How can I recover commercial rent arrears? Part 1

What is Commercial Rent Arrears Recovery (‘CRAR’) and When Can I Use It?

Commercial Rent Arrears Recovery (otherwise known as “CRAR”) was introduced in April 2014 by virtue of Part 3 of The Tribunal Courts and Enforcement Act 2007.

CRAR enables a commercial landlord to recover unpaid rent by seizing the tenant’s goods from the demised premises, via the instruction of enforcement agents. The right only arises in relation to commercial leases, which are evidenced in writing. Accordingly, CRAR cannot be used where there is an oral periodic tenancy, tenancy at sufferance; or where the lease allows for residential use (whether or not it is in occupation as a residential dwelling).

Until 25 March 2022, the use of CRAR was restricted in accordance with The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 (the “Moratorium”). This meant that, unless a tenant was in arrears equal to 544 days’ unpaid rent, a landlord was unable to use this method to seek recovery of its losses.

Whilst the Moratorium has now come to an end, commercial landlords continue to face restrictions on the use of CRAR. Specifically, the controversial binding arbitration scheme came into force on 24 March 2022 under the Commercial Rent (Coronavirus) Act 2022 (the “Act”). The new scheme creates an extended protection period for certain business tenants affected by COVID-19 restrictions. Under the Act, a landlord is not able to exercise CRAR in relation to any protected rent (as defined by the Act) and must, instead, apply for arbitration using a Government-approved arbitration body.

What is Recoverable under CRAR?

CRAR may only be used to recover pure rent, together with the VAT and interest payable in relation to these sums. CRAR cannot be used for recovery of any other sums due in accordance with the lease, for example: service charge; insurance, maintenance, or repairs (whether or not these sums are reserved as rent within the lease).

What is the Procedure?

Before CRAR is exercisable, notice must be given to the tenant. The enforcement agent must give seven clear days’ notice of CRAR to the tenant. Care must be given when calculating the requisite notice period, as Sundays, bank holidays, Good Friday or Christmas Day do not count in calculating the period.

What Can I Seize?

An enforcement agent may only seize items owned by the tenant and which are either on the demised premises, or on a highway in England and Wales. The agent may not seize any goods which are tools of the tenant’s trade, and which have a value of up to £1,350.

There are additional restrictions on seizing goods which relate to goods belonging to children or vulnerable people, in addition to any goods which are required to satisfy the basic domestic needs of the tenant.

When Can I Exercise CRAR?

For CRAR to be exercisable, certain factors must be met. These are outlined below:

(a)   the rent must have become due and payable before notice of enforcement is given;

(b)   the rent is certain, or capable of being calculated with certainty;

(c)     The amount of any rent recoverable by CRAR is reduced by any permitted deduction (including removal of any arrears which fall into the “relevant period” under the Act); and

(d)     CRAR is exercisable only if the net unpaid rent is at least equal to 7 days’ rent before the time when notice of enforcement is given, and the first time that goods are taken control of after that notice.

As noted above, the Act received royal assent on 24 March 2022. Accordingly, any rent arrears pursuant to a business tenancy (as defined by Part II of the Landlord and Tenant Act 1954), where the business was required to close (either fully or partially) as a result of COVID-19 regulation, and which accrued during the relevant period, are subject to protection under the Act. For the purposes of the Act, it is immaterial as to whether limited activities were permitted, despite being mandated to close; for example, where restaurants were able to continue a “take out” service.

The “relevant period” is defined as beginning at or after 2pm on 21st March 2020 and ending at or before 11:55pm on 18th July 2021 (in England). Accordingly, this sum amounts to “protected rent”.

Who Can use CRAR?

Only the landlord entitled to the immediate reversion in the lease is permitted to use CRAR. Further, CRAR is available to a commercial landlord whether or not this is specified within the lease.

Importantly, CRAR can only be exercised by a certified enforcement agent, acting on behalf of a landlord. This is distinct from other types of enforcement agents acting under the court’s authority, as the use of CRAR does not require a court order. For this reason, CRAR is particularly appealing to a commercial landlord seeking to recoup its losses as quickly as possible.

There are specific provisions within the Tribunals, Courts and Enforcement Act 2007 that allow a superior landlord (via its enforcement agent) to serve notice upon its subtenant requiring it to pay rent directly to the superior landlord. These provisions effectively “cut out the middle-man” and are effective against tenants utilising the superior landlord’s property to make a profit, without fairly paying their proportion of the rent.

Note of Caution

It should be noted that the exercise of CRAR will be deemed to have waived any right to forfeit the lease. Accordingly, a landlord should take care to consider whether it wishes to bring the lease to an end, by way of forfeiture, or to recoup its losses by the implementation of CRAR.

How can Ellis Jones help?

At Ellis Jones, we specialise in dealing with all aspects of commercial lease disputes and helping our clients recover monies they have lost as a result of tenants falling into arrears.

If you are a landlord who has a commercial tenant in arrears and you wish to discuss this with one of our contentious property solicitors, please get in touch with our Property Disputes team by calling 01202 525333 or by emailing resolution@ellisjones.co.uk to discuss your needs and how we may be able to assist you.