Recovering Commercial Rent Arrears5th April 2014
Frequently Asked Questions/Tips for Landlords
Question: What steps should a landlord take to adapt to the new system?
Answer: Landlords should review their portfolios and systems to ensure they are ready with all the information required to serve a 7 day notice (see paragraph 6 above) on a defaulting tenant as soon as possible. That means keeping a full, accurate and updated record of accounts which separately record payments of principal rent, VAT on principal rent, interest on principal rent, service charge, insurance rent etc so that time is not wasted in trying to work out what proportion of the total arrears can be correctly claimed using the CRAR procedure when the time comes for notice to be served.
Although the CRAR procedure permits a variety of methods for service of the 7 day notice landlords should keep tenants’ contact details under regular review including a postal address, fax number and email address where notice can be served. The notice can be served:-
(a) by post addressed to the tenant at the place, or one of the places, where the tenant usually lives or carries on a trade or business;
(b) by fax or other means of electronic communication;
(c) by delivery by hand through the letter box of the place, or one of the places, where the tenant usually lives or carries on a trade or business;
(d) where there is no letterbox, by affixing the notice at or in a place where it is likely to come to the attention of the tenant;
(e) where the tenant is an individual, to the debtor personally; or
(f) where the tenant is not an individual (but is, for example, a company, corporation or partnership), by delivering the notice to—
(i) the place, or one of the places, where the tenant carries on a trade or business; or
(ii) the registered office of the company or partnership.
Question: Can the landlord and tenant just agree terms in a lease to provide for an alternative procedure, rather than CRAR, to recover arrears?
Answer: No. Any such provisions will be void. The parties cannot “contract out” of CRAR.
Question: What else can a landlord do to improve its position in view of these changes?
Answer: User clauses in commercial leases, where appropriate, should provide that use of the premises as a dwelling is not permitted. This is because a landlord cannot exercise CRAR in respect of premises being used as a dwelling unless that use is in breach of the terms of the lease.
In relation to mixed use premises a landlord may be better off letting each element separately so that it preserves its right to use CRAR in respect of the wholly commercial part. Separate lettings may cause other more practical difficulties for a landlord which it would rather avoid than have the ability to use CRAR so this option should be considered properly with a solicitor.
It would be wise for a landlord to require a tenant to pay a larger rent deposit and seek personal guarantees if possible.
Where an inclusive rent is set out as payable in a lease it should clearly record how the inclusive rent is calculated and apportioned so that the amount of rent specifically payable for use and possession of the property by the tenant, that is subject to CRAR, is certain or capable of being calculated with certainty.
Question: What can a landlord do to recover other arrears such as service charge and insurance if it cannot use the CRAR procedure?
Answer: A landlord could withdraw an amount in respect of the arrears from a tenant’s rent deposit, serve a statutory demand on the tenant (threatening bankruptcy or winding up the tenant company), issue county court proceedings to obtain a judgment against the tenant in respect of the arrears or take steps to forfeit the tenant’s lease if it contains a forfeiture clause. Landlords should be mindful that serving a CRAR notice will waive its right to forfeit so should consider this before such notice is served.
Question: Can a landlord use CRAR to recover rent arrears if its tenant goes into administration?
Answer: CRAR cannot be used in this scenario without the consent of the administrator or without the permission of the Court.
Question: If a landlord serves a CRAR notice and its tenant subsequently pays a proportion of the outstanding rent so that it falls below the minimum amount (equal to 7 days’ worth) can the landlord still go ahead and exercise CRAR for the balance?
Answer: No. The net unpaid rent must be an amount equal to or greater than 7 days rent both at the time that CRAR notice is served and when control of the goods is taken pursuant to that notice. Landlords may find, and tenants may be advised, that a proportion of rent is paid once the CRAR notice has been served so that the landlord is unable to exercise CRAR and seize the tenants’ goods for the balance.
Question: How will control of goods actually be taken by the enforcement agent?
Answer: There are 3 methods that must be used – (1) secure goods on the premises (2) remove the goods and secure them on different premises (3) enter into a controlled goods agreement with the tenant (similar to a walking possession agreement).