The current CRAR (Commercial Rent Arrears Recovery) system came into force in 2014 as a way to collect rent arrears from commercial property tenants, taking over from the previous principle of distain.
Previously a landlord was able to ‘send in the bailiff’ who could then begin noting actual items of the tenant to seize and sell in order to pay the arrears. This was a very crude way of collecting arrears, and although under CRAR there is this still this principle of a commercial landlord being able to seize and sell a tenant’s own items to pay the debt, there are now procedures and time frames involved in order to ensure it isn’t misused.
In terms of understanding how this works out in reality, here are the 10 most important issues to be aware of regarding the CRAR procedure. As well as providing general parameters that you need as a landlord or tenant to be aware of, they include a few pointers as to how they can be applied in reality (Click here to see a video presentation and transcript of these explained)
1. This is a Legal Right That Exists Outside Any Lease, But it Needs a Lease in Place to Have Effect
So the right comes under legislation and does not need a specific clause adding into any lease for it to be an automatic right for a landlord if all other circumstances exist. However, one of these circumstances is that a proper commercial property lease exists between a landlord and tenant, not any kind of temporary licence or any verbal agreement.
Therefore make sure one exists and is enforceable with simple things like dates and signatures inserted. Also, understand if there are any other sub tenants in existence as they may require separate notices and action.
2. This is Only Applicable for Purely Commercial Property
So make sure all of the lease demise refers to business use, because even a mixed-use one encompassing, say, residential flats above a retail shop can mean that this can’t be applied because all of it is not for commercial use.
3. It is Only For Rent Arrears
So all other charges such as service charges, insurance premiums, and utility and rates charges are excluded, and that’s irrespective of how they’re worded in the lease.
So even all-inclusive rents which are still described as a ‘rent’ in the lease but in reality help pay service charges and insurance behind the scenes can be excluded from this remedy.
Plus, make sure you have the correct calculation and apportionment with say quarterly in advance rent payments usually being due.
The good news though is that it does include any genuine interest charges and VAT on the rent under the lease.
4. Only Enforcement Agents Can Implement CRAR Action
So even the landlord can’t instigate themselves or through any other parties like a solicitor; it must be a certified Enforcement Agent who sees the whole process through right from the first notice to the final seiure of goods and management of monies. In reality these tend to be the old bailiff firms, but you need to check that they are correctly authorised.
5. There Are Two Main Notices to Issue, Both With 7 Days’ Notice
The first one can only be issued after the debt occurs, and the second afterwards when you’re at the stage of taking actual action. These need to be correct in terms of accurate dates and service, taking into account weekends and bank holidays, otherwise action can be classed as void.
One criticism of the new procedures is that this slows everything down, with the first notice not even being possible until the debt first becomes due, but in actual fact this was the whole gist of the exercise, to give breathing space to the tenant to pay up, and hopefully not disappear.
Practically, make sure the information on these notices is correct, they’re sent to the right names and addresses, and remember they need to come from the Enforcement Agent and separate to any general invoices and reminder letters from the landlord.
6. An Enforcement Agent First Needs to Attend the Property to Agree a Controlled Agreement With the Tenant
So in short, they need to note what tenant goods are available to potentially look at re-selling in order to pay the debt. Now although this sounds simple in theory, in practice it can cause lots of issues.
Firstly is the challenge of entering the property when the tenant is there to go around and begin this listing-items exercise, and although in the majority of cases this is successfully arranged by the Enforcement Agent, there are some circumstances when it can’t be either through genuine circumstances or the tenant is playing hard to get.
Secondly, once you do begin you need to make sure you list the right items which are genuinely the tenants and over a value of £1,500.
Thirdly, you need to have a reality check of what any resale value is as the second-hand value is often far less than what you might imagine to clear the debt.
7. The Eventual Seizure of Goods
The eventual goal of the CRAR procedure is for the landlord to be able to legally take tenants’ goods from the site to re-sell in order to repay the debt.
The final stage by the Enforcement Agent then is to have this right to practically go back to the property and begin taking goods and then arranging for their sale. This will have to be carried out correctly and at certain times, and any costs taken into account as well.
In reality it will hardly ever get to this stage, as the earlier notices and Controlled Agreement should focus the tenants’ mind and begin an agreed settlement of the arrears straight away on an agreed payment plan.
8. Remember all the Costs Involved and Who Will Pay Them
The theory may be the tenant to pay these either as part of a claim or the Enforcement Agent separately charging them, but reality can get messy.
You particularly need to watch the amount of rent being formally claimed as the fees beyond the initial notice are dependent upon this and can rack up with higher rental amounts. One way around this is to deliberately state a lower figure under CRAR to keep these fees down and use the opportunity to agree the remaining arrears with the tenant, however the tenant will be under no obligation to pay above this limit under this particular CRAR procedure.
9. The Tenant Has a Right of Appeal and Application to the Court
Essential of course to deal with any genuinely unfair or blatantly wrong claims by the landlord, although it can be open to abuse and stretching out of proceedings.
10. Watch Out For Tenants Being Insolvent
The focus of course is the actual goods on site to secure the debt even if the tenant themselves is now insolvent, but this can have a knock on effect to the effectiveness of CRAR. Longer term there will be problems with the tenant being able to pay due monies even though this may be a quick-fix now, and it may cause the tenant to begin removing goods anyway which could fall within the Controlled Agreement.
Even short term though, if a tenant enters, say, administration, then the consent of the administrator or court will be needed to instigate procedures under CRAR just like other forms of recovery, therefore it is important to determine this right at the outset.
As you go through these 10 aspects to action under CRAR for a commercial property landlord, the important aspects are to appreciate what you’re trying to achieve and how realistic it is to do this. Often the threat of this and the beginning of proceedings can be helpful to then come to a sensible separate agreement with the tenant without needing to follow through, but if you do need to continue then you need to ensure the detail is right and the cost and time involved in getting there is worth it.
It’s also important to look at other alternatives to CRAR as well, for example agreeing and using separate deposit monies, turning to a guarantor or other action such as lease forfeiture and court proceedings.
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