In this month’s potted guide, Jonathan Seitler QC guides practitioners through the basics of the law relating to the recovery of rent arrears under a commercial lease by seizure of goods
What is CRAR?
Commercial rent arrears recovery (“CRAR”) is the statutory successor to the common law remedy of distress for rent, effective from April 2014. The CRAR regime swept away an ancient and complex jurisprudence, relating to distraint. The common law right to distrain is now abolished.
A landlord’s recovery of arrears of rent under a written lease of commercial premises, by the taking of the tenant’s goods, must therefore now only occur within the parameters of CRAR. If its rules are abided by, it allows the landlord (by its enforcement agent) to seize the tenant’s goods, sell them and remit the proceeds against rent arrears. It is obviously therefore a potentially potent weapon for any landlord faced with a commercial tenant in arrears of rent.
What are the limits on the use of CRAR?
There are five important limitations:
First, it can only be used in respect of commercial premises. This means premises neither let (whether under a lease or sub-lease) nor occupied as a dwelling though occupation as a dwelling unlawfully (ie without landlord’s consent if it is needed) will not be enough to render its use non-commercial for these purposes. Nor will the fact that a sub-tenancy is being unlawfully used as a dwelling inhibit CRAR in relation to a commercial headlease.
Second, CRAR can only be used after the lease has ended if either the process was started before the expiry of the lease or the tenant is occupying under the terms of a new commercial lease from the same landlord, the old lease having expired less than six months ago.
Third, CRAR must take place at the premises in relation to which the rent arrears have arisen. There is no right to seize goods from anywhere else, even if they clearly belong to the defaulting tenant.
Fourth, CRAR is only exercisable in relation to principal rent – the amount paid in respect of use and occupation. Service charge or insurance rent or anything else, even if expressly reserved as rent under the lease, will not fall within the CRAR regime.
Lastly, although the seizure of goods under CRAR can extend to any property other than land on the premises to which the power of entry relates which are owned by the tenant, it does not extend either to “exempt” goods (valued at less than £1,350 and being used for the tenant’s personal use in its business or to satisfy basic domestic needs) or to property in use in circumstances in which seizure would involve a breach of the peace. However, this does not preclude the enforcement agent from re-entering at a later point when the property is not in use.
Who exercises the rights under CRAR?
The landlord, or its mortgagee (if the mortgagee has given notice to the lessee of the lease binding on it of its intention to enter into possession) or the landlord’s court-appointed receiver, in each case, by a registered enforcement agent (certificated bailiff).
Who are the rights under CRAR exercised against?
They are exercisable against a tenant (not a licensee) and also against a sub-tenant.
In relation to a sub-tenant, the head landlord is entitled to seek the arrears of rent under the headlease from the subtenant under CRAR in a process reminiscent of the old section 6 of the Law of Distress (Amendment) Act 1908.
CRAR permits a landlord to serve a “section 81 notice” requiring the sub-tenant to pay its rent under the sublease direct to the head landlord. The rent is payable 14 days after service of the section 81 notice on the under-tenant. Obviously any rent so paid by the under-tenant is not also payable to the mesne tenant in arrears of its rent to the head landlord.
If an under-tenant fails to pay in accordance with a valid section 81 notice, the entire menu of options available to a landlord in relation to tenant default, including the right to seize goods under CRAR as set out above, kicks in as normal.
What are the preconditions to the exercise of rights under CRAR?
Before the legal right to seize goods under CRAR arises, the landlord, through the enforcement agent, must give seven clear days’ notice to the tenant (excluding Sundays and bank holidays) as to the net unpaid rent outstanding (net of VAT and interest), which must be more than a certain minimum (seven days’ worth). This is called an enforcement notice.
The enforcement notice must set out certain specified information, not least of which is precise details of the debt owing, interest and costs and precisely how and when payment should be made in order to avoid the tenant’s goods being taken and sold.
What happens after service of the enforcement notice?
