landlords whose tenants had fallen behind in the payment of rent, allowing them to enter the leased premises and seize and sell goods up to the value of the monies owed, with no prior warning and no court order required. Although this was a quick, effective and inexpensive remedy for landlords, it was considered to be too draconian for tenants as a result of which the decision has now been made to abolish this right and implement a new regime.

Key Changes

  • CRAR only applies to commercial leases evidenced in writing where no part of the premises is lawfully used as a residential dwelling. Mixed use premises with a residential element are excluded.
  • CRAR can only be used for rent, VAT and interest. Unlike the old regime of distress, it cannot be used to recover any other amounts normally reserved as rent such as service charge or insurance.
  • CRAR is only available provided that the net amount of unpaid rent (excluding VAT and interest) amounts to not less than 7 days' rent under the lease.
  • The landlord must give the defaulting tenant not less than 7 clear days' advance notice in writing (by the service of an enforcement notice) before CRAR may be exercised. This notice period may be shortened by the Court but only if the landlord is able to demonstrate that to delay would likely result in the tenant taking steps to avoid enforcement by removing or disposing of goods. This is a significant (and perhaps the most controversial) change for landlords because under the old remedy of distress, bailiffs could be instructed to seize goods within 24 hours of the rent falling into arrears. The requirement under CRAR to give notice now eliminates that element of surprise.
  • Seizure of goods must be carried out by certificated enforcement agents.
  • Enforcement may take place on any day of the week, between the hours of 6am and 9pm (or between the hours of business of the tenant's company). This is in contrast to the old law which prohibited enforcement on a Sunday or after dark.
  • Items which are necessary for the defaulting tenant's personal use in his employment, business, trade, profession, study or education up to a maximum value of £1,350 are exempt.
  • After goods have been seized, the defaulting tenant must be given at least 7 clear days' notice before the goods may be sold, unless the goods have a shorter shelf life in which case one day's notice may be given. Goods must be sold by public auction unless the Court orders otherwise.
  • Where premises are sub-let, the superior landlord may require the sub-tenant to pay its rent directly to the superior landlord, subject to the service of a notice and this right is preserved under CRAR. If a sub-tenant who has been served with notice then fails to pay the amount claimed, CRAR may be exercised against that sub-tenant.

Impact

Commercial landlords will need to be aware of the significant changes in this area and how to exercise their rights under CRAR. Recovery of rent through this method is likely to be more time-consuming and potentially more expensive due to the statutory requirements which have now been introduced.

A concern, in particular, is the new requirement to give seven days' notice before any enforcement action may be taken. This is likely to make CRAR a less fruitful method of rent arrears recovery with the risk being that there may not be anything of value to recover when the time for enforcement comes.

In view of this difficulty, commercial landlords may wish to give more thought to requesting further security from their tenants, in the form of guarantors or rent deposits, at the point when new leases are entered into. Alternatives to CRAR should also be considered. In circumstances where the rent arrears are undisputed, for example, the service of a statutory demand can be an effective way to encourage payment, particularly if the tenant is keen to avoid the risk of insolvency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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