02 April 2014

CRAR: Commercial Rent Arrears Recovery - new rules for sending in the bailiffs

CRAR (Commercial Rent Arrears Recovery) – the new rules for seizing a tenant’s goods - comes into force on 6 April 2014 in England & Wales, replacing the ancient common law rules of distress for rent.  CRAR is designed to be fairer to tenants, but will it be an effective remedy for landlords and are there any alternatives?

What is CRAR?

Like distress for rent, CRAR allows a landlord to instruct an enforcement agent, in writing, to enter the premises of a tenant who is in arrears, to seize and sell the tenant’s goods in order to recover an equivalent value to the rent arrears.

Distress was a cheap, quick and easy way to collect rent arrears.  The arrival of bailiffs at the tenant’s premises was often enough encouragement for the tenant to pay off its arrears, without goods having to be sold and sometimes not even removed from the premises.  But sending in the bailiffs without a court order, warrant or even prior notice was considered draconian, a breach of human rights and unfit for the twenty-first century.  CRAR is significantly more limited.

Limitations of CRAR

Which tenancies are covered?

CRAR only applies to written tenancies of commercial premises.  There is no longer any right to seize the goods of a residential tenant, unless any residential occupation is in breach of the terms of the lease.  CRAR cannot be used for the commercial element of mixed-use (commercial and residential) premises, unless the commercial and residential parts are in separate leases.

Do I have to give notice to exercise CRAR?

One of the most valuable features of distress was the element of surprise: with no prior notice the bailiff could turn up and seize the tenant’s goods.  By contrast, the CRAR enforcement agent must give the tenant at least 7 clear days' notice in writing.  If a landlord believes his tenant will move the goods, the landlord can apply to court for a shorter notice period, but the additional administration makes the process more costly.

Does CRAR apply to service charges?

CRAR recovers principal rent only (with any interest and VAT) and no longer covers rates, service charge, maintenance, insurance or other supplementary charges.  The rent arrears must exceed 7 days’ net unpaid rent, excluding interest and VAT.  This applies both when the notice is served and when the agent seizes the goods, so always recheck the figures on the day the enforcement agent is going in.

What if the tenant is in administration or liquidation?

A statutory moratorium prevents the use of CRAR against a tenant in administration or liquidation (unless the administrator or the court consents).

What is the procedure for CRAR?

There are minor adjustments to the procedure for entry and seizure of goods.  As before, the enforcement agent does not need a warrant provided that he does not use force.  He can now go in at any time between 6am and 9pm 7 days a week and at any other times that are within the tenant’s business hours.  Goods can either be secured at the premises or removed to a different location, or the enforcement agent and the tenant can sign a Controlled Goods Agreement which permits custody of the goods and is similar to the old 'walking possession agreement’.  CRAR now imposes tighter control on the method of sale: goods may be sold after 7 days at an auction for the best price that could reasonably be obtained.

What can bailiffs take?

The first £1350 worth of the tenant’s equipment is exempt from CRAR but, above that limit, equipment including computers and vehicles that are on the premises can now be seized.  However, items seized must be owned by the tenant, which excludes leased equipment and vehicles.

What alternatives to CRAR are available to recover rent?

The objective behind CRAR was to level the playing field between landlords and tenants, but landlords fear that the added cushioning for tenants and, in particular, the loss of the element of surprise, will undermine the effectiveness of seizure.  In some cases, landlords can take other steps that might be more effective:

What if the premises are underlet?

CRAR permits a landlord to serve a notice on an undertenant requiring them to pay their rent directly to the landlord, bypassing the tenant who is in rent arrears.  This is similar to the old notice under section 6 Law of Distress Amendment Act 1908, although the arrangement now takes effect 14 clear days after service of the notice.  Landlords can breathe a sigh of relief that this effective remedy has been retained.

Can I use a rent deposit?

If the landlord has taken a rent deposit, a withdrawal from the deposit can provide an immediate cash flow.  Check if there is a requirement to give notice to the tenant beforehand and whether the rent deposit deed covers service charges and other amounts due or only principal rent.  Tenants who are in arrears rarely replenish the rent deposit account, so it might be better to preserve the rent deposit to cover future liabilities, e.g. damages for dilapidations.

Should I serve a statutory demand?

A statutory demand is a fast and fairly cheap procedure and can be an effective way to encourage tenants to pay their arrears.  If the tenant fails to settle the demand, they run the risk of being declared bankrupt or being placed into compulsory liquidation.  Landlords should always consider first whether the tenant has any potential counter-claim, as the tenant can apply to have the demand set aside.

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