The new commercial rent arrears recovery procedure (CRAR)By: Katherine Ekers

Distress or distraint is a common law remedy which has been around for over 800 years. It's a method for landlords to recover arrears from tenants by seizing their assets without going to court or giving the tenant any advance warning.

In fact, in 1215 the Magna Carta extended the remedy of distress to properties occupied by the monarch although it is doubtful that there has been much call for that particular branch of distress in recent centuries. 

Generally, landlords wishing to use the remedy of distress do not need the consent of the Court. That is unless they are planning to enter protected residential dwellings which is, perhaps understandably, frowned upon by most people. This means that landlords of premises subject to Rent Act protected or assured tenancies have to apply to Court in advance.

Landlords may also require the Court's consent where they intend to use distress against tenants who are in administration, liquidation or have had bankruptcy orders made against them. In this scenario the administrator/liquidator/trustee in bankruptcy may well have a prior interest in the relevant assets of the tenant which would need to be considered by the Court.

Distress is generally seen as a quick and effective remedy by landlords; they can instruct a certificated bailiff within 24 hours of the rent falling into arrears. The bailiff will attend the property without giving the tenant any prior notice and seize goods to the value of the outstanding arrears. The goods are held for five days and the landlord can then sell them if the tenant has not settled the arrears. The potential downside is that the premises actually need to contain suitable goods available to seize.

On the flipside, tenants will often view distress as an unduly aggressive step to take, meaning it can permanently sour an otherwise good landlord/tenant relationship. Incidentally, a landlord cannot subsequently choose to forfeit the lease for non-payment of rent once they have distrained the tenant's goods as, by distraining, they are treating the lease as continuing, which waives a landlord's right to forfeit for that particular breach. The right to forfeit would, however, arise again if the tenant failed to pay the next quarter's rent.

Changes to the law of distress
The Tribunals Courts and Enforcement Act 2007 introduced the idea of the commercial rent arrears recovery procedure (CRAR) but, six years on, the relevant part of the 2007 Act has not yet been implemented. CRAR is finally coming into force on 6 April 2014 and will essentially replace the autonomous remedy of distress with a strict statutory process which landlords will have to follow if they want to seize and sell assets to cover outstanding rent arrears.

All you need to know about the Commercial Rent Arrears Recovery Procedure (CRAR)

1. CRAR will only apply to wholly commercial premises; there will be no equivalent remedy for residential premises or mixed residential/commercial premises, which the tenant occupies under one lease.
2. CRAR will only apply to arrears of principal rent (and VAT and interest on that rent); it will not be available against arrears of service charge or insurance or other sums due from the tenant under the lease. Where a tenant pays an "inclusive" rent, CRAR will only be available against the proportion which is "reasonably attributable" to the tenant's possession and use of the premises.
3. There must be a minimum of seven days' worth of rent in arrears before CRAR can be used.
4. Bailiffs are replaced by "enforcement agents" who will only be able to enter premises by way of a door.
5. Landlords will have to give tenants seven days' prior notice (not counting Sundays or bank holidays) before an enforcement agent enters the property to seize assets. A Court can grant an order shortening this period but only where they believe it is likely that the tenant will move the goods to avoid their being seized.
6. The enforcement agent can either seize the goods and remove them or enter into a "controlled goods agreement" with the tenant whereby the goods remain on the premises but the tenant acknowledges that it will not remove them until the debt is paid.
7. The landlord will have to give tenants a minimum of seven days' notice before selling the goods.

It is not possible for a landlord and tenant to enter into any agreement, which would grant the landlord wider powers than those available under CRAR; any provision of an agreement which tries to do so will be void.

How CRAR will affect tenants and landlords
While these changes will be welcomed by tenants having difficulties keeping up with rent payments, it will frustrate landlords and may make the recovery of arrears a more time consuming and costly process.

It remains to be seen how frequently tenants will simply pack up and move all valuable items elsewhere on receiving a landlord's warning notice, but the necessity of a Court order before dispensing with the notice requirement (and uncertainty as to what will be needed to persuade the Court to grant an order) is likely to increase the costs of the procedure for landlords.

Landlords will have to consider the other options available to them, including serving a statutory demand on the tenant (after which the landlord can commence insolvency proceedings if the debt remains unpaid), bringing court proceedings to recover the debt or taking steps to forfeit the lease. All of these will normally be more expensive than the remedy of distress would have been. There may also be some other security such as a guarantor or a rent deposit although a well-advised landlord will usually have looked to this before resorting to distress / CRAR.

Only time will tell whether the impending reforms will prove beneficial to either landlords or tenants.

About the author

Katherine Ekers is a solicitor in the Commercial Property team at Forsters LLP.