From 6 April 2014 landlords’ ancient right of distress will be abolished and replaced by a new statutory regime – the Commercial Rent Arrears Recovery (“CRAR”) process. Distress is the common law remedy that enables landlords to enter leased premises in order to seize a tenant’s goods and sell them so as to recover arrears of rent.
The key elements of the CRAR are as follows:
- it is only available for basic rent (plus VAT and interest);
- it is only available to landlords under written leases of commercial premises;
- before CRAR is exercised a 7 day notice of enforcement must be served upon the tenant;
- there is a minimum level of arrears and period of time for the existence of arrears before exercising CRAR; and
- landlords will be able to exercise CRAR against an under-tenant and recover rent owed by its tenant from an under-tenant.
CRAR will provide a considerably more limited remedy to landlords than the current common law rule. Please see below for some “top tips” that Landlords can adhere to following this change in the law.
The definition of Rent:
CRAR is only available for basic rent (plus VAT and interest) irrespective of what the definition of “rent” in the lease includes. As a result, landlords should bear in mind that all other sums reserved (such as service charges and insurance) are not recoverable under CRAR.
Recovering arrears of rent in relation to leases of dwellings:
CRAR applies strictly to commercial premises only. Landlords will therefore not be able to recover arrears of rent if the property or any part of the property is let as a dwelling. However, it should be noted that if a tenant is using all or part of the premises as a dwelling in breach of the lease then CRAR will still apply. This is helpful to landlords as it prevents tenants from attempting to avoid CRAR by breaching the terms of the lease.
Preventing tenants from removing goods during the 7 day “enforcement notice” period:
There is an ability for the Court to order that the notice period be shortened when it is satisfied that without such an order it is likely that the goods will be removed. Therefore if you as a landlord suspect that the above may occur there is an option to apply to the Court. However, landlords should bear in mind that applying for a reduced notice period is likely to impose considerable administrative and cost burdens.
Minimum amount of net unpaid rent:
The new unpaid rent must be outstanding for a minimum period of seven days. This minimum amount must be present both when a landlord serves notice of its intention to exercise its rights under CRAR and when entry is made to take control of the tenant’s goods. As a result, it is important for landlords to ensure that prior to entering the premises the net unpaid rent remains above the minimum threshold. Once this minimum threshold is met a landlord can enter the premises to seize the goods. However, it must also be noted that a landlord cannot exercise CRAR personally; this must be done by an enforcement agent on behalf of the landlord.
Redirecting rent from under-tenants:
The ability for a landlord to recover arrears of rent from under-tenants will remain under the CRAR. However, a notice to pay rents directly to a superior landlord will only take effect 14 clear days after it is served on the under-tenant. This is in opposition to immediately, as was the case before 6 April 2014. This change will mean that landlords will have to give more consideration to the CRAR process, especially where rent payments under an under-lease are structured differently to the head lease.