CRAR: A Distressing Development for Commercial Landlords?
Distraint for rent (also known as ‘levying distress’) was an ancient common law remedy available to commercial landlords, allowing them to seize a tenant’s assets to sell in order to recover rent arrears. This is not a process available to HMRC to recover unpaid taxes.
Distress allowed landlords, their agents and certificated bailiffs to enter the tenant’s premises and remove assets either to be held pending payment of the arrears, or to be placed for sale, entirely without notice to the tenant. Landlords could distrain for any sums treated as rent under the tenancy, including service charges, insurance and rates. There were few restrictions, other than that the tenancy must be current.
On 6 April 2014, Part 3 of the Tribunals Courts and Enforcement Act 2007 was finally implemented. Section 71 abolished the remedy of distress, and section 72 brought Commercial Rent Arrears Recovery (“CRAR”) into force.
CRAR replaces distress, and grants commercial landlords a statutory right to recover rent arrears using an enforcement procedure prescribed by law.
- CRAR applies only to commercial premises. Mixed use premises (where part is let or occupied as a dwelling) are now excluded from the scope of the legislation.
- CRAR applies only where the tenancy is evidenced in writing, that is to say, only in relation to a lease or tenancy at will. It does not apply where premises are occupied under licence.
- CRAR can only be exercised where there are at least 7 days’ arrears, and where the outstanding sums exceeds the value of 7 days’ rent as opposed to distress which could be levied from the first day the tenant fell into arrears,
- CRAR also applies only to ‘rent arrears’ (including VAT and interest), and not to any other sums due in respect of the lease. Landlords will have to commence court proceedings to recover unpaid rates and service charges incidental to the tenant’s occupation.
- Where distress could be levied entirely without notice to the tenant, under CRAR a minimum of 7 clear days’ notice must be given to the tenant prior to the seizure of any goods.
- In addition, a minimum of 7 clear days’ notice from the date of seizure must be given before the goods can be placed for sale. With distress, the goods could be seized without warning, with only 5 days’ notice required before sale.
- The seizure of goods under CRAR must be undertaken by a certificated bailiff. Landlords are no longer able to seize goods themselves.
What does CRAR mean for landlords and tenants?
Not surprisingly, whilst tenants have welcomed what they see as a more modern, transparent and fair process for commercial rent recovery, landlords have reacted with particular concern, as the requirement to give at least 7 days’ notice has removed the element of surprise which made distraint such an effective remedy. The obvious worry is that tenants will use the notice period to remove any items of value from the premises rather than raise sums to clear the arrears, undermining the usefulness of CRAR and effectively depriving the landlord of his remedy.
Distress was widely used and particularly effective. Now, the balance has undoubtedly swung in the favour of tenants, and although landlords have the option to apply to court for a reduction in the period of notice required to exercise CRAR, there is no indication that the courts will be inclined to favour these applications.
How can landlords protect themselves?
Whilst landlords will feel threatened by the implementation of CRAR, the reality is that tenants are likely to find it difficult or impossible to remove assets from the premises without hampering their ability to trade, and so an element of perspective is required. In addition, although landlords will find their options for recovering unpaid sums are increasingly restricted, they can nevertheless take steps on the granting of any lease to limit the potential damage, either by requiring increased rent deposits which they can dip into more readily in the event of default, or by requiring the lease to be guaranteed by a third party.