CRAR – what needs changing?

In July, the British Property Federation (BPF) put forward its views on CRAR.

CRAR – or Commercial Rent Arrears Recovery to give it its full title – was introduced in April 2014 as part of the enactment of the Tribunals, Courts and Enforcement Act 2007. It replaced distress for rent as the means for commercial landlords to recover rent arrears without a court order.

The BPF has raised several points in its review (http://www.bpf.org.uk/sites/default/files/resources/BPF-submission-to-CRAR-review.pdf) that it would like the Ministry of Justice to consider when reviewing CRAR.

Fees

The BPF states that some tenants are using the 7 day notice of enforcement period as a cheap “overdraft” facility: rent is overdue, they are sent the notice of enforcement and wait until the last day to make payment of the rent.

The £75 fee for this stage is not deterring this behaviour and the BPF feels it is not proportionate to the debt, although they do feel that the fee of 7.5% of the debt at the sale/disposal stage is too high.

7 day notice period

Even though the goods are “bound” once notice is received, the BPF says that a landlord has no way of knowing what those goods are and has to rely on the tenant telling the truth and not removing anything. Under distress, the certificated bailiff would attend without notice and take an inventory.

Services

The BPF believes that a delay in rent payment puts great financial pressure on smaller landlords who may have to pay for the continued provision of services before they receive their rent. If service charges are not paid, landlords will have to take the longer path of going to court to obtain a judgment, as CRAR only covers rent.

To cover themselves, landlords may end up asking for larger deposits and/or increasing service charges to cover themselves.

BPF recommendations

Let CRAR apply to service charges if these are included in the contract

A notice of enforcement stage fee of 2.5% of the debt and 5% for the sale/disposal stage

24 hour notice for an inventory check, then the standard 7 day notice of enforcement

“3 strikes and you’re out” – after the third CRAR notice, the landlord would not need to issue a notice and could move straight to the enforcement stage

Our response:

Service charges

Taking each point in turn, I totally agree that CRAR should cover service charges included in the contract, as was the case with distress for rent. These are charges directly linked to occupation of the leased premises, so should be recoverable in the same way as rent.

Fees

Secondly, whilst I understand the thinking behind some commercial tenants using the notice period as an unofficial “overdraft”, the fees for each stage do take into account the amount of work involved by the enforcement agent in undertaking each stage and what is therefore reasonable.

I think it would be difficult to justify charging 2.5% of a debt/rent arrears of say £10,000 for writing a letter. This would also go against the rationale behind the notice stage, which was to encourage payment sooner rather than later to avoid the debtor incurring further enforcement fees. However, I do think that the statistics show that not as many debtors are paying at this stage as the MoJ had initially hoped.

Inventory checks

The 24 notice period for an inventory check is a good idea in principle, but the implementation of this would be challenging. Who would carry out the inventory? Assuming it would be a certificated enforcement agent (the only person permitted to enforce under CRAR), then who would pay their fees for the inventory, which would cost more than £75? In all likelihood, it would be the landlord, with those fees then recoverable from the debtor.

Assuming it were at the landlord/creditor’s discretion, then I can see that in the case of a significant sum owed, or where there were high value assets being “bound”, then this would be of benefit. For a smaller landlord though, this may be one cost too far.

Three strikes

Three strikes is also an interesting idea, but I can see many tenants appealing to court if it were brought in. If a tenant is regularly late with rent, then forfeiture of the lease might be a more sensible recourse.

Given that any changes to CRAR would also apply to the enforcement of money judgments, then the three strikes rule could cause havoc – if there were several judgments at the same against one debtor, then how would the EA decide which to send notice for? If he attended to enforce the first three judgments he’d served notice on, could he then enforce all the others at the same time without notice? Multiple and simultaneous judgments against one debtor do occur, and more frequently than you might think.

It also raises the question of how do you keep a tally of notices sent if different EAs have been instructed? Whilst this is less likely in the case of CRAR, it is highly possible with the enforcement of money judgments.

In conclusion

Whilst I agree with the recommendations made by BPF, I think that one fundamental issue remains, and that is that this legislation has attempted to treat commercial rent arrears and the enforcement of money judgments in a very similar way.

The two should be completely separated, and that would then allow for a more relevant fee structure and process for commercial rent arrears recovery.

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