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25th March 2014

New regime for collecting commercial rent arrears

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The introduction of a new procedure to replace the ancient common law process of “distress for rent” – Commercial Rent Arrears Recovery (“CRAR”) - is almost upon us. Part 3 of the Tribunals, Courts and Enforcement Act 2007, languishing on the statute books for some time, will be brought into force on 6 April 2014. Distress for rent will be abolished and landlords wishing to recover rent arrears for commercial premises will have the option of using CRAR.

A landlord may only use the CRAR procedure where the premises are solely for commercial use, therefore if the premises are mixed use – both commercial and residential – CRAR will not be available. The lease must be in writing (CRAR is not available in a licence situation) and continuing, though there are limited circumstances which permit the use of CRAR where the lease has ended. CRAR is only exercisable where the minimum threshold for net unpaid rent is met (at least 7 days rent). Net unpaid rent is calculated exclusive of VAT and interest and taking into account any deductions that the tenant may be entitled to apply.

So, is the introduction of CRAR a distressing change for commercial landlords? Unlike “distress for rent”, CRAR requires a warning notice to be served on the tenant. This must give 7 clear days’ notice to the tenant (excluding Sundays, Bank Holidays, Good Friday and Christmas Day). This surely raises the risk of tenants removing goods of value before the enforcement agent arrives. The landlord may protect against this risk by applying to Court (without notice to the tenant) for a shorter notice period. The Court will permit this if it is satisfied that it is likely that the goods will be moved or otherwise disposed of to avoid the enforcement agent taking control of the goods. Any application to Court will, of course, involve further delay and following service of the notice, a tenant may apply to Court for the setting aside of the notice and an order that no further steps are to be taken.

Furthermore, CRAR is limited to the recovery of outstanding principal rent only (plus interest and VAT) and does not extend to unpaid service charge, insurance, rates or repair charges, even where those sums are expressly reserved as rent by the lease. The landlord’s right to forfeit the lease will be waived if CRAR is exercised (though the right to forfeit may arise again in respect of future tenant breaches). Before instructing an enforcement agent the landlord should consider whether it wishes to retain the right to forfeit and how it will deal with any other tenant breaches that may have occurred in conjunction with the failure to pay rent.

CRAR may be exercised by a landlord against a sub-tenant. However, a notice must be served and the sub-tenant will not become liable to pay the arrears directly to the landlord until 14 clear days following service of the notice. So, if the tenant pays any rent in the period after service on the sub-tenant but before the expiry of 14 days, the notice on the sub-tenant will not take effect until the next rent instalment falls due.

Landlords with tenants in arrears will need to consider carefully whether CRAR is the most efficient way to recover those arrears. Forfeiture may be a preferable option if there are other tenant breaches or the tenant is unlikely to meet its ongoing lease liabilities.

When entering into a lease, landlords should consider taking steps to protect their position, for example by ensuring that the lease is one to which CRAR applies (consider separate leases rather than a mixed use lease), aligning any payments from sub-tenants (to avoid missing out on a rent instalment if it becomes necessary to serve a notice on the sub-tenant) and by considering rent deposits or guarantors.

For more information please contact Eleanor Rutherford on 01604 463340 or email Eleanor click here.

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