Has CRAR caused as much distress as landlords feared?

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

As we approach the two-year anniversary of the introduction of commercial rent arrears recovery (CRAR), we reflect on how much the world of arrears recovery has actually changed and offer a reminder to our readers of some of the intricacies of this means of enforcing recovery of arrears.

Background

On 6 April 2014 part 3 of the Tribunals, Courts and Enforcement Act 2007 (the 2007 Act) came into force. The common law right of distress was abolished for both residential and commercial premises and a new statutory procedure, CRAR, relating only to commercial premises was born.

Whilst narrower in scope than distress, CRAR still allows landlords to remove a tenant's goods and sell them if a tenant has failed to pay rent due under a lease.

Current position

Although the element of surprise, which was one of distress's fortes, has been lost since the arrival of CRAR, it is our understanding that this method of enforcement is still being carried out by landlords and is successfully being implemented throughout the country to recover arrears from tenants.

Dos and don'ts

We set out below some useful reminders of the "dos and don'ts" of exercising CRAR.

• Can a landlord use CRAR if a licensee has failed to pay its licence fee?

No. CRAR can only be exercised if the occupier occupies under a lease. The lease must be in writing but can include a tenancy at will. A lease may also be one which exists at law or in equity. CRAR does not apply to a tenancy at sufferance.

• My tenant occupies premises under a lease, which demises a shop on the ground floor and a flat on the first floor. Can I use CRAR to recover their arrears?

CRAR can only be exercised against commercial premises. Therefore, if part of the premises is let as a dwelling or is occupied as a dwelling, CRAR cannot be used (unless such use is in breach of the terms of the lease). Accordingly, if a landlord owns mixed-use premises, it should consider whether it would be better to let the commercial and residential elements separately.

If premises are residential, a landlord must now obtain a court order to recover the arrears, by way of a simple debt claim.

• How much can a landlord recover?

A landlord can only pursue a tenant for rent paid for "possession and use" (plus any VAT and interest on that sum). Accordingly, a landlord cannot use CRAR to recover service charge, insurance charges, rates or other outgoings due under the lease, even if they are reserved (or referred to) as rent under the lease.

• Can the landlord exercise CRAR himself?

No. Only an enforcement agent can exercise CRAR on behalf of the landlord. Any instructions to an enforcement agent by a landlord must be in writing and must include certain information, otherwise the appointment could be invalid.

• Can a landlord "surprise" a tenant by exercising CRAR?

No. An enforcement agent (acting on behalf of the landlord) can only exercise CRAR if the tenant has been given notice. Notice must be given at least seven clear days before CRAR is exercised.

In addition, an enforcement agent can only enter the premises between 6 a.m. and 9 p.m., unless the premises are open for business for longer. Entry also has to be by door.

• If a landlord cannot recover the arrears from its tenant, can it still pursue an undertenant under the new regime?

Yes. A landlord may serve notice under section 81 of the 2007 Act requiring the undertenant to pay the underlease rent direct to the head landlord. The notice takes effect 14 clear days after it is served. If the undertenant does not pay under the section 81 notice, the head landlord may exercise CRAR against the undertenant.

• Does it really matter if a landlord does not comply with the statutory procedure?

Yes. Failure to follow the strict procedure means that the tenant could pursue a claim for the goods to be returned and for damages to be paid for the loss suffered.