On expiry of the seven days under the enforcement notice, the enforcement agent has the right to enter on to the leased premises (with the use of reasonable force and, if necessary, having obtained a warrant from the court) between 6am and 9pm (or outside those hours if the tenant’s business is open then) to secure or remove the tenant’s goods from the leased premises to secure them elsewhere.
The enforcement agent is also entitled to enter into a “controlled goods agreement” with the tenant. This is analogous to the old right of a landlord to enter into “walking possession”, under which the tenant keeps physical custody of the goods while acknowledging that legal control has passed to the enforcement agent and therefore that the goods are not to be removed or otherwise dealt with.
On entry, the tenant is entitled to a notice specifying the steps being taken by the enforcement agent. This will provide confirmation of the enforcement agent’s entry on to the premises and state what enforcement action has been taken. Again, the tenant is entitled to know, by the provision of an inventory as soon as reasonably possible, what goods have been seized and what is happening to those seized goods and how to redeem them from the process by payment of the rent arrears.
Under certain circumstances – there being no goods of value belonging to the tenant on the premises at one point, but there being some expected at a later point, or the original entry being likely to involve a breach of the peace – repeated acts of entry by the enforcement agent are permitted. The tenant is entitled to two days’ notice of a proposed re-entry.
It is a criminal offence punishable with a fine and up to 51 weeks’ imprisonment to obstruct an enforcement agent acting lawfully in that role.
The rights under CRAR must be exercised within 12 months from the date of the notice, though that period can be extended once by the court, if the landlord can show a good reason for not having exercised those rights.
How does the enforcement agent deal with the seized goods?
The enforcement agent must obtain a valuation of the goods within seven days of seizure, which must then be provided to the tenant. This gives the tenant a final chance to avert the sale of its goods: indeed, if the rent arrears are paid in full at any point before the sale of the goods, no further steps can be taken towards such sale.
If that does not happen, the seized goods can be sold or disposed of at the best price reasonably obtainable, usually at public auction unless the court is prepared to authorise another method of sale. The tenant is also entitled to notice of the date, time and place of sale at least seven days ahead of it.
The Taking Control of Goods (Fees) Regulations 2014 which, among other things, provide for fixed fees for phases of the enforcement agent’s processes, govern the distribution of the proceeds of sale, any balance of which, after the debt, costs, fees and disbursements have been paid, must be returned to the tenant.
What happens if the landlord or enforcement agent breaches the requirements of CRAR?
The tenant can claim in relation to such breach and the powers of the court include ordering a return of the seized goods to the tenant and awarding damages.
Will using CRAR waive a right to forfeit for the rent arrears that are the subject of the CRAR?
Yes. A landlord waives the right to forfeit when it does something or says something with knowledge of the cause of the entitlement to forfeit, which is unambiguous and which, viewed objectively, is only consistent with an intention to treat the tenancy as continuing. Using CRAR to recover rent in respect of a period after the right to forfeit has arisen, is to treat the tenancy as continuing as regards that period.
CRAR checklist
- What is CRAR?
- What are the limits on the use of CRAR?
- Who exercises the rights under CRAR?
- Who are the rights under CRAR exercised against?
- What are the preconditions to the exercise of rights under CRAR?
- What happens after service of the enforcement notice?
- How does the enforcement agent deal with the seized goods?
- What happens if the landlord or enforcement agent breaches the requirements of CRAR?
- Will using CRAR waive a right to forfeit for the rent arrears that are the subject of the CRAR?
Leading resources
- Tribunals, Courts and Enforcement Act 2007
- Taking Control of Goods (Fees) Regulations 2014
Seitler’s leading practitioners
- Richard Bedford, Burges Salmon
- Clare Bellis, Freeths
- Warren Gordon, Olswang
- Hannah Ingham, Fieldfisher
- Ed Meggitt, Geldards
- Alison Mould, Fladgate
- David Pomeroy, Ashfords
- David Sinclair, Norton Rose Fulbright
Jonathan Seitler QC is a barrister at Wilberforce Chambers
