CRAR - distressing times

Posted: 06/03/2013

It seems that for every bit of good news published there is an equal amount of bad news to dampen the spirits. Landlords may be heartened by recent insolvency figures. In the fourth quarter of 2012, liquidations were down 10.7% and other corporate insolvencies (including receiverships, administrations and CVAs) were down 14.2%, compared with the same period a year ago. However, with some high-profile retail insolvencies already this year, landlords may not want to hear that their remedies for recovering commercial rent arrears are to be restricted.

In its response to the Ministry of Justice consultation, Transforming Bailiff Action, the government confirms that it will press ahead with the abolition of distress and the introduction of commercial rent arrears recovery (CRAR). It is expected that Part 3 of the Tribunals, Courts and Enforcement Act 2007 (the 2007 Act), which establishes CRAR, will be brought into force in April 2014, but with some amendments.

The government has indicated that the necessary amendments will be put forward "as soon as parliamentary time allows", with a view to the final regulations being published this summer.

Why is this important?

Distress is a common law "self-help" remedy allowing landlords to recover arrears of rent by seizing a defaulting tenant's goods and selling them. There is no need to give notice or obtain permission from the court before exercising the remedy. Effectively, it allows landlords to recover arrears ahead of other creditors and is a quick and efficient remedy where the tenant has valuable goods on the premises. The new remedy of CRAR is narrower in scope. While it still allows goods to be removed and sold, new checks and balances are introduced to protect tenants.

What landlords need to know about CRAR

Commercial premises: As its name suggests, CRAR only applies to rent arrears due under leases of commercial premises. It cannot be used for premises that are either occupied or let as a dwelling. That could include mixed-use premises. Take a lease of a shop with a flat above, for example. CRAR will not be available if the flat is used (or the lease requires it to be used) as a dwelling. However, if the lease does not require the flat to be used as a dwelling and the tenant actually uses it for storage, it will be a lease of commercial premises.

What if commercial premises are used as a dwelling in breach of the lease? Sections 75(4) and (5) of the 2007 Act deals specifically with this point. Such use will not take the premises outside the definition of commercial premises and CRAR will still be available.

Written tenancies: CRAR only applies to a "tenancy" evidenced in writing. CRAR can therefore be used for written tenancies at will but not for licences to occupy.

Basic rent: CRAR will only be available for arrears of "basic" rent, that is rent paid by the tenant for "possession and use" of the premises. VAT and interest on the "basic" rent can also be recovered.

CRAR will not, however, be available for service charges, insurance charges, rates etc (even if such sums are reserved as rent). For such sums, landlords will have to rely on other remedies to recover arrears, including drawing on a rent deposit deed or calling on a guarantor. The wider use of these types of security is likely. Of course, a landlord can bring a debt claim or forfeit the lease, but in the current economic climate, how many landlords want empty property on their hands? Landlords also need to be aware that recovery of arrears of inclusive rents could be problematic.

Prior notice: Controversially, the landlord will be required to serve "notice of enforcement" on the tenant before sending in the bailiffs. The government confirms in its consultation response that the notice period is to be reduced from 14 days to seven clear days. This is in response to landlords' concerns that a notice period will give tenants time to evade enforcement by removing the goods from the premises. Landlords may feel that the government has not gone far enough, arguing that the existence of any period of notice seriously restricts the usefulness of CRAR.

Minimum level of arrears: A landlord can only recover rent arrears above a minimum level, which is currently unconfirmed. The majority of respondents to the consultation did not agree with the proposed period of seven days rent arrears. It appears that the period will not be set beyond seven days but could be reduced as there were strong arguments made for retaining the existing one-day minimum. The government will work with creditors and the enforcement industry to settle on an appropriate minimum.

Enforcement agents: Only an enforcement agent authorised in writing by the landlord can seize the tenant's goods. Landlords will no longer be able to distrain themselves. The government has confirmed that more information will need to be given by the landlord to the enforcement agent, including an indemnity from the landlord against action being taken on his behalf in error.

Extended enforcement hours: Enforcement under CRAR can take place on any day of the week; this is wider than distress, which cannot be exercised on a Sunday or public holiday.

What next?

Look out for further regulations and start preparing for CRAR. In particular:

• where a lease to be granted today is likely still to be in place after CRAR comes into force, carefully consider what security should be taken to protect against rent arrears;
• pay attention to the drafting of the permitted use clause in leases of mixed-use premises. Consider whether it would be better to let the commercial and residential elements separately;
• remember that CRAR may not be available for inclusive rents. Landlords will only be able to recover the proportion that is reasonably attributable to the possession and use of the premises. This could be difficult to ascertain in practice and it may be wise to record how the inclusive rent has been calculated;
• leases will have to be updated to remove references to distress for rent.  

Finally, while landlords' remedies for recovering commercial rent arrears will be narrower, it is worth remembering that the use of distress to recover arrears is decreasing. Landlords want to keep trading tenants in their premises and distraint can leave the landlord with unwanted empty property. Landlords are now much better at actively monitoring and managing arrears and may find that serving a CRAR notice alongside a letter before action may prove effective in persuading a tenant to pay up.

This article was published in Estates Gazette in March 2013.

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