The Pros and Cons of Commercial Rent Arrears Recovery (CRAR) vs Forfeiture

As a Landlord of somebody with Commercial rent arrears, exactly what are your options, and which is the best option for you?

There are pros and cons for each option available, but we run through them below.

CRAR (Commercial Rent Arrears Recovery)

A Landlord under a lease of Commercial premises is permitted under SECTION 72 OF THE TCE ACT 2007 to use the Taking Control of Goods procedures in Schedule 12 to the act, to recover rent payable under the lease.

In order for the Taking Control of Goods procedure to be used for CRAR, the minimum amount that must be unpaid and overdue is an amount equivalent to at least 7 days rent (or more). This process can only be operated by instructing a Certificated Enforcement Agent, in writing and signed by the Landlord.

The process is as follows:

Following the change in regulations back in April 2014, the Enforcement Agent is now legally obliged to send the Debtor a “Notice of Enforcement” (Otherwise known as a Compliance Letter) giving the Debtor 7 clear days to contact them to arrange payment.  At this point, this incurs a fee of £75 added onto the initial debt

If they fail to contact the Enforcement Agent, then he will call to the property, during opening hours, where he will Take Control of Goods, as per the TCE 2007 Act and TCOG Regulations 2013. This incurs a fee of £235 (plus 7.5% of the initial debt of anything over £1500) to be added onto the outstanding balance.

The EA can then either;

• Remove the goods from the premises to be sold at auction in an attempt to cover the outstanding debt (Actual Seizure).  At this point an Enforcement Agent sale and removal fee of £110 (plus 7.5% of the initial debt of anything over £1500) will be added to the outstanding balance.
• With your agreement, we enter into a Controlled Goods Agreement, whereupon the goods are still listed on paper (Constructive Seizure), but the Debtor can keep them, and to utilise them in order to continue trading, but agrees to pay the debt back in installments. Should they fail to do this, the goods can then be removed.
• The goods can be secured on the premises, in such a way to prevent the Debtor having access to them, or any use of the goods being made. If this is not possible and there is no other way of securing the goods (in the case of business premises) the whole of the premises containing the goods (or the non-domestic part of a mixed-use premises) may be secured and the goods could be sold on site. Or, the Enforcement Agent could also remain on the premises to guard the goods until they are secured, or arrangements for removal are underway.

Pros for CRAR

• All fees are payable by the Debtor
• Your current tenant would stay in the premises, saving you the problem of having an empty shop temporarily, and having to find a new tenant.
• 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.

Cons for CRAR

• Exercising CRAR is a waiver to the right to immediate Forfeiture (of the Lease) as an Enforcement Agent cannot action CRAR and Forfeiture of the same debt during the same period. So, if CRAR is exercised and your tenant is found to not have the means or assets to pay the debt, you are effectively “stuck with him” until the next quarter is unpaid, which could prove very costly.
• If goods are removed and sold, the money fetched must be distributed in a particular way, as per the TCE 2007 Act. Co-owner, then Auctioneer costs are be taken first and foremost from the proceeds of the sale, then the £75 Compliance fee, and then the remaining monies are distributed pro-rata in relation to the debt due and the total of remaining fees and costs. This could mean that you have gone to the trouble of instructing an Enforcement Agent, but the monies you receive from the proceeds of sale do not cover the debt, and that your tenant still has a lease with you, which you are unable to forfeit, but that tenant is now unable to trade as his goods have been removed. This could mean you have a premises for which unpaid rent is further accruing, and for which you have no means of collection in that quarter also, as the tenant now has no goods to remove.

With the Enforcement Agent legally obliged to send out a Notice of Enforcement (Compliance Letter) this could “tip off” the tenant before the Enforcement Agent calls, which could give him time to remove or secrete assets, or to abscond from the property overnight.

Forfeiture

Forfeiture is when a landlord ends the lease due to the tenant breaching the terms of that lease by not paying their rent, or by other significant breach.

A Commercial Landlord does not have an automatic right to forfeit a lease before the specified termination date without recourse to the Courts, and can only do so if there is a relevant Clause specified in the Lease.  If you have been prudent enough to include such a clause in the lease, a Landlord can choose to go for Forfeiture of a premises (Repossession), as per the Lease.

Once instructed in writing, our Enforcement Agent would call out to the property (when it is closed and unoccupied**) with a Locksmith. The Locksmith would then enter the property and change all locks, providing the keys to the new locks to the EA to give to the Landlord.  The EA would enter the property and would complete an inventory of all items inside, take photographs and would take Electricity and Gas meter readings if able.  The EA would then secure the premises, posting Notices to all doors and windows of the property, advising that the Lease has now been forfeited, and that any attempt to re-enter the premises would constitute a criminal offence.

**However, should the tenant be on the premises at the time of the EA visit, and refuse to leave when asked, and then staying at the premises throughout the day and night, the Landlord must apply to the Court for possession of their property.

Pros for Forfeiture

• It is a quick and effective method to regain control of your property.
• Forfeiture or re-entry, is a useful tool for landlords who want to protect their interest in the property and obtain possession when a tenant breaches the lease or becomes insolvent.
• The property may be made available almost immediately for redevelopment, be re-let at a higher rent in a buoyant market, or a landlord may simply be able to rid him/herself of a problem tenant.
• The tenant is unaware that the procedure will take place, and so has no time to damage property, or squat on the premises and force the Landlord to use the Court process, which can be long wined and costly.
• For tenants a “right to apply” for relief of forfeiture exists, and will usually be granted if the full amount of arrears, plus costs of any proceedings is paid in full, meaning that you could get the monies owed to you, but you would have to allow the tenants back into the property to continue their lease.

Cons for Forfeiture

• Once possession is re-taken, until a new tenant is in place, the Landlord will be liable for payment of insurance, and may be liable for utilities and business rates too, (dependant on the lease), although empty rates relief may be available.
• There is also a risk that squatters may move into the empty property. Landlords may therefore want to ensure that extra security measures are put in place.
• Once a lease has been forfeited, landlords become involuntary bailiees of any goods left at the premises. These goods belong to the former tenant and the landlord has a duty not to cause reckless or deliberately damage to them. In these cases, tenants should be served statutory notices to collect their belongings.

Having listed the pros and cons for both CRAR and Forfeiture, it is down to you as the Landlord to decide which method would be most suitable for your current position.