Advantages and Disadvantages of CRAR!

Shergroup

3 years ago

As a landlord, you may be faced with unpaid rent by a tenant in the course of managing your property. In commercial tenancy agreements, there is a specific recovery framework that enables arrears to be recovered by enforcement action. This is the commercial rent arrears recovery process (known as CRAR).

What is Commercial Rent Arrears Recovery?

Let’s give you a little background of the law.

CRAR is a method of enforcement action for commercial property rental arrears that was implemented on April 6, 2014.

The commercial rental arrears recovery process allows a landlord to authorise enforcement agents to seize custody of a tenant’s assets and sell them to recover rent arrears of equal value.

The CRAR establishes a staged process in which enforcement officers are required to send various notices to tenants. Although no specific form of notice is required, the CRAR does stipulate that a certain amount of information must be included.

Application of CRAR

Circumstances in which CRAR does and doesn’t apply |

CRAR doesn’t apply

Tenancy at sufferance (which is created when a tenant stays in occupation of a property beyond the expiry of the lease, without the landlord’s consent).
Licences (such as licences to occupy).

CRAR applies

All tenancy arrangements for ‘commercial’ premises.
It only applies to the premises which are covered by the lease.
Such tenancies must be in writing – specifically, the CRAR provides that if the tenancy is not in writing the CRAR cannot be exercised.
‘Tenancies at will’.

For agricultural holdings specific rules are applicable.

Definition of a commercial lease

CRAR only applies to commercial leases, as previously stated. Commercial leases are those that are not let or inhabited for a residential home for CRAR.

Landlords should be aware of the usage rights offered to tenants, as this could result in the lease not being classified as a “business” lease, removing the opportunity to pursue enforcement action under the CRAR. The word ‘as a habitation,’ as mentioned above, is defined in law, and applies when the lease enables one or both of the following |

occupation only as a dwelling; or
occupation as a dwelling together with another use.

If residential lettings are provided in violation of the provisions of a superior lease, they will be in scope (and the ahead lease will not be taken out of scope). This is the case to prevent a commercial tenant from circumventing the CRAR regime by simply allowing a third party to occupy as a residence in violation of the superior contract.

S.No	Advantages of CRAR	Disadvantages of CRAR
1.	Can be quick and efficient means of recovering arrears.	For landlords, it will have the effect of waiving any right to forfeiture (meaning the right to bring the lease to an end) that may have arisen. Given this, before taking action as part of the CRAR process, a landlord should take specific advice and explore:· whether it will matter that any right to forfeit will be lost in consequence; and· how the landlord will deal with any existing breaches of the lease (other than the non-payment of rent).
2.	Limited costs as the cost of enforcement are borne by and recovered from the tenant as part of the enforcement recovery.	In addition, as the tenant is required to be given seven days’ notice of the potential enforcement action, it provides the tenant with the opportunity to dispose of or ‘hide’ its assets before the seizure.
3.	Your current tenant would stay on the premises, saving you the problem of having an empty shop temporarily and having to find a new tenant.	Perhaps the biggest issue is that an Enforcement Agent cannot act on CRAR and Forfeiture of the same debt at the same time, exercising CRAR constitutes a waiver of the right to instant Forfeiture (of the Lease). So, if CRAR is used and it is determined that your renter does not have the financial means or assets to pay the obligation, you are basically “stuck with him” until the following quarter is unpaid, which could be very costly.
4.	If the Debtor pays in full at the time of the call or adheres to the Controlled Goods Agreement agreed, you will receive the monies owed to you.	The worth of the seized goods is the other issue. The auctioneer costs are deducted first from the sale, followed by the compliance fees, and any remaining money is applied to the outstanding amount and fees. As a result, if the sales of goods do not create a lot of money, you may get a very low return. Furthermore, the tenant is unable to trade because you have removed the commodities that allow them to do so.

CRAR letter and proceedings: what is the process?

