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Commercial Rent Arrears Recovery

12/06/2014

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United Kingdom

On 6 April 2014, a commercial landlord's remedy of distress was finally abolished and replaced by a new (more tenant friendly) regime: Commercial Rent Arrears Recovery.

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First appeared in Informer: Real Estate Newsletter - Spring/Summer 2014

On 6 April 2014, a commercial landlord's remedy of distress was finally abolished and replaced by a new (more tenant friendly) regime: Commercial Rent Arrears Recovery ("CRAR"). CRAR is a method of enforcement to recover rent arrears relating to commercial property and allows a landlord to take control of and sell a defaulting tenant's goods.

No amendments are needed to existing leases to enable landlords to use CRAR and it is not possible to contract out of CRAR in a new lease (although it is possible to agree to limit CRAR). Neither can landlords specify in a new lease an alternative procedure to be taken once the tenant is in arrears. CRAR is similar to distress in many ways, but there are some important differences:

DISTRESS

CRAR

SIGNIFICANCE

Prior Notice

Premises can be entered without warning and goods seized.   

7 clear days' written notice must be given to the tenant by the landlord of the intention to use CRAR before entry to the premises and seizure of goods can take place. The notice is in prescribed form and must contain certain specified   information. 

There is a risk that tenants may remove valuable goods from the premises in the 7 day notice window. The court has the power to shorten the notice period in certain   circumstances (e.g. if there is a valid concern that goods will be removed).

Place for service of notice

No notice   required.

A place where the tenant carries on business or its registered office. No requirement for the notice to be served at the demised premises.

Serving the notice on a place other than the premises may avoid tipping off the tenant   immediately that seizure of their goods is intended.

Arrears

Goods can be seized to recover arrears of all sums reserved as 'rent' in the lease (e.g. service charge / insurance).

Goods can be seized only to recover arrears of principal rent, VAT and interest.

Tenants may adopt the tactic of paying to the landlord the principal rent, in preference to other sums due under the lease, to prevent the landlord from being entitled to exercise CRAR.

Arrears Threshold

Goods can be seized to recover any amount of outstanding arrears.

There must be a minimum of seven days' of rent arrears (less interest, VAT and any set-off the tenant is entitled to claim) at the time the notice is served and when CRAR is exercised.

Tenants may pay a proportion of the arrears in the 7 day notice window to bring the arrears below the threshold. Tenants may challenge the threshold if they believe they are entitled to any set-off.

Who can enter the premises to take control of goods?

Landlords or bailiffs between sunrise and sunset on any day of the week other than Sunday.  

A certified enforcement agent authorised by the landlord. The enforcement agent must   exercise CRAR within 12 months of the date of the notice and can only enter the premises between 6am and 9pm or the tenant's business hours (if outside these limits) through a door or usual means of entry using "reasonable   force".

The need for prior written authorisation may slow the process down.

What goods can be taken control of?

Goods on the premises including, in some circumstances, those belonging to third parties,   but excluding trade goods and goods in use.

Only goods belonging to the tenant and those not in use. Trade goods are exempt up to   the value of £1,350. Agents can either:

(i) secure the goods at the premises;

(ii) remove the goods and secure them at a different location; or

(iii) enter into a controlled goods agreement with the tenant.

A smaller pool of goods can be seized under the CRAR regime.

Notice of Sale

Goods may be sold after 5 days. There is no required method of sale.

7 clear days' written notice of sale must be given to the tenant unless in that time the goods will be rendered unsaleable / reduce significantly in value.

The goods can be sold or disposed of at public auction for the best price that can reasonably be obtained. Any surplus funds are to be returned to the tenant.

There will be a further delay before the seized goods can be sold.

Subtenants

Where a head tenant is in rent arrears, a landlord can serve a notice (s6) on its tenant's subtenant requiring the subtenant to pay its future rent to the landlord and not the head tenant with immediate effect.

The previous procedure remains available to a landlord but the notice will only take effect 14 clear days after it has been served on the subtenant.

The notice period is intended to level the playing field for subtenants. Previously, a   subtenant could receive notice in circumstances where it was too late to   reverse the payment of future rent to the head tenant (e.g. where a tenant had pre-authorised a bank transfer and there was not time to reverse   payment). As the notice had "immediate effect" such a subtenant would be liable for that quarters rent to the landlord, despite already   having paid rent to the head tenant. The 14 day notice period will lessen the   likelihood of this situation occurring.

Effect on forfeiture

Will waive right to forfeit

Will waive right to forfeit

Landlord will need to bear in mind that any right to forfeit will be lost if CRAR is exercised, and consider how they will deal with any other existing breaches of the lease once the right to forfeit has been waived.   

Faye Hyland, Solicitor, Property Litigation Group

Hannah Ingham, Associate, Property Litigation Group

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