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Commercial landlords put on notice by CRAR introduction

19 August 2013

Good news is said to come in threes. Retail tenants will have welcomed news that the recent warm weather drove UK retail sales in July to their highest growth since 2006 as like-for-like sales rose by 2.2% from July 2012, up from a 0.1% increase for the same period last year. Further positive news is the announcement that landlords’ remedies for recovering rent arrears are to be restricted. From 6 April 2014, the right of distress to recover arrears of rent will be replaced with Commercial Rent Arrears Recovery (CRAR) for commercial premises.

This bulletin sets out a summary of the key changes and discusses the likely implications for tenants.
The Government has confirmed that it will press ahead with the abolition of distress and the introduction of CRAR. Part 3 of the Tribunals, Courts and Enforcement Act 2007, which establishes CRAR, will be brought into force in April 2014.

The reforms are significant as they will abolish the landlord’s ancient remedy of distraint. Distress is a common law ‘self-help’ remedy allowing landlords to recover arrears of rent by seizing a tenant’s goods and selling them in instances of tenant default. There is no requirement for a landlord to give notice or obtain permission from the court before exercising the remedy.

Whilst CRAR will still allow landlords to remove and sell goods, new checks and balances have been introduced to protect tenants.

A summary of the key points:

1. Commercial premises:

CRAR only applies to rent arrears due under leases of commercial premises and cannot be used for premises that are either occupied or let as a dwelling, which may include mixed-use premises.

2. Written tenancies:

CRAR will only apply to a ‘tenancy’ as evidenced in writing. Landlords can therefore use CRAR in respect of written tenancies at will but not for licences to occupy.

3. Basic rent:

A key point sure to be welcomed by tenants is that CRAR will only be available in respect of arrears of ‘basic’ rent, together with VAT and interest on the basic rent. Crucially, it will not be available for service charge arrears, insurance charges or rates, even if these sums are reserved as ‘rent’ in the lease. It is to be envisaged that the recovery of inclusive rents could become difficult.

4. Notice:

A key change is that landlords will be required to serve a ‘notice of enforcement’ on the tenant before sending in the bailiffs. Seven clear days notice will need to be given. Landlords will be able to apply to court to ask that the notice period is reduced if they believe that there is a serious risk of tenants removing the goods.

5. Minimum level of arrears:

CRAR can only be exercised if the outstanding sums exceed a minimum amount of 7 days’ rent (once interest, VAT and any set-off have been deducted).

6. Enforcement agents:

Only an enforcement agent authorised in writing by the landlord can seize the goods and therefore landlords themselves will no longer be able to carry out the distraint.

CRAR brings welcome news to tenants of commercial premises as it limits the ability of landlords to take immediate enforcement action without prior notice. Given the introduction of the 7 day notice of intention and the prohibition on using CRAR in respect of arrears of service charges, insurance charges and business rates, landlords may seek to avoid CRAR and instead rely more heavily in future on alternative forms of security, such as a recourse to draw down from rent deposits and the pursuit of guarantors and former tenants.

Given the implementation of CRAR and the recent positive news from the high street, retail tenants will be hoping for a third piece of goods news!

The content of this bulletin is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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