A landlord may be faced, in the course of managing its property, with unpaid rent by a tenant. In commercial tenancy arrangements, a specific recovery regime exists which enables recovery of arrears through enforcement action. This is the commercial rent arears recovery process (known as CRAR).
Here we'll be discussing:
What is commercial rent arrears recovery?
Background to the law
CRAR is a specific method of enforcement action relevant to commercial property rental arrears, which came into effect on 6 April 2014.
The commercial rental arrears recovery process provides for a landlord to instruct agents tasked with enforcement to take over control of a tenant’s assets and sell them to effect recovery of an equal value to the rent arrears.
CRAR sets out a staged process within which various notices are required to be sent by the enforcement agents to the tenants. Although there is no specific form of notice, the CRAR does provide for a set of minimum information to be included.
Application of CRAR
Circumstances in which CRAR does and doesn’t apply:
| CRAR doesn’t apply | CRAR applies |
|---|---|
| Tenancy at sufferance (which is created when a tenant stays in occupation of a property beyond the expiry of the lease, without the landlord’s consent). | All tenancy arrangements for ‘commercial’ premises. |
| Licences (such as licences to occupy). | It only applies at the premises which is covered by the lease. |
| Such tenancies must be in writing – specifically the CRAR provides that if the tenancy is not in writing the CRAR cannot be exercised. | |
| ‘Tenancies at will’. |
It should be noted that there are specific rules that apply to agricultural holdings.
Definition of a commercial lease
As noted above, CRAR only applies to commercial leases. Commercial leases, for the purposes of CRAR, are leases in which they are not let or occupied for the purpose of a residential dwelling.
Landlords should be mindful of the use rights granted to tenants, which could inadvertently risk the lease of the premises not being defined as a ‘commercial’ and remove the ability to bring enforcement action under CRAR. Specifically, the term ‘as a dwelling’, as referred to above, is defined in law and applies where the lease allows either of the following:
- occupation only as a dwelling; or
- occupation as a dwelling together with another use.
It is important to note that residential lettings will be in scope (and a headlease would not be taken out of scope) if they are granted in breach of the terms of a superior lease. This is the case to prevent a commercial tenant from defeating the CRAR regime by simply permitting a third party, in breach of the superior lease, to occupy as a dwelling.
Advantages and disadvantages of CRAR
| Advantages | Disadvantages |
|---|---|
| Can be quick and efficient means of recovering arrears. | For landlords, it will have the effect of waiving any right to forfeiture (meaning the right to bring the lease to and end) that may have arisen. Given this, prior to taking action as part of the CRAR process, a landlord should take specific advice and explore: |
| Limited costs as the cost of enforcement is borne by and recovered from the tenant as part of the enforcement recovery. | In addition, as the tenant is required to be given seven days’ notice of the potential enforcement action, it provides the tenant with the opportunity to dispose of or ‘hide’ its assets prior to seizure. |
CRAR letter and proceedings: what is the process?
Before a CRAR can be exercised
The following conditions must be met before a CRAR can be exercised:
- the tenant must be in arrears before giving notice of enforcement
- the amount of arrears claimed must be certain or capable of being calculated with certainty
- amount of arrears claims meets minimum amount set out in the legislation – this is currently stated to be seven days’ rent; and
- arrears must still be unpaid at the point when the enforcement action takes effect (being the date the goods are taken).
Who can exercise the CRAR
The landlord is the main party who can exercise the CRAR. The ‘landlord’ is defined within the legislation as the only person entitled to the immediate reversion to the lease. This means that it can be exercised by a landlord whose immediate tenant has failed to pay the rent (not a sub-tenant).
It is not always the case that there is one distinct landlord. Where there is joint ownership, any one of the joint owners can exercise the rights under CRAR.
There are some other circumstances where a party other than the landlord may exercise the CRAR. This includes:
- a lender or mortgagee (normally a bank or building society); and
- a court receiver.
A mortgagee may also enforce CRAR, but only where:
- notice has been given by the mortgagee of its intention to take possession; or
- the lease is binding on a mortgagee.
Where a receiver has been appointed in respect of the landlord’s interest, this receiver may exercise the CRAR in place and in the name of the landlord.
Stages
There are three stages to the CRAR as follows:
- The compliance stage – the seven-day letter (enforcement notice) provides notice of arrears and offers the tenant a seven-day period to pay the arrears;
- Enforcement stage – if the tenant fails to pay within the seven-day period, the enforcement officer seeks to take control of property of the tenant equivalent to the value of the rent owed; and
- Disposal stage – the seized goods are typically sold at public auction.
Distribution
The proceeds of the sale of any assets seized must be used to pay the amount due. The amount due is calculated as follows:
- the debt remaining unpaid (or such lower amount if the landlord agrees to accept this in full payment of the amount due); and
- costs recoverable in exercising the CRAR.
Any surplus of the proceeds after payment of the outstanding amount must be given to the tenant.
Time limits for enforcement
Within 12 months of the date of the enforcement notice, the enforcement agent must exercise the recovery. This period could be extended with a court order. The court will extend the period if it can be satisfied that:
- the application to the court has been made by either the appropriate agent or the landlord;
- there hasn’t been a previous extension of the time; and
- the court considers that the landlord or the enforcement agent have reasonable grounds for not having taken control of the goods during the initial 12-month period.
The 12-month time limit will be deferred if the enforcement agent and the tenant enter into a repayment agreement. If there is a breach of the repayment agreement, the 12-month period will begin to run from the date of the breach of the lease.
CRAR and eviction
Forfeiting the lease allows a tenant to regain control of the property, but it does not recover outstanding rent. If a landlord chooses to forfeit the lease, it will lose the ability to recover the tenant’s assets to settle the arrears in accordance with the CRAR process.
There are, however, some advantages to forfeiting. Normally, there is no requirement to give notice. Furthermore, if the tenant continues to fail to pay rent, the landlord will want control of the property as soon as possible to be able to re-let and once again gain a rental income.
Following the end of a lease, CRAR can only be used where:
- control of the goods had already been taken prior to the end of the lease; and
- the rent was due and payable prior to the end of the lease and all of the following apply:
- the lease was not forfeited;
- it is within 6 months of the end of the lease;
- the rent was due from the tenant and that person is still in possession of part of the premises;
- any new lease under which the tenant remains under possession, is a commercial premises; and
- the landlord is unchanged.
A landlord who is owed rent may consider both forfeiture and the CRAR process. Forfeiture, if possible, allows the landlord to get its property back quickly and, indeed, even the threat of forfeiture may force the tenant to pay the arrears. CRAR could be a quick means of getting rent paid and ensuring the tenant continues to occupy the property and pay rent going forward, and also allows the landlord to include its costs within the recovery of the rent.
What goods can be taken following the CRAR procedure and what’s the process?
Only goods owned by the tenant as stated within the lease and on the demised premises (i.e. the property covered by the lease) can be seized under CRAR and they can only be removed by Certificated Enforcement Agents (CEAs) during 6:00am and 9:00pm (or the tenant’s normal business hours, if they’re different) on any day of the week. Goods owned by a sub-tenant or other third party are excluded and it’s also worth highlighting that the tools of the tenant’s trade (up to an aggregate value of £1,350) are exempt from CRAR but beyond that, CRAR can apply to such tools.
If the seized items go to sale, they are required to be sold at a public auction and the tenant must be given seven clear days’ notice of the sale (shorter if the goods seized are perishable) – unless the landlord or a CEA can satisfy the court that there’s a risk of the goods being removed and thereby have the notice period dispensed with.
Alternatives to CRAR
It might be worth a landlord considering whether one of the alternative options below is preferable or better suited to the situation instead of following the CRAR procedure, but it will be very much dependent on the circumstances.
Statutory demand
A commercial landlord could think about serving a statutory demand on the tenant to recover rent owed. The amount demanded and owed by the tenant must be more than £750 (if the tenant is a company) or more than £5,000 if the tenant is an individual.
The tenant then has three weeks to pay the outstanding rent and if they don’t, the landlord can issue a petition to wind up the tenant's business, which can often result in the commercial rent arrears being paid quickly.
The advantages of serving a statutory demand are that it’s a relatively cheap and straightforward process, but there’s a risk that the tenant might react by applying to the court for an injunction preventing the landlord from beginning full insolvency proceedings if it’s believed they have genuine grounds to dispute the debt.
Forfeiture
We’ve touched upon forfeiture as a potential option above under ‘CRAR and eviction,’ along with its advantages and disadvantages, and you can read more about the topic in depth in our article on Forfeiting a Commercial Lease.
Draw down on the rent deposit
If a rent deposit deed was entered into at the time of the lease agreement, the landlord may draw down from the rent deposit paid by the tenant. The landlord will need to give the tenant notice that the draw-down is being made. The tenant would also be obliged to put further funds into the rent deposit account to replenish those funds which have been drawn down.
Whilst this option can often be a useful method to recover a proportion of the commercial rent arrears due, the main disadvantage for the landlord is that it’s unlikely to be the full amount.
Issuing court proceedings
Whilst a landlords can of course issue court proceedings to recover the tenant's rent arrears and it may prove advantageous in terms of the ultimate result, the downside to this is that court proceedings are usually a last resort because it can be such a lengthy and expensive process to navigate.
Recovering unpaid rent from a guarantor
Where a third party in the form of a person or a company has agreed to act as a guarantor for the tenant's covenants under the lease, the landlord has the right to think about pursuing them if the tenant is in commercial rent arrears. Depending on the provisions contained within the lease and the guarantee given by the guarantor, the landlord would usually issue court proceedings to enforce the guarantor's obligations. Again, whilst this might ultimately prove successful in recovering the rent arrears, it could prove financially cumbersome and it might take a number of months to obtain the money.
Summary
Obtaining the right advice from a commercial property dispute lawyer is highly recommended if you are a landlord whose tenant has accrued rent arrears. Whilst CRAR has many advantages, there are very specific steps that must be followed and notice to the tenant to factor in, as well as the need to employ CEAs to actually seize control of the tenant’s goods if this becomes necessary, so it might be the case that one of the alternatives suggested in this article are a better fit for your specific situation. Our team will discuss all of the options with you and will help you to decide which course of action is the best – and most cost-effective – in the circumstances.
