Frequently asked questions
When did Commercial Rent Arrears Recovery replace the Laws of Distress?
On 6 April 2014 the ancient Laws of Distress, which had been in need of modernisation, were replaced by a new regime known as Commercial Rent Arrears Recovery (CRAR).
The process of change began in 2007 with the Tribunals, Courts and Enforcement Act 2007 (TCEA2007) which set out the basic details as to how CRAR would work. The general election came and all appeared to go quiet until, in July 2013 the Taking Control of Goods Regulations 2013 were published, paving the way for CRAR.
Explain the new terminology under CRAR
Bailiffs are now known as Enforcement Agents.
Distress is now known as Taking Control of Goods.
Can a landlord take control of goods?
No, only an enforcement agent can take control of goods.
Under the old laws a landlord could distrain on his tenant himself, without enlisting the services of a bailiff. Under CRAR a landlord cannot take control and must instruct a certificated enforcement agent to do so on his behalf.
What has changed?
There are two big changes:
1. The enforcement notice giving the tenant 7 days to pay.
The biggest and most fundamental change under CRAR is the 7 day Enforcement Notice.
The old laws of distress enabled a landlord or managing agent to distrain for rent as soon as the rent was overdue, eg the day after quarter day, with no warning to the tenant.
Under CRAR tenants must be given 7 clear days in which to pay, in the form of the enforcement notice, which PBS send by post and where possible email.
2. Service charges and insurance cannot be collected using CRAR
Only pure rent, VAT and interest can be collected under CRAR.
Under the old laws a landlord could distrain for service charges and insurance, but under CRAR these charges do not qualify and must be collected as a debt.
What is meant by ‘Taking control of goods’?
There are three ways by which an Enforcement Agent can Take Control of Goods under CRAR for commercial rent arrears.
- The agent can secure the goods on the premises on which he or she finds them.
- The agent can remove them and secure them elsewhere.
- The agent can enter into a controlled goods agreement with the tenant.
A controlled goods agreement replaces the old walking possession agreement. It is an agreement under which the tenant is permitted to retain custody of the goods, but acknowledges that the Enforcement Agent has taken control of them and agrees not to remove or dispose of them, nor permit anyone else to, until the debt is paid.
What should a landlord do when a tenant falls into arrears?
Landlords and managing agents now need to act more swiftly than ever before, to avoid being caught out by the 7 clear days. During this period the tenant has a golden opportunity to avoid CRAR by removing their goods, or vacating the premises before the enforcement agent’s visit.
As soon as a tenant is in arrears, whether or not the landlord thinks they will pay after a few days, they should enlist the services of PBS immediately and instruct us to send the 7 day notice in order to start the clock ticking.
Delay could cost a landlord dearly.
What are the three stages of CRAR and the costs?
1. Compliance stage – sending the 7 day enforcement notice– no charge to clients
If the tenant pays within the 7 days, then all well and good – PBS do not charge clients for this service, so the landlord has nothing to lose. The tenant is charged an enforcement fee of £75 plus VAT.
If the tenant is wise they will make contact with PBS during the 7 day period and pay the arrears in full, or make a payment arrangement and pay the enforcement fee. £75 for this service is not unduly harsh for most tenants, who are more than happy to pay to avoid the much higher charges, which apply if they delay.
2. Enforcement stage – Taking Control of Goods – no charge to clients
If a tenant fails to pay within the 7 day period, on the 8th day PBS is able to go on to the next stage, taking control of goods and giving the landlord the upper hand.
PBS will send an enforcement agent to take control of the tenant’s goods and if necessary remove them to be sold to cover the arrears. The procedure is very similar to the old procedure under the laws of distress.
The costs set out by CRAR for this second stage of enforcement are as follows:
- For arrears of £1,500 and under – £235 plus VAT.
- For arrears over £1,500 – £235 plus 7.5% of the arrears outstanding minus the first £1,500, plus VAT.
