Many commercial landlords and tenants had long complained that the current laws were outdated, overly complicated and unfair. They seemed to favour the landlord in a way that was wrong but also made it unclear what landlords could and couldn’t do.
That all changed in 2014 when a new set of legislation was introduced – the Commercial Rent Arrears Recovery or CRAR. This process replaced the Rent Act 1977 for commercial properties and meant there were clear and modern rules around what could or couldn’t be done.
What is CRAR?
CRAR allows a commercial landlord to collect any overdue rent without the need for a court order. But there are conditions. For starters, it only applies to commercial tenancies and there must be a written lease in place. It also only allows for the collection of rent and interest as well as any VAT payable with the terms of the leave.
Under the new rules, landlords can only seek to recover the lost rent when 7 days have passed. Previously they could attempt this immediately. This is known as the ‘net unpaid rent’ and means there is a minimum amount before the CRAR system can be used.
2020 COVID-19 changes
Due to the coronavirus epidemic, there were some temporary changes to CRAR announced. During this period, CRAR could still be used to collect rent not paid but repossession by forfeiture was paused.
This means that from 25th June 2020, landlords were able to issues petitions and take goods for any debts that were incurred before the lockdown began in March 25th as long as enforcement notice was served. The threshold for CRAR was increased from 90 to 189 days for rent arrests for enforcement notices between 24th June and 30th September. Once this period has ended, it is still worth being aware that there were differences in CRAR during this period.
How rent is recovered
Under CRAR, the commercial landlord can use Section 72 of the TCE Act 2007 to use the Taking Control of Goods procedure of Schedule 12 to recover unpaid rent. Once the minimum period of 7 days has been reached, the landlord can instruct a Certified Enforcement Agent in writing to take action.
The process they will follow will then be:
- The enforcement agent will send the Debtor a ‘Notice of Enforcement’ also known as a Compliance Letter that gives them 7 days to get in touch and arrange payment. A fee of £75 is added to the initial debt
- If there is no response or payment, the enforcement agent will visit the property during working hours to take control of goods under the legislation. This incurs a fee of £235 plus 7.5% of the initial debt of anything over £1500.
The goods can then be sold at auction to recover some of the outstanding debts, which adds another fee of £110 plus 7.5% of the initial debt for anything over £1500.
Alternatively, a Controlled Goods Agreement can be entered where the debtor may keep the items and use them to continue trading but pays back the debt in instalments. If these payments aren’t made, the goods can be removed.
If the tenant has unpaid debts and is facing insolvency, they may seek assistance with this, and this may lead to the rent debt not being recovered and them no longer continuing to trade.
Pros and cons of CRAR
As with any system, there are pros and cons to the use of CRAR and these should be considered before committing to this option.
Pros of CRAR
For the landlord, one of the biggest things in favour of CRAR is that all fees involved are paid by the debtor. This means it doesn’t cost the business anything to go along this route.
The process also allows the tenant to remain in the property. This avoids the problem of an empty unit and having to find another tenant for it.
If the debtor pays or the Controlled Goods Agreement works, you will receive the money owed to you.
Cons of CRAR
Perhaps the biggest issue with CRAR is that if you use it, you waiver the right to immediate Forfeiture of the Lease as an Enforcement Agent cannot use CRAR and Forfeiture for the same debt at the same time. In other words, if the tenant doesn’t have goods worth enough to cover the debt, you are stuck with them until the next quarter, allowing them to run up greater debts.
The other issue is down to the value of the goods seized. Under auction, the auctioneer costs are taken first from the sale then the compliance fees and any remaining money is then put against the outstanding balance and fees. So if the sales of goods don’t generate a lot of money, you could see very little return. Plus, the tenant finds themselves unable to trade as you have taken away the goods that allow them to do this.
Are there situations where CRAR cannot be used?
Apart from the need for a written lease and a 7 day period to have passed, there are a couple of situations where CRAR cannot be used. Examples of these include:
- If the lased property is mixed-use or residential
- If the lease has come to an end (although there are some exceptions to this one)
- If any of the arrears cannot be calculated with certain (for example, with turnover rents)
How to get help
The key with the use of CRAR is that you must have a licensed Certified Enforcement Agent to handle the case for you. They are the ones who will then talk to the debtor and also recover any goods if this is needed.
Able Investigations are experts in the use of CRAR along with other debt recovery processes and are Certified Enforcement Agent. This means we can offer our services and expertise to help you decide if CRAR is the right course of action for your situation and to put the process in place if this is the case.