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What is today's blog about?
This week we will take a look at Commercial Rent Arrears Recovery (CRAR) - essential knowledge for surveyors and RICS APC candidates involved in property management.
Essential reading for RICS APC and AssocRICS candidates.
You can also listen to our CPD podcast on Anchor for more free AssocRICS and RICS APC training and support.
Why is this relevant?
Surveyors often need to advise landlord clients whose commercial tenants owe rental arrears. Extreme care is needed as some methods of debt recovery can lead to a landlord waiving their right to forfeit the lease on the basis of the rental arrears.
In all cases, the objective is to secure payment of the arrears in full, whilst also ensuring ongoing occupation of the property by a sufficiently strong covenant. A key method of doing this is Commercial Rent Arrears Recovery, also known as CRAR.
What is the first step when a tenant owes rental arrears?
The first step is usually to send a letter before action to try to encourage the tenant to pay the arrears. A without prejudice save as to costs letter could also be served at a reduced settlement, depending on the specific circumstances.
Another key issue will be to consider whether the landlord wishes to forfeit the lease and what the risks and rewards around this may be:
Does the landlord want possession?
Can the premises be re-let easily and at what rent?
Could possession facilitate redevelopment plans?
Are there any guarantors/former tenants to pursue?
What is the reason for the debt?
We will discuss forfeiture in further detail in a future blog article.
What methods of recovery exist?
Suing the tenant by issuing Court proceedings
Serving a statutory demand
Pursuing bankruptcy/winding up proceedings
Pursuing any subtenants
Pursuing any former tenants/guarantors - remember the Landlord & Tenant (Covenants) Act 1995 will have an impact here
Drawing down a rent deposit
What is CRAR?
CRAR is a statutory procedure which replaced the ancient law remedy of Distress for Rent. It came into force in April 2014 and it remains a hot topic in RICS APC interviews.
Why was CRAR introduced?
Distress for Rent was a cheap, quick and easy way to collect rent arrears. However, sending in the bailiffs without a Court order, warrant or even due notice was considered draconian and a breach of human rights.
CRAR was designed to be fairer to tenants and is far more limited in it's scope.
What changes were made under CRAR?
Bailiffs became known as 'Enforcement Agents' and 'Distress' became the taking control of goods. Only Enforcement Agents can take action to recover commercial rent arrears by taking control of goods.
CRAR also only applies to written tenancies of commercial premises. It cannot be used for the commercial element of mixed-use (commercial and residential) premises, unless the commercial and residential parts are held by way of separate leases.
What rent can be recovered under CRAR?
Principal rent for possession and use of the premises, plus any interest and VAT. This does not include any sum in respect of rates, council tax, services or insurance, even if they are reserved as rent in the lease. This is important to remember when advising tenant clients in relation to any CRAR proceedings they may face.
In this respect, the landlord will need to consider other action to recover other debts. This could mean having to serve a statutory demand or commence court proceedings, as outlined in the list above.
What notices must be served?
An Enforcement Agent cannot take control of goods until a formal notice has been served. The notice must be served, either by post, hand, fax or electronic communications such as email.
At least 7 working days’ prior notice must be given to the tenant. There also has to be a minimum amount of arrears before CRAR can be exercised, known as 'net unpaid rent', which is equal to 7 days' rent.
The landlord can also require subtenants to pay their rent directly providing that at least 14 days' notice is given.
This means that the 'surprise' element of the former Distress procedure no longer exists, as the notice period gives the tenant the opportunity to pay the arrears to prevent the Enforcement Agent turning up. However, in practice, it can introduce the risk of the tenant taking avoiding action to pay the debt.
Once notice has been served, the tenant may apply to Court to set aside or delay execution.
What happens next?
CRAR can be exercised between 6am and 9pm on any day of the week, or outside of those hours if the premises are open for trade.
When the Enforcement Officer attends the property, the matter is at an end if the tenant pays the debt in full, together with the Enforcement Officer’s charges.
However, if this does not happen then the Enforcement Agent can:
Secure the goods on the premises
Remove them and secure them elsewhere
Enter into a Control of Goods Agreement with the debtor
What is a Control of Goods Agreement (CGA)?
A CGA is an agreement under which the tenant is permitted to retain custody of the goods, acknowledges that the enforcement agent is taking control of them and agrees not to remove or dispose of them, nor to permit anyone else to, before the debt is paid.
If an Enforcement Agent takes control of goods, they must provide the tenant with an inventory of the goods as soon as is reasonably practicable. The Enforcement Agent may not take control of goods after 12 months have expired from the date of the notice of enforcement.
If the CGA is breached, then at least 2 clear days' prior notice must be given before the Enforcement Agent can re-enter the property.
Under CRAR, goods that can be seized must be owned by the tenant. Goods owned by a sub-tenant or third party are not available for seizure. Tools of the tenant’s trade are also exempt up to an aggregate value of £1,350.
How are the goods sold?
In order to sell goods under CRAR, at least 7 clear days’ notice must be given by the Enforcement Agent of the date, time and place of the sale of the goods. The notice periods can be dispensed with where the landlord or Enforcement Agent can satisfy the court that the goods are ‘at risk’ of being removed.
If the tenant is in administration, there is a moratorium on starting or continuing legal processes against the tenant or it's property without the court’s permission or the administrator’s consent.
Does the tenant have a right of appeal?
The tenant has the right to apply to court for an order that no further step may be taken under CRAR, without further order of the Court, in relation to the rent claimed.
How can we help?