3. Disposal stage – removing and selling goods
If, once the landlord has taken control of goods, the tenant fails to pay or defaults on a payment arrangement, the landlord can instruct PBS to remove and sell the goods to cover the arrears. A 48 hour default notice must first be sent to the tenant, giving them the opportunity to bring things up to date before any removal action can begin.
The costs to the tenant for this stage of enforcement are as follow:
- Disposal stage fee of £110 plus 7.5% of the sum outstanding minus the first £1,500, plus VAT.
- The auctioneer’s commission and out of pocket expenses
- Storage costs
- Reasonable disbursements incurred in respect of advertising the sale
The threat of removal is often the landlord’s most effective weapon and a landlord should not be afraid to take advantage. However it is worth considering the likely outcome of a sale before embarking on a removal, as any shortfall will be payable by the landlord.
Can the Notice of Enforcement give less than 7 clear days?
In exceptional circumstances a landlord can make application to the Court for an order giving their tenant less than 7 days’ notice, where they have good reason to believe that the tenant will dispose of goods in order to avoid those goods being taken into control by an Enforcement Agent. In practise this happens very rarely, but it is worth a landlord having the knowledge should it be required at some future date.
Do PBS charge for collecting service charges and insurance?
PBS offer a combined service for collecting service charge and insurance arrears, received together with a CRAR instruction for the same tenant. The service charges and insurance will be collected free of charge to the landlord, and providing the tenant pays in full within 7 days they too will incur no charge.
The two processes run side by side; we send a debt notice when we send the 7 day Enforcement Notice.
We cannot exercise CRAR in respect of the debt, but as we will be in communication with your tenant we will attempt to collect any non-rent arrears at the same time without charge to you or your tenant. The standard legal charges as dictated by CRAR will still apply for the rent.
What do PBS charge for debt collection where no rent instruction is given?
PBS offer a debt collection service for all commercial debts, with no charge to clients, even if we are unable to collect the debt. There is a small charge payable by the debtor, in accordance with Late Payment legislation.
Before engaging legal services and commencing costly court proceedings, it is worth instructing PBS to recover the debt. We have a dedicated debt collection team chasing service charges, insurance and other commercial debts.
Upon receipt of your instruction a member of staff will be allocated to your case and will chase the debt by post, email and telephone.
Our aim is to collect the debt in full or arrange a sensible payment plan.
Can CRAR be used with a Sub-Tenant?
Yes CRAR can be exercised on any sub-tenant.
Where there is a sub-lease in place, rather than serving notice on the immediate tenant, the landlord may instead serve notice on the sub-tenant, requiring the sub-tenant to pay the rent direct to the landlord.
The notice in this case is slightly different from the standard Notice of Enforcement, in that it allows the sub-tenant 14 clear days to pay, rather than the usual 7 days.
The sub-tenant may have paid the rent on time to the tenant, and it may be that the tenant has not paid the funds over to the landlord. CRAR allows 14 clear days with sub-tenants to account for this.
If the sub-tenant makes payment under such a notice then he may deduct that amount from the rent that he would otherwise pay to his immediate landlord i.e. the defaulting intermediate tenant.
If there is a chain of under-leases the deduction is passed up the chain.
If the sub-tenant fails to pay the amount claimed in the notice the landlord may exercise CRAR against the sub-tenant. However, the landlord cannot seek to recover the amount due from the sub-tenant by serving a further notice on an inferior tenant of the sub-tenant.
The 14 day Notice of Enforcement can be served at the demised premises, the sub-tenant’s head office, or any other address where the sub-tenant is trading. But CRAR only allows a landlord to take control of goods at the demised premises; not at the head office or any other address.
Can CRAR be used with Inclusive Rents?
An inclusive rent will often include an element in relation to rates, council tax, services, repairs, maintenance, insurance or other ancillary matters under the terms of the lease. If these items are included within the inclusive rent then they cannot be recovered under CRAR.
Where a landlord has an inclusive rent they must identify the amount payable for the use and occupation of the property in order to be able to exercise CRAR.
Can CRAR be used with Turnover Rents?
