Commercial Rent Arrears Recovery (CRAR)

May 2014

Author: Laura Marchington

Commercial Rent Arrears Recovery (CRAR) is a method of enforcement to recover rent arrears relating to commercial properties. CRAR came into force on 6th April 2014 and is governed by the Tribunals Courts and Enforcement Act 2007 (TCEA) and the Taking Control of Goods Regulations 2013 (TCGR). CRAR must now be used for commercial property and the common law rights of distress is abolished.

CRAR allows the landlord to instruct an enforcement agent to take control of the tenants’ goods and sell them in order to recover an equivalent value to the rent arrears. It also requires various notices to be served on the tenant by the enforcement agent at each stage of the process.

Who is the Landlord?

The TCEA defines the landlord as “the person entitled to the immediate reversion to the lease”. Therefore it can be exercised by a landlord whose immediate tenant has failed to pay the rent. If the landlord’s interest is jointly owned, any joint owner may recover the rent. If the landlord’s interest is mortgaged, the mortgagee will be entitled to exercise CRAR if:-

• Notice is given of intention to take possession or enter into receipt of rent and profits; and
• The Lease is binding on the mortgagee.

If the Court has appointed a Receiver then the Receiver can act as the landlord. The landlord will have to authorise an enforcement agent to carry out CRAR on its behalf. The authority must be in writing.

To which Leases does CRAR apply?

CRAR applies to all tenancies of commercial premises, whether the tenancy is legal or equitable (including tenancies at will). However, the tenancy must be in writing for CRAR to apply. If the tenancy is unwritten, CRAR cannot be exercised.

CRAR does not apply to licences to occupy or tenancy at sufferance. A tenancy at sufferance arises when a tenant remains in occupation after its lease has expired, but the landlord has not confirmed that it is willing for the tenant to remain.

CRAR only applies to tenancies and therefore will not be available to a licensor for non-payment of a licence fee. Special rules will apply to agricultural holdings. Using CRAR will waive any right to forfeit that may have arisen.

Using CRAR when a Lease has ended

CRAR only applies if control of the goods was taken before the lease ended; or rent was due and payable before the lease ended and all of the following conditions are satisfied:-

• The lease did not end by forfeiture;
• Not more than 6 months has passed since the lease ended;
• The rent was due from the tenant at the end of the lease;
• That person remains in possession of any part of the demised premises;
• Any new lease under which that person remains in possession is a lease of commercial premises (even if the lease is not in writing);
• Landlord at the end of the lease remains entitled to the immediate reversion.

What are Commercial Premises for the purposes of CRAR?

CRAR only applies to leases of commercial premises. For CRAR, premises are treated as commercial provided that none of the following apply:-

• The premises (nor any part of them) are let under the immediate lease as a dwelling;
• The premises (nor any part of them) are let under an inferior lease as a dwelling);
• The premises (nor any part of them) are occupied as a dwelling.

Mixed Use Premises

CRAR will only apply to the lease if the premises are let and used for commercial purposes. However, a lease will still be within the scope of CRAR if the residential occupation is in breach of the terms of the lease or any superior lease. Similarly, if the premises have been under-let as a dwelling then the under-letting would not take the head lease outside the scope of CRAR if it was in breach of the terms of the head lease. These provisions are designed to stop a commercial tenant avoiding CRAR by allowing a third party to occupy part of the premises as a dwelling in breach of the lease.

Under Section 75 (3) of the TCEA 2007, the term “let as a dwelling” covers circumstances where the terms of the lease permit either of the following:-

• Occupation as a dwelling only;
• Occupation as a dwelling with another use.

This should be considered carefully by landlords when agreeing the permitted use of premises as they may be limiting the enforcement remedies available to them.

What rent can be recovered under CRAR?

For the purposes of CRAR “rent” is the amount payable under the lease for the possession and use of the premises (together with any interest and VAT chargeable on that amount or on the interest). Rent does not include any rates, Council Tax, services, repairs, maintenance or insurance even if these amounts are reserved as rent in the lease.

Where relief provides for an inclusive rent (one that includes an element relating to other expenses, such as business rates or utilities), only the proportion that is reasonably attributable to the possession and use of the premises is recoverable under CRAR.

