We cover a broad range for commercial landlords and tenants, for a variety of clients in the public, private and voluntary sectors, whether acting for banks, charities, private companies or individuals – all of whom are assured of the same quality of service and professional handling of their case.
COMMERCIAL RENT ARREARS
AJ Angelo Solicitors can provide assistance with retail and commercial leases in a number of capacities. It is important to seek legal advice about these commercial matters, before entering a lease, as it has the potential of becoming a negative impact on your cash flow at a later stage. We offer practical advice about lease and CRAR, so that our client, whether a landlord or tenant can make an informed decision.
AJ Angelo Solicitors can also assist you with:
- Drafting and reviewing retail and commercial leases
- Negotiation for the terms of the lease (including rent, transfer options, duration, exit and renewal options)
- Sub-letting of premises
- Insurance advice and assistance identifying the most suitable business insurance opportunities
- Possible dispute resolution
COMMERCIAL RENT AREARS RECOVERY (CRAR)
In April 2014, the landlord’s right of distress against his tenant to recover arrears of rent was abolished and for commercial premises it was replaced by the statutory regime for Commercial Rent Arrears Recovery (CRAR). The relevant legislation that brought about these changes is the Tribunals Courts and Enforcement Act 2007 and the more recent Taking Control of Goods Regulations 2013.
For hundreds of years, landlords have had the common law right to “levy distress” when a tenant failed to make payments due under a lease in time. “Distress” involved the landlord entering the tenanted premises to take control of and sell the tenant’s goods, so that they paid the outstanding arrears. This law was repealed and replaced in April 2014 with a new enforcement process called Commercial Rent Arrears Recovery (or commonly now called “CRAR”).
The right for a landlord to enter the tenant’s premises to seize certain goods, sell them and set the sale proceeds against a lease debt still exists. However, the way in which that power can now be exercised has changed. Many landlords now feel that this is a less powerful weapon than distress. We set out below some of the main changes that commercial landlords, tenants and their advisers should take careful note.
The debt must be owed under a written lease
One major change is that CRAR can only be exercised when the land is held under a lease, and the lease must be in writing. This means that CRAR now applies to written Tenancies at Will, but not to licences or undocumented tenancies. CRAR does not apply to oral tenancies or licences, irrespective of whether written or not.
It should be noted that for the same breach CRAR is exercised, a landlord cannot forfeit the lease. CRAR will waive the landlord’s right to forfeit in respect of the arrears which are enforced.
The debt owed must be rent
Before 6 April 2014, landlords were able to levy distress for any sum due under a lease which was ‘reserved’ as rent. This led to the practice of commercial leases referring to other monies due to be paid by the tenant under a lease (e.g. service charge, interest, and insurance contributions) as a ‘rent’.
This is no longer permissible, because CRAR can only be used to enforce non-payment of rent (i.e. the amount payable by the tenant for possession and use of the premises) and any VAT on the rent. Other sums, for example, service charges, rates, council tax, repairs, maintenance or insurance are outside the scope of CRAR, even if the lease refers to such sums as ‘rent’.
Although good news for tenants, this is bad news landlords. Where a tenant is in default of rent and other sums such as service charge, the landlord will either have to use CRAR for the unpaid rent and another enforcement mechanism for the other unpaid sums, or decide not to use CRAR at all. Many landlords have been dissuaded from using CRAR, in circumstances where the tenant is in default of rent and other sums. This is where we help clients decide what options they have, from the outset.
CRAR is only available in respect of purely commercial premises
As with distress, CRAR can be used for tenanted commercial premises. However, these changes are more limited than distress. Whereas a landlord could levy distress over mixed-use premises, CRAR can now only for let premises and used solely for commercial premises. CRAR is not an option for premises for residential purposes (unless such use is a breach of the lease).
Notice of intention to exercise CRAR
Gone are the days when a bailiffs would turn up at the premises unannounced, giving the tenant no time to move valuable assets away from the premises. This effective debt recovery tool with the element of surprise is no longer available.
