What Commercial Rent Arrears Recovery Means

What do you do if you are renting out commercial property and your tenant falls into arrears? What you are legally entitled to do has changed recently – and we want to ensure you know about these changes should this situation happen to you.

The new Commercial Rent Arrears Recovery (CRAR) rules were implemented on 6 April 2014, and they replace the ancient “right of distress”.

Right to Enter

The right of distress allowed landlords to enter a leased property without giving notice and seize goods owned by the tenant, which could then be sold to recover rent arrears.

CRAR modernises the right of distress, by making the procedure much stricter and attaching conditions which must be met before CRAR can be used.

The use of CRAR is only for leases of commercial premises, and it can only be used if that lease is in writing. It does not apply to residential buildings, or buildings where part of the premises is being used for residential purposes, such as shop with a residential flat above it where both the shop and the flat are included in the same lease.

At Least Seven Clear Days’ Notice

The tenant needs to be at least seven days in arrears before CRAR is used, and the tenant must be given seven clear days’ notice of the landlord’s intention to use CRAR. The rules can only be carried out by certified enforcement agents.

Enforcement agents can only enter premises between the hours of 6am and 9pm (which is different from the previous situation which allowed entry at any time).

If the landlord thinks a tenant might deliberately remove goods during the notice period, he or she can apply to the Court for a shorter notice period.

CRAR Application and Effect

CRAR can only apply to the main rent, VAT and interest. It doesn’t apply to other payments reserved as rent, such as service charges or insurance contributions.

The new rules include guidance on which of the tenants’ goods can and can’t be seized and, once they have been seized, the tenant must be given an inventory of those goods as soon as possible. The seized goods need to valued within seven days, and then sold or disposed of for the best possible price that can reasonably be achieved.

In addition, by exercising CRAR, a landlord waives the right to forfeit – if the landlord had that right.

Practical Implications

CRAR gives greater protection to tenants. Renting out property is always a gamble, for both the landlord and the tenant, but the new rules set clear limits to the seizure of property, and clarity is always something we welcome.

In summary, the change is not good news for landlords. Landlords will be concerned that the obligation to provide notice to the tenant will give the tenant ample opportunity to remove any items of value from the premises before the enforcement agent arrives thus thwarting the landlord’s attempt to recover the arrears by this method. Whilst the landlord could apply to the court for permission to give less notice, that could prove an expensive and time consuming option.

We anticipate that, as a result of the change, more and more landlords will be seeking redress via alternative methods such as making withdrawals from rent deposits or claims against personal guarantors of the tenant. Landlords will need to be more vigilant than before to ensure that any tenant is providing adequate security for the performance of their obligations in the lease.

The CRAR procedure is set out in the Tribunals, Courts and Enforcement Act 2007 and the Taking Control of Goods Regulations 2013. If you would like further information, please contact Rob Fawcett today on 01903 706967.