Can A Landlord Of A Commercial Property Legally Sell A Tenant’s Goods If that Tenant Is In Arrears Of Rent?
A landlord and tenant will normally enter into a commercial lease agreement with the expectation that rent will be paid on time and in full. However, the reality is that, on occasion, tenants may fall behind on their rent payments, leaving landlords in a tricky financial position.
In such cases, the Commercial Rent Arrears Recovery procedure (“CRAR”) which came into force on 6 April 2014 can be a valuable legal tool for landlords. CRAR is a statutory process that empowers landlords of commercial premises to recover rent arrears by taking control of a tenant’s goods and selling them to recoup the unpaid rent.
This article gives a brief overview of CRAR, how it works in practice, its legal framework, its advantages for both landlords and tenants and what commercial tenants should keep in mind.
What is CRAR and how does it work?
CRAR is a legal procedure established in England and Wales under the Tribunals, Courts and Enforcement Act 2007, and the Taking Control of Goods Regulations 2013. It provides a structured and regulated approach for commercial landlords to recover rent arrears from tenants. CRAR applies regardless of whether it is expressly referred to in the lease or not.
CRAR is applicable to commercial property leases where a lease is in writing, the tenant is in arrears of rent, and the lease is not a ‘relevant goods lease’ (e.g., leases involving residential properties or mixed-use (commercial and residential) premises). Before commencing the CRAR process, landlords must provide tenants with a statutory notice, which typically gives the tenant seven days to settle the outstanding rent. This notice informs tenants of the impending action and provides an opportunity to resolve the matter without legal proceedings.
If the tenant fails to pay the arrears within the specified period, the landlord can instruct a Certified Enforcement Agent (“CEO”) (often referred to as a ‘bailiff’) to take control of the tenant’s goods. It is important to note that CRAR can only be carried out by a CEO and not any other type of bailiff. The agent will prepare an inventory of the goods, secure them, and assess their value.
Once the goods are under control, the enforcement agent has the authority to sell them at auction or through other means to recover the outstanding rent. The proceeds from the sale are first used to cover the agent’s fees, followed by the rent arrears, with any surplus being returned to the tenant.
Who can use CRAR?
Before any action can be initiated under the CRAR process, a minimum sum equal to seven days’ rent must be in arrears. Furthermore, the tenant must receive a notice of enforcement that contains specific information, and this notice must be provided at least seven clear days before any goods are subject to seizure.
In circumstances where there is a concern that the tenant may attempt to remove goods from the premises, especially during situations such as insolvency, it is possible to seek a court order to reduce the notice period.
CRAR imposes various additional requirements, which are as follows:
- The notice served on the tenant must contain all the necessary details as prescribed by law.
- The notice must be served on the tenant in a precise and legally compliant manner.
- From the moment the notice is served, there is a time limit of 12 months within which goods can be seized under CRAR.
- Goods can only be seized during specific times as defined by the regulations.
- CRAR specifies certain types of goods that can be seized, and an inventory of these seized items must be meticulously maintained.
- Goods that are seized must undergo a valuation process and cannot be sold for a minimum of seven days, affording the tenant some time to address the arrears before any sale takes place.
These requirements are an integral part of the CRAR process, ensuring that the procedure is carried out fairly and in accordance with the law while also offering safeguards to tenants in commercial lease agreements.
The general rule is that CRAR can only be used by landlords of commercial premises if the tenant remains in occupation of the premises. There must be in existence a lease in writing, a mere licence to occupy the premises will not be sufficient to use CRAR. Furthermore, CRAR can only be used to recover principal rent. It cannot be used to recover other sums owed by the tenant to the landlord (i.e., insurance premiums and service charges).
Advantages of CRAR
CRAR offers several advantages for both landlords and tenants:
- CRAR provides a clear legal framework that protects the rights of both parties. It ensures that the process is fair and transparent.
- The statutory notice period allows tenants a chance to settle the arrears of rent before goods are seized, potentially preventing the need for legal action.
- CRAR is generally more cost-effective than traditional legal proceedings, as the tenant’s goods are used to cover the outstanding rent.
- Unlike eviction, which may lead to the termination of the lease, CRAR allows the tenant to remain in the property while addressing the arrears.
- Landlords have a reliable means to recover unpaid rent, reducing both financial losses and the need for litigation.
Issues which the commercial tenant should bear in mind
When a notice of enforcement is issued, it effectively binds the tenant’s goods to the property, preventing any sale or removal of the goods. However, there are avenues available to navigate this situation. One option is to seek a postponement of enforcement through an application to the court for a delay of execution or a set-aside order.
Alternatively, the tenant can enter into a controlled goods agreement to gradually repay the outstanding amount. Under such an arrangement, the goods will continue to remain on the premises. It’s important to note that, in the event of a default on the agreed repayment plan, the landlord’s enforcement agent retains the authority to remove them.
In cases where goods are seized, the enforcement agent is obliged to provide the tenant with a comprehensive inventory of all seized items, in accordance with section 33 of the Taking Control of Goods Regulations 2013.
Regarding the expiration of the lease, it’s important to understand that the landlord can only employ the CRAR process under specific circumstances, including if:
- the lease was terminated within the past six months;
- the lease did not end due to forfeiture;
- rent arrears were outstanding at the time of lease termination;
- the tenant still has possession of some of the goods that were previously located on the premises;
- the tenant is currently in control of the goods under a commercial lease; and
- the former landlord had the right to immediate reversion at the time the lease concluded.
Failure to meet financial obligations, such as commercial rental payments, when they come due, can serve as an early indicator of potential insolvency. If your company finds itself in this situation, it is highly advisable to seek professional advice on insolvency or turnaround strategies from a reputable firm. Taking proactive steps in such circumstances can often lead to a more favourable outcome and the preservation of the business’s long-term viability.
The CRAR procedure is a vital tool. More often than not, landlords and tenants enter into commercial lease agreements with the expectation of timely rent payments, albeit sometimes tenants find themselves in arrears of rent. In such instances, CRAR offers a structured and regulated approach to address such arrears, benefitting both parties.
CRAR is generally advantageous for both landlords and tenants. It provides a clear legal framework, opportunities for resolution before goods are seized, cost-effectiveness compared to litigation, and the ability for tenants to retain their tenancy during the process.
In essence, CRAR represents a well-structured and equitable mechanism that aids in maintaining the balance between the interests of commercial landlords and tenants. By understanding its provisions and implications, both parties can navigate rent arrears situations with clarity and fairness, preserving the long-term viability of their business relationships.
How we can help
If you are a commercial landlord or tenant requiring advice in relation to CRAR or any other type of commercial landlord/tenant dispute, we would be more than happy to advise and guide you to a satisfactory resolution out of court, or through litigation if necessary. As always, we will ensure that your matter is dealt with efficiently, diligently and effectively.
This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2024.