The most significant change introduced is that the landlord is now required to give at least seven (7) clear days’ notice to the tenant of the intention to exercise CRAR. The Court is able to order that a shorter period of notice is given to the tenant if the Court is satisfied that the tenant is likely to move goods to other premises to escape the effect of CRAR.
The landlord’s notice must be served on the tenant by an enforcement agent and must contain certain prescribed information. The impact of the landlord’s requirement to give the tenant notice of his intention to exercise CRAR will differ depending on the nature of the tenant. For tenants who have the means and intention to pay, but have failed to do so for administrative reasons, the seven (7) days’ notice is helpful and should prevent the enforcement agents. For more unscrupulous tenants, who have no intention to pay, the notice period may alert them and give them the chance to relocate assets off site.
Out with ‘certificated bailiffs’ and in with ‘enforcement agents’
Previously, distress was levied by “certificated bailiffs” who were bailiffs that had been certified as appropriate for the role by the local County Court. There is now greater regulation over persons authorised to enter premises to take control over goods. CRAR must be carried out by an “enforcement agent”.
If an enforcement agent tries to exercise CRAR on behalf of a landlord, you should request to see their form of authorisation to satisfy yourself that they are suitably authorised to exercise CRAR. If the authorisation has not come from the tenant’s immediate landlord, the enforcement agent cannot exercise CRAR.
New minimum amount of rent owing
CRAR has introduced a number of conditions relating to the amount owed by the tenant, each of which must be satisfied before CRAR may be exercised. One of the main conditions is that CRAR places greater restrictions on the type of goods that can be seized by an enforcement agent, but limits the value of the tools of the trade over which CRAR cannot be exercised to £1,350. This gives a tenant faced with an enforcement notice the option to pay a proportion of the arrears to bring the outstanding amount below the seven (7) day minimum, thereby preventing the landlord from proceeding to take control of its goods.
Changes to the practicalities for taking control of and selling goods
The new rules have introduced a number of minor practical changes to how enforcement agents can enter premises.
Sanctions for a breach of the legal requirements for CRAR
Neither the landlord nor his enforcement agent will become a trespasser, if the CRAR provisions are not strictly adhered to. However, if a tenant believes that the CRAR provisions have been breached the tenant could bring a legal claim against the landlord or the agent.
When dealing with any such claim, the Court could Order that any goods seized are given back to the tenant and/or that damages are paid for any loss suffered by the tenant because of the breach. A defence is available to an enforcement agent if they had a reasonable belief that the CRAR provisions were not being breached or that they written instruction from the landlord was not defective.
By the same token, it is open to a landlord to bring a claim against a tenant for obstructing an enforcement agent and/or interfering with controlled goods without lawful excuse. A tenant found guilty, could be liable to imprisonment of up to 51 weeks, or be fined or both.
The new rules allow a landlord to levy charges against the tenant for the costs of exercising CRAR. A fixed fee is permitted for each stage of the process (i.e. the compliance stage, enforcement stage and sale stage) and in some circumstances, a percentage of the value of the goods over which control has been taken can also be recovered.
Tenant’s right of appeal
The tenant has the right to apply for a Court Order that no further step may be taken under CRAR, without further Order of the Court, in relation to the rent claimed.
The CRAR regime seeks to rebalance a landlord’s rights and put them back in to line with other creditors. While a tenant will no doubt welcome these changes, a landlord will be concerned by the time, cost and delay they will have to suffer when seeking to recover the rents that a tenant agreed to pay in its lease.
New procedure for re-directing rent from sub-tenants
As an alternative to distress, landlords of sub-let premises to serve notice on any sub-tenant requiring the sub-tenant to re-direct its sub-lease rent and pay it to the superior landlord and not to its immediate landlord. Under the Head Lease the superior landlord still has this right, when his immediate tenant is in default.
This right survives under the new legislation. However, a new notice procedure is introduced. A notice to pay rents directly to the superior landlord only takes effect fourteen (14) days after it is served. This will give rise to timing considerations where rent payments under sub-leases are structured differently and/or made at different times to the Head Lease.
The table below is a brief summary of the main differences between distress and CRAR, this list is not exhaustive, but purely for illustrative purposes only: