As readers will be aware, 6 April 2014 saw a radical change in enforcement rights for landlords with the abolition of the ancient common law right of distress for rent and the simultaneous implementation of the Commercial Rent Arrears Recovery (CRAR) procedure.
Undoubtedly, from the point of view of the majority of readers of this article, two of the most profound changes were:
- limiting CRAR to only commercial properties; and
- giving tenants 7 clear days’ notice of an intention to attend the premises and to sell and remove goods or enter into a Controlled Goods Agreement.
We have been considering how a landlord might reduce the effects of CRAR (if at all) and the alternative enforcement options for landlords. These are our thoughts:
On the face of it, CRAR is not at all helpful for landlords of pubs where the tenant also resides in the flat above, unless such occupation of the residential parts is unlawful or in breach of the lease. The wording in the legislation is such that any occupation of any part of the pub as a dwelling would be covered.
In order to unlock the CRAR procedure when it is otherwise not available, one possibility is to consider letting the commercial and residential parts on separate leases. Landlords of pubs would then be free to exercise CRAR in respect of the commercial parts.
A word of caution though: if a landlord then wished to end a tenant’s occupation of the entire property, including a separate residential part, then it would need to forfeit both the commercial lease and the residential lease separately. If these parts of the pub are let on separate leases, then the landlord could peaceably re-enter the commercial parts and change the locks. But, remember, a landlord cannot peaceably re-enter and change the locks of residential premises. A court order would be needed. In those circumstances, a landlord would need to also consider the grounds on which it can forfeit the residential lease.
7 days’ Notice
The most common vexation of CRAR is the requirement to give 7 clear days’ notice to the tenant of an intention to attend the premises and sell and remove goods, or enter into a Controlled Goods Agreement. The perceived implication of this requirement is that the cunning tenant will simply remove any goods of value from the premises before the landlord’s Enforcement Agent can effect CRAR.
The Regulations stipulate that the Enforcement Agent must exercise CRAR within 12 months of the date of the Enforcement Notice. To take advantage of this, a Landlord could serve an Enforcement Notice on the tenant but tactically not exercise CRAR until such time as it considers that the tenant has returned any goods of value to the premises.
This might delay recovery of the rent arrears slightly but, if the goods are important to the tenant (stock, fixtures and fittings etc) a tenant will not want their business disrupted for too long.
However, note that if a tenant makes a payment in the meantime and elects that payment to be applied against the arrears, then the landlord would not be entitled to exercise CRAR (unless the arrears remain above the rent threshold, which is the sum equivalent to 7 days’ unpaid net rent – i.e. excluding VAT and interest – in which case a landlord can continue to exercise CRAR).
Part payments and appropriation
If the tenants amongst the readers think that they can pay the quarterly rent by monthly instalments and avoid CRAR, then think again. The rent threshold test described above is required to be applied twice: (1) firstly, when the Enforcement Notice is served and (2) secondly, when the Enforcement Agent takes control of the goods (section 77 of the Tribunal, Courts and Enforcement Act 2007). If a tenant wants to avoid CRAR, then it would need to make a payment to ensure that the arrears fall below the threshold of 7 days’ unpaid net rent.
Lastly, assuming that a tenant makes a part payment but does not elect as to how that payment is to be appropriated, then landlords might find it useful (in some circumstances) to appropriate such part payments against other arrears that do not form part of the Enforcement Notice, thereby preserving the right to exercise CRAR in respect of the arrears in the Enforcement Notice. Remember that a right for a landlord under a lease to appropriate payments would override an election made by a tenant (whilst the lease subsists).
What are the alternatives to CRAR?
- If there are any sub-tenants, then the landlord can serve a notice on the subtenant requiring them to pay their rent directly to the landlord. Such a notice now takes effect 14 clear days after service and only applies to the headline rent, VAT and interest (like CRAR), but it is an alternative for a landlord where sub-tenants are in place.
- One of the most effective enforcement tools, and probably our favourite, is a statutory demand. The main advantage of the statutory demand is that it is quick and relatively inexpensive to prepare and serve and is likely to encourage a solvent tenant to pay the arrears. If the tenant fails to pay the arrears, they run the risk of being declared bankrupt (if an individual) or being placed into compulsory liquidation (if a company). Before serving a statutory demand, a landlord should consider whether the tenant has a potential counterclaim, which may entitle the tenant to have the statutory demand set aside.
- If there is a rent deposit, then consider drawing down on the deposit to satisfy any arrears and provide immediate cash flow. But be mindful that a tenant that is in arrears is probably unlikely to ‘top up’ the rent deposit again. We would normally advise a landlord to only use the rent deposit as a last resort. It is generally preferable for the landlord to leave the rent deposit to cover any future claim against the tenant for dilapidations.
The options available to a landlord to recover rent arrears are very much dependant on the individual facts of the case. It is important for a landlord to maximise these remedies by ensuring that it has the full benefit (where possible) of an increased rent deposit at the outset, a guarantee, an authorised guarantee agreement and sub-guarantee. This is highlighted by the demerits of the new CRAR procedure.
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.