Similarly with regard to a turnover rent, although in most leases requiring payment of a turnover rent, the tenant will be paying a separate amount in relation to service charge etc. The landlord may therefore take the view that the whole of a turnover rent is attributable to the use and occupation of the property.
Can a landlord allocate a payment to arrears of service charge before rent?
If the tenant pays monies to the landlord but does not specifically identify them as being payable in relation to the rent, then the landlord is free to allocate those monies as they see fit.
Accordingly, a landlord could allocate the monies to arrears of service charges, where the tenant may have intended them to be allocated to rent.
The tenant may challenge this.
Can a landlord place the Enforcement Notice on the back of a rent demand?
Under CRAR only an enforcement agent can serve the enforcement notice on behalf of the landlord, therefore a landlord cannot add the notice to a rent demand.
Furthermore the landlord cannot instruct an Enforcement Agent to serve the notice until the rent is in arrears, meaning a landlord is unable to set out the wording in relation to an Enforcement Notice on the back of a rent demand.
What happens if the lease has expired?
This is dealt with in section 79 of the 2007 Act. For the purpose of section 79, the lease ends when the tenant ceases to be entitled to possession of the demised premises under the lease, together with any continuation of it by operation of any enactment or of a rule of law. So if the tenant is holding over under the Landlord & Tenant Act 1954, the landlord can still exercise CRAR.
Otherwise CRAR ceases to be exercisable when the lease ends, subject to the exceptions set out in section 79 (4) which include the following:
(a) The lease did not end by forfeiture.
(b) Not more than 6 months has passed since the day when it ended.
(c) The rent was due from the person who was the tenant at the end of the lease.
(d) That person remains in possession of any part of the demised premises.
(e) Any new lease under which that person remains in possession is a lease of commercial premises.
(f) The person who was the landlord at the end of the lease remains entitled to the immediate reversion.
Can CRAR be used to recover arrears of rent due from a tenant in a pub?
There are difficulties in using CRAR to recover arrears of rent due in relation to a pub if part of the demised premises is let as a dwelling.
If part of the demised premises is let under a lease as a dwelling, let under an inferior lease as a dwelling or occupied as a dwelling, then it is not treated as a lease of commercial premises and the landlord cannot use CRAR.
So if premises demised by a lease of a pub include a dwelling, then the landlord cannot use CRAR.
However, if those parts of the premises which could be used as a dwelling, are either empty or being used for something else (eg storage) or if the lease does not permit their use as a dwelling, then CRAR is still exercisable.
What of a landlord has allowed Grace periods?
The majority of leases require that the rent is paid on a particular date, either the quarter day or the first day of the month.
If historically the landlord has allowed the tenant to pay the rent late, then steps should be taken to make sure that the tenant knows that if the rent is not paid on the due date, according to the terms of the lease, then the landlord will be authorising an enforcement agent to serve notice on the tenant requiring that the rent is paid.
Can CRAR and Forfeiture be used in the same quarter?
There are two different scenarios here, firstly where both CRAR and forfeiture are both being used for rent, and secondly where CRAR is being used for rent and forfeiture for service charges and insurance
1. Can we take control for RENT and forfeit for RENT in the same quarter?
The answer is no as these are mutually exclusive means of recovery. However, where the enforcement agent attends after the Notice of Enforcement has been sent and seven days have passed with no contact, and finds the premises vacant, we can then formally withdraw from the CRAR process and proceed to forfeiture.
2. Can we take control for RENT, and forfeit for SERVICE CHARGES or INSURANCE in the same quarter?
The answer is yes, depending on the wording of the lease and again only if done in the correct sequence. A landlord wanting to use both remedies needs to take control first, as there must be an ongoing landlord/tenant relationship for CRAR to be used.
In circumstances where the tenant cannot or will not make payment, and the goods are of little value, meaning that removal is not commercially viable, the landlord can proceed with forfeiture for unpaid service charges and/or insurance. It must be stressed that this action can only be taken if the wording in the lease permits.