The summer of 2014 has brought us a little more than an embarrassing sun-burn and disappointing England performances. The property market is, dare I say it, showing very concrete signs of recovery. Indeed the speed with which parts of the market have exploded in recent months has left many in disbelief. The UK is still an attractive place to do business.
London’s busy property scene is not as confined as is sometimes feared by us northern types. The recovery has gradually extended its tendrils to the northern cities. The commercial world continues to recognise the importance of property acquisition and does not entirely use rented accommodation. Consequently, we have seen a significant rise in the value and frequency of property acquisition, as UK businesses feel increasing confident in the market’s stability. Renting business accommodation is the preferred option of the vast majority of SME’s. In turn this makes buying investment property attractive in view of interest rates.
Commercial Recovery of Rent Arrears – An Overview
The old remedy of “distress” was abolished on 6 April 2014 and replaced with the commercial recovery of rent arrears (CRAR). The Tribunals Courts and Enforcement Act 2007 governs the operation of CRAR and makes the new procedure compulsory in commercial property claims.
CRAR allows a landlord to instruct an enforcement agent to take control of a tenant’s goods and sell them in order to recover an equivalent value to the rent arrears. First, there are a number of various notices which need to be served on the tenant.
CRAR bears many similarities to distress. The devil is, however, in the detail. The old distress system was created in an ad hoc manner by the courts and Parliament and predictably the principal differences between the two regimes have increased formality and administration for landlords and protection for tenants.
CRAR v Distress
In contrast to recovery by distress, CRAR:
1. Requires there to be a written lease. A mere landlord/ tenant relationship is no longer sufficient.
2. Allows the Landlord to recover only the principal rent (plus VAT) and interest, with a minimum of 7 days’ rent needed to be outstanding before the landlord can invoke the CRAR.
3. Does not allow recovery of service charge, insurance recharge or electricity costs without a court judgement.
4. Applies to commercial premises only. It is no longer the case that the landlord can recover unpaid sums from mixed use premises of the tenant.
5. Requires the landlord to instruct an enforcement agent (rather than a bailiff) and must confirm their instructions in writing. The authorised agent must either be certified, exempt or acting under the presence and direction of someone who is.
6. Requires that the tenant receives 7 clear days’ notice prior to the exercise of the authorised agent’s entry of the property to recover goods.
7. Gives the authorised agent the right to enter the property between the hours of 6am and 9pm (on any day of the week) and during the tenant’s business hours.
8. Requires the goods recovered by the authorised agent to be sold at public auction or such other means of sale authorised by the court, after giving the tenant a further 7 clear days’ notice.
As the rent per square foot for many commercial premises seems to be consistently increasing, tenants will find themselves having to shell out more and more to rent space. If the economy holds strong tenants should largely be able to keep paying their rents.
However, in the event that the tenant is struggling to stay up to date, the CRAR gives it certainty and prior warning of their landlord’s intentions. The minimum threshold of 7 days’ rent at 7 days’ notice also prevents the landlord from making superficial claims and limits the Tenant’s exposure to disruptive proceedings for relatively small sums.
Obviously, the loss of stock (and reputation) to a tenant who is struggling with cash flow could be fatal. At least the CRAR grants the tenant a short grace period to get their house in order, which could be a vital lifeline to a drowning tenant.
Many landlords will find the restrictions under CRAR make the recovery process more difficult. In particular a canny tenant may pay the principal rent but delay for months with service charge. In such cases, a landlord may choose the more costly ‘nuclear’ option of serving a “winding-up petition” (provided the amount is undisputed and exceeds £750).