Conditions to be satisfied before CRAR can be exercised

The following conditions must be satisfied before CRAR can be exercised:-

• The tenant must be in arrears of rent before the Notice of Enforcement is given;
• The amount of the arrears must be certain or capable of being calculated with certainty;
• The “net unpaid rent “equals or exceeds a minimum amount to be described in the TCGR 2013. The minimum amount of net unpaid rent is currently set at an amount equal to 7 days rent;
• The tenant must be in arrears of the net unpaid rent when control of goods is taken.
• 7 clear days notice must be given

Calculation of net unpaid rent

The “net unpaid rent“ is the amount of rent in respect of which CRAR is exercisable, less any interest or VAT included in the rent arrears and any deductions or set off that the tenant would be able to claim.

It is worth noting, although CRAR is exercisable in respect of interest and VAT, these amounts are excluded from the calculation of the net unpaid rent. The “net unpaid rent“ test must be satisfied both when the notice of enforcement is given and when control is taken of pursuant to that Notice. The landlord must therefore recalculate the net unpaid rent immediately before it takes control of the goods.

Goods over which CRAR can be exercised

The TCEA 2007 defines goods as being “property of any description, other than land”. Any enforcement agent may exercise CRAR over goods only if they satisfy the following conditions:-

• Are on the premises that the enforcement agent has the power to enter;
• Belong to the tenant;
• Are situated in England or Wales;
• Are not exempt.

The enforcement agent is prohibited from exercising CRAR over goods which are in use and the exercise of CRAR would breach the peace.

Exempt Goods

The enforcement agent cannot take control of exempt goods which are specified as:-

• Items of equipment which are necessary for the tenants personal use in the tenants employment, business, trade, profession, study or education. This includes computer equipment and vehicles. This extension only applies where the aggregate value of the items is up to £1,350. Items valued over this threshold may be seized;
• Clothing, bedding, furniture, household equipment, items and provisions that the tenant reasonably requires to satisfy its basic domestic needs and those of the tenant's household (this will apply in the limited circumstances the enforcement agent can enter mixed use premises);
• Assistant dogs, sheep dogs, guard dogs or domestic pets;
• A vehicle with a valid disabled person's badge;
• A vehicle which is being used for a disabled person, or which there are reasonable grounds for believing is used for, Police, Fire or Ambulance services;
• A vehicle displaying a valid British Medical Association badge or other health emergency badge because it is being used for, or there are reasonable grounds for believing it is used for, health emergency purposes.

Right to recover rent from an under-tenant

There is a right for a landlord to require an under-tenant to pay the rent that it owes directly to the landlord rather than the intermediate tenant. This can be referred to as a “Section 81 Notice”. All of the provisions concerning CRAR, including the type of rent and the amount of rent outstanding apply to a Section 81 Notice. This right is similar to that enshrined in Section 6 of the Law of Distress (Amendment) Act 1908. However there are some practical differences. The most significant difference is that the under-tenant is not obliged to start to pay the rent to the superior landlord until a period of 14 clear days from the service of the Notice on it.

Which under-tenant to recover from?

An under-tenant means any tenant who has an interest in any part of the premises below the landlord’s immediate tenant. This therefore, includes the sub-under-tenant as well. The landlord must choose on which under-tenant it will serve the Notice. A Notice served on an under-tenant will not continue if the Notice is also served on a further under-tenant who has a superior, or inferior, lease at the same property.

Service of a Notice on the under-tenant

The Notice of the under-tenant must be in writing, be signed by the landlord and contain the following information:-

• The landlord’s name, reference and contact details and the date of the Notice;
• The amount of rent the landlord has the right to recover from the immediate tenant by CRAR;
• Confirmation that, while the arrears remain, the under-tenant must pay its rent directly to the superior landlord rather than the immediate tenant until the notified amount has been paid, or the Notice has been replaced or withdrawn;
• Confirmation that, the landlord can withdraw the Notice in accordance with paragraph 55 of the regulations.

What if the under-tenant fails to pay?

Once the Section 81 Notice has been served on an under-tenant, it is treated as an immediate tenant of the landlord for the purposes of enforcement remedies for non-payment of rent. Therefore, the usual methods of enforcement will be available, including CRAR. However, it is not clear whether a fresh right of forfeit will arise.