Before a CRAR can be exercised

The following conditions must be met before a CRAR can be exercised |

the tenant must be in arrears before giving notice of enforcement
the amount of arrears claimed must be certain or capable of being calculated with certainty
amount of arrears claims meets minimum amount set out in the legislation – this is currently stated to be seven days’ rent; and
arrears must still be unpaid at the point when the enforcement action takes effect (being the date the goods are taken).

Who can exercise the CRAR?

The principal party who can use the CRAR is the landlord. The Act defines the “landlord” as the sole person who is entitled to the instant reversion of the lease. This means that a landlord can use it if his or her immediate tenant has failed to pay the rent (not a sub-tenant).

It is not usually the case that the landlord is the same. When there is joint ownership, any of the joint owners have the right to exercise the CRAR rights.

There are some other circumstances where a party other than the landlord may exercise the CRAR. This includes|

a lender or mortgagee (normally a bank or building society); and
a court receiver.

A mortgagee may also enforce CRAR, but only where |

notice has been given by the mortgagee of its intention to take possession; or
the lease is binding on a mortgagee.

If a receiver has been appointed in the landlord’s interest, the receiver may exercise the CRAR in the landlord’s place and on the landlord’s behalf.

Stages

There are three stages to the CRAR as follows |

The compliance stage | the seven-day letter (enforcement notice) provides notice of arrears and offers the tenant a seven-day period to pay the arrears.

Enforcement stage | if the tenant fails to pay within the seven days, the enforcement officer seeks to take control of the property of the tenant equivalent to the value of the rent owed; and

Disposal stage | the seized goods are typically sold at public auction.

Distribution

The proceeds of the sale of any assets seized must be used to pay the amount due. The amount due is calculated as follows |

the debt remaining unpaid (or such lower amount if the landlord agrees to accept this in full payment of the amount due); and
costs recoverable in exercising the CRAR.
Any surplus of the proceeds after payment of the outstanding amount must be given to the tenant.

Time limits for enforcement

The enforcement agent shall execute the recovery within 12 months of the date of the enforcement notice. With a court order, this period could be extended. If the court is convinced that the time limit has been exceeded, the court will extend it if |

the application to the court has been made by either the appropriate agent or the landlord.
there hasn’t been a previous extension of the time, and
the court considers that the landlord or the enforcement agent has reasonable grounds for not having taken control of the goods during the initial 12-month period.

If the enforcement agent and the tenant reach a repayment agreement, the 12-month time limit will be extended. If the repayment agreement is breached, the 12-month period will begin to run from the date of the lease breach.

CRAR and eviction

A tenant can regain possession of the property by forfeiting the lease, but it does not allow them to recover unpaid rent. If a landlord chooses to forfeit the lease, he or she loses the power to seize the tenant’s assets and use them to settle the arrears through the CRAR process.

However, there are certain advantages to forfeiting. In most cases, there is no need to give notice. Furthermore, if the tenant continues to fail to pay rent, the landlord will wish to take possession of the property as soon as possible so that it can be re-let and earn rental income.

Following the end of a lease, CRAR can only be used where |

control of the goods had already been taken before the end of the lease, and
the rent was due and payable before the end of the lease and all of the following apply |
the lease was not forfeited.
it is within 6 months of the end of the lease.
the rent was due from the tenant and that person is still in possession of part of the premises.
any new lease under which the tenant remains under possession is a commercial premise, and
the landlord is unchanged.

Summing-up

If a landlord is owed rent, he or she may seek forfeiture as well as the CRAR process. If possible, forfeiture helps the landlord to reclaim its property swiftly, and the prospect of forfeiture may even force the tenant to pay the arrears. CRAR may be a rapid way to get rent paid and ensure that the tenant continues to occupy and pay rent in the future, as well as allowing the landlord to include its expenditures in the rent recovery.

The key to using CRAR is to have a certified Enforcement Agent handle the case on your behalf. They are the ones who will speak with the debtor and, if necessary, reclaim any goods.

Shergroup has a competent team of Certified Enforcement Agents that are experts in the use of CRAR and other debt collection processes. This means we can provide our services and knowledge to assist you in determining whether CRAR is the best course of action for your situation and, if so, putting the process in place. You can contact us on the following list of channels to discuss your requirements and get started.