Cracking CRAR

Cracking CRAR

What are landlords and tenants making of the Commercial Rent Arrears Recovery scheme (CRAR)?  Lucy McCormick of Henderson Chambers comments on the new scheme.

On 6 April 2014, the new Commercial Rent Arrears Recovery (CRAR) procedure came into effect. This replaced the ancient remedy of ‘distress’, which entitled a landlord to recover unpaid rent by entering a tenanted property without notice, seizing goods and selling them.  A few months on, it is now possible to comment on how CRAR is bedding in in practice.

What is the most controversial element of CRAR?

The key change is that the tenant must now be given seven clear days’ notice in writing of the intention to enter the premises to seize goods. This is intended to give the tenant an opportunity to negotiate or take legal advice, but many feel it simply gives the wayward tenant an opportunity to remove valuable items. Where there is a particular reason to believe it is ‘likely’ that the goods will be disposed of, the landlord may apply to the court for permission to give shorter notice. However, there is no doubt that the new regime has ‘rebalanced’ the rights of tenants and landlords towards the tenants in many respects.

When can CRAR be used?

The scope of CRAR is much narrower than that of its predecessor. Perhaps most importantly, it does not apply to leases of mixed residential/commercial properties. Any use of the premises for residential purposes (unless such use is a breach of the lease) will prevent CRAR from being an option for the landlord.

One further major change is that CRAR may only be used on a lease which is “evidenced in writing”. A purely oral lease is not within its scope. There is, however, no need for the lease document to be signed to allow CRAR to bite. Precisely the extent to which a lease must be evidenced in writing – on the spectrum between ‘back of an envelope’ scribble and fully drafted lease – has yet to be tested in the courts.

Prior to 6 April 2014, landlords were able to levy distress in respect of any sum due under a lease which was 'reserved as rent’. This led to the practice of commercial leases describing other monies due to be paid by the tenant under a lease (e.g. service charge, insurance etc) as 'rent'. However, CRAR may only be used to recover true ‘rent’, i.e. “the amount payable under a lease (in advance or in arrear) for possession and use of the demised premises”, together with interest and any VAT. No sum in respect of rates, council tax, services, repairs, maintenance or insurance may be recovered through CRAR. Where there is any difficulty in identifying the true ‘rent’, this is taken to be so much of the total amount payable under the lease as is “reasonably attributable to possession and use.”  Of course, these provisions raise i) the possibility of a dispute over what is indeed “reasonably attributable”, and ii) the likelihood of struggling tenants ‘playing the system’ by prioritising rent payments over service charge and insurance payments.

Unlike distress, there is also a minimum amount before CRAR can be exercised: specifically at least 7 days rent must be due both at the date notice of enforcement is given, and at the date the goods are seized.

How is CRAR exercised?

In brief, once 7 days rent is due, the landlord is free to give notice of his intentionto exercise his CRAR rights. This notice must contain a range of prescribed information, as set out in Taking Control of Goods Regulations 2013 at Regulation 7. Once served, the notice is valid for 12 months from the date of delivery.

On receipt of the notice, the tenant may choose to take advice, to pay up, or negotiate with his landlord. If he considers that the CRAR procedure should not have been invoked, there is scope to apply to have a notice set aside, or to apply for an order to stay enforcement. However, surprisingly, the grounds on which it would be appropriate for the courts to exercise this power have not yet been specified in statute, nor have there yet been any reported cases. No doubt the courts would exercise this power readily if there had been some plain mistake (e.g. the property was residential; the outstanding rent was less than 7 days); what remains to be seen is what test the court would apply if the debt was resisted on a more substantive ground.

Under CRAR, only Certificated Enforcement Agents are permitted to seize goods belonging to the tenant to recover rent arrears. They can enter through an open or unlocked door or other normal means of entry on any day of the week between 06:00 and 21:00 (or the tenant’s normal business hours if different). Only goods belonging to the tenant on the demised premises may be seized. The Certificated Enforcement Agent may not take control of goods with a value greater than the rent owing plus the costs, and he must give the tenant a valuation of the items seized.

Should the seized items go to sale, they must be sold at public auction (unless a court order is obtained to permit an alternative method of sale) and seven clear days' notice of the sale must be given to the tenant.

It is notable that these provisions create a ‘minimum timeframe’ for CRAR of 21 days: 7 days’ arrears must build up, followed by 7 days’ notice of the landlord exercising his right to use CRAR, and 7 days’ notice of sale. This is significantly slower than distress, which could in theory be complete within 6 days: 1 day of arrears and five days’ notice of sale.

For full details of the process, please refer to the originating legislation: The Taking Control of Goods Regulations 2013, and the Tribunals Courts and Enforcement Act 2007 (especially Sch.12).

What are the alternatives to CRAR?

As can be seen above, CRAR is a slower process than that of distress, and lacks the latter’s element of surprise. It also is more limited in scope, particularly in its exclusion of mixed uses properties. In reality, many landlords are choosing other more familiar remedies, such as pursuing a guarantor, serving a statutory demand, issuing a debt claim or forfeiting the lease.

Landlords should note that the exercise of CRAR will waive the right to forfeit in respect of the arrears which are enforced.

What changes should landlords be making to their leases as a result of CRAR? 

Predictably, CRAR contains anti-avoidance provisions: a tenant cannot agree to limit the protection it confers, although a landlord could in theory give up his CRAR rights. However, there are some steps that a landlord can take to improve his position.

For mixed-use premises, landlords should consider separate leases of the residential and non-residential parts, so that CRAR can be used to recover the latter rent. Landlords should also ensure that any lease is in writing (a sensible step in any event).

As discussed above, since CRAR may only be used to recover true ‘rent’, and in a poorly drafted lease there might be scope for a dispute what portion of the overall sum due is “reasonably attributable to possession and use”. A prudent landlord would therefore ensure that any new lease clearly apportioned the sum payable under the lease between true ‘rent’ and other heads such as service charges, to avoid any potential satellite litigation.

Inevitably, it seems that landlords are also pricing the increased difficulty in recovery into their leases, demanding higher rents, as well as increasing the use of guarantees, rent deposits and performance bonds.

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