The introduction of CRAR – Cause for distress?
Since 1689 landlords have been entitled to enter premises let to their tenants, seize goods and sell them to recover arrears of rent. This is going to change from 6 April 2014.
The Tribunals Courts and Enforcement Act 2007 addressed the abolition of the common law remedy of distress. Under that Act distress was to be replaced by the less-poetically named “Commercial Rent Arrears Recovery” or “CRAR”. However, it was not until 30 July 2013, following uncertainty due to years of inaction and further consultation in 2012 (“Transforming Bailiff Action”), that the procedure under CRAR was published in the Taking Control of Goods Regulations 2013.
The right to distrain can be exercised after only one day of rent arrears. The new procedure requires that there must be at least seven days of arrears before it can be exercised. In addition under CRAR a minimum period of notice is required before an enforcement agent (previously certified bailiffs, but this is in practice a change in terminology) can seize goods belonging to a tenant to the value of its arrears. Commercial landlords must give seven clear days’ written notice before taking goods. This notice must include information such as the name and address of the landlord and the nature of the debt. This seven-day period does not include the day on which the period begins, Sundays or bank holidays. Landlords must instruct and indemnify a certified enforcement officer to both serve the notice, in writing given certain prescribed details, and, on its expiry, attend the premises to seize the goods. As the regulations provide for service of notice by the enforcement agent. Service by the landlord’s managing agent or solicitor may not suffice.
Landlords are able to apply to Court to reduce the seven-day period if they can demonstrate that the tenant is likely to remove its goods. The notice period can only be reduced, not disposed of. That the tenant will relocate or dispose of its goods on receipt of notice will be a major concern in most cases and arguably it is the biggest drawback of the CRAR regime. Court applications will be prohibitively expensive in many cases, landlords are unlikely to be able to issue an application before the arrears have fallen due and the delay in getting a Court hearing may be considerable. It is also unclear from the regulations whether landlords have to notify tenants of the Court application!
Under CRAR tenants are also able to apply to Court to have notices set aside. Alternatively, they are able to seek a Court order staying the CRAR procedure.
Another major restriction under the new procedure is that landlords will not be able to use CRAR to recover service charges, insurance premiums, business rates or other sums reserved as ‘rent’ under the terms of the tenant’s lease. Its use is limited to principal rent and associated VAT and interest. It is currently uncertain how this rule will apply to inclusive or turnover-based rents.
CRAR cannot be used in relation to premises that include any part used for residential purposes. It is only available in relation to commercial premises where the lease in question is in writing. CRAR is not available in relation to licences to occupy. If the tenant is in administration the landlord will need the Court’s permission to exercise CRAR.
There are also new rules replacing the existing limits on what types of goods are exempt from seizure. Goods that are ‘necessary’ for the tenant’s business up to a value of £1,350 are exempt from CRAR. Goods belonging to a third party, including a sub-tenant, are not subject to CRAR either.
Enforcement agents are no longer to take ‘walking possession’ of goods. Instead there are to be ‘controlled goods agreements’, the form and content of which are prescribed and which must include an inventory signed by the enforcement agent. These may be entered into with anyone with the tenant’s ‘apparent authority’. The enforcement agent will have twelve months from the date of the notice or the controlled goods agreement to remove the goods. If a controlled goods agreement is breached, the tenant must be given a further notice before the goods can be removed, providing the defaulting tenant with plenty of time to finish disposing of the items.
The regulations address how enforcement agents may enter premises to secure the goods. Goods can be seized on any day of the week, including Sundays and bank holidays, between 6 am and 9 pm, unless the premises are open for trade outside those hours, in which case the right is extended. It is no longer possible to enter premises through open windows or internal partitions. Premises can only be accessed by door or other usual means.
The selling of the goods following their removal is also governed by new detailed rules. Once goods have been seized the tenant must be given another seven clear days notice of their sale, which must take place by auction unless the Court has previously sanctioned sale by another method. The tenant must also be provided with a valuation of the goods before they are sold.
The new rules change the extremely useful remedy provided by section 6 of the Law of Distress (Amendment) Act 1908. Landlords can still serve notice on a sub-tenant requiring it to pay its rent direct to the landlord until the head-tenant’s arrears are paid. However, that notice will now only take effect fourteen clear days after it has been served on the sub-tenant. A notice cannot be served until the tenant is in arrears. Therefore, the sub-tenant is likely to have already paid the tenant the sub-rent before the superior landlord’s notice is effective. If the rent under both tenancies is payable quarterly in advance, the superior landlord will have to wait a full quarter before it can intercept the next payment under the sub-lease.
CRAR has achieved greater protection for commercial leaseholders and is good news for occupational tenants, particularly those in financial difficulty. Much of the potential for embarrassment, which landlords found to be possibly the most powerful element of distress, has been removed under CRAR.
Whilst it is, on balance, good news for tenants, the new regime, with increased notice requirements, a longer timeframe and, inevitably, an increased cost, is bad news for landlords. They have lost an effective, inexpensive and, therefore, valuable remedy.
Distress provided a quick remedy for landlords concerned about a tenant’s impending insolvency. Under the new regime such landlords are in the future likely to find their rights superseded by the commencement of a formal insolvency procedure.
Rather than rely on the weak remedy provided by CRAR landlords may wish to consider seeking further protection by way of a guarantee or tenant deposit.
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This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.