COVID-19: Rent arrears and CRAR during the lockdown

COVID-19: Rent arrears and CRAR during the lockdown

COVID-19: Rent arrears and CRAR during the lockdown

Since 26 March 2020 section 82 of the Coronavirus Act 2020 prevents landlords of commercial premises exercising any right of forfeiture or re-entry for non-payment of rent. This prohibition currently runs until 30 June 2020, but may be extended.

Following this, landlords were left considering what alternative options remained to claim unpaid rent from their tenants. This was particularly in respect of the widespread non-payment in certain sectors of the March quarterly rent that fell due on 25 March 2020. The next quarterly rent payment date is 24 June 2020, only a few weeks away.

A further government announcement on 23 April 2020 of measures against ‘aggressive rent collection’  by landlords to protect the largely closed UK high street included changes to the use of the commercial rent arrears recovery procedure (“CRAR”) and restrictions on the use of statutory demands and winding up petitions. At the time of writing we are still waiting on the legislation to make the necessary changes to the insolvency regime.  However the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 (the “Regulations”) were introduced on 25 April 2020 and amend the existing CRAR rules.

Overview of the CRAR procedure

It is worth revisiting how landlords can use CRAR in normal circumstances. Broadly, CRAR allows a landlord to recover unpaid rent by instructing an enforcement agent to serve notice then enter the tenant’s premises, seize their goods and sell them to meet the value of the rent arrears. It is a statutory procedure which came into force on 6 April 2014, replacing the common law remedy of distress. CRAR is only available to landlords of commercial premises and can only be used to claim arrears of pure rent, not any other amounts due under the lease such as service charges and insurance rent.

Entering closed premises during the lockdown

CRAR is exercised through an enforcement agent, rather than the landlord itself. The enforcement agent is instructed by the landlord and may, after giving the tenant seven clear days’ notice, enter the tenant’s business premises without a warrant. However, where the agent needs to use “reasonable force” to gain entry (for example due to the premises being closed), they require authority to use such force.

Since the outbreak of COVID-19, some businesses have been forced to close their premises temporarily under new regulations requiring compulsory closure of certain sectors, particularly the hospitality and leisure industry.  Many other businesses have followed government guidance with employees working from home where this is possible. While government guidance this week on easing lockdown might see some businesses reopen, enforcement agents will need to exercise reasonable force to access any closed properties and will require authority to do so. Authority may be granted through a warrant, or may arise automatically.

Applying for authority to use reasonable force

The enforcement agent may apply to the court for a warrant permitting reasonable force to be used. However, before granting this, the court must be satisfied that the goods have been deliberately removed from their original premises to avoid CRAR being exercised over them. In most current situations, the tenant will have simply closed their premises, often on short notice following the government’s announcement on Monday 23 March and will not have attempted to move their goods at all. Therefore, any application for a warrant will usually fail on this point.

In addition, when considering the current climate with courts operating remotely, even getting an application issued and heard will be more challenging.  In the context of the wider government measures to protect business tenants, the court may well refuse a warrant on the basis that enforcing CRAR is not appropriate in the circumstances.  With these extra hurdles, landlords are unlikely to see pursuing CRAR as worthwhile when premises are closed.

Automatic authority to use reasonable force

The authority to use reasonable force may instead arise automatically. Broadly, an enforcement agent has automatic authority where they are either:

  1. acting under power conferred by a warrant of control for the recovery of a sum adjudged to be paid by a conviction; this follows a criminal conviction, so is not relevant here
    or
  2. acting under a writ or warrant of control issued for the purpose of recovering a sum payable under a High Court or County Court judgment.

The second option is possible where the landlord has obtained a court order for rent arrears to be paid by the tenant as a debt. In practice, even if landlords are able to obtain a money judgment from the court, they may still find this difficult to enforce. The Civil Enforcement Association has reported that the enforcement of debts has been suspended during the COVID-19 lockdown, with civil enforcement agents putting CRAR on hold as well.

What has changed: effect of the Regulations

The Regulations came into force on 25 April 2020 and make three main changes which apply generally rather than just protecting high street tenants, which was the government’s stated intention. 

Firstly, where a notice of enforcement is given after 25 April 2020, CRAR may only be exercised where there is at least 90 days of unpaid rent outstanding rather than the usual 7 days. However this does not seem to be a particular protection to tenants who have not paid the March quarter rent, being 91 days of rent.  It would seem that if a tenant makes part payment of any rent arrears to bring the level below 90 days’ worth, they would be protected from CRAR.

Secondly, the Regulations extend current time limits for exercising CRAR where a notice has already been served. The usual deadline to exercise CRAR is 12 months from the date in the notice. This has been extended so that any CRAR notices that were due to expire close to the beginning of the lockdown are extended by 12 months and landlords will still be able to rely on those ‘old’ notices once current restrictions are lifted.

Thirdly, the Regulations now clarify that an enforcement agent may not enter or take control of goods at domestic premises or highways during the lockdown (i.e. at a time when the person living at the address contained in the enforcement notice would be prevented from leaving without reasonable excuse).

Conclusion on CRAR

CRAR is still a potential option for landlords whose tenants have several months’ of unpaid rent outstanding and whose premises are open and accessible. If there are at least 90 days’ of unpaid rent, the landlord is still free to instruct an agent to serve an enforcement notice in the usual way. However, landlords may find it difficult to find an enforcement agent who is willing to exercise CRAR during the lockdown, and will certainly be prevented from doing so if the goods are being held at residential premises or a highway.

A landlord may nevertheless instruct an agent to serve an enforcement notice which meets the new requirements with the option to exercise it once the lockdown lifts.  Whether it will want to do so and potentially jeopardise its tenant’s survival and recovery from lockdown (and any future rental income) will be a commercial assessment for that landlord. 

While the current Regulations are in force tenants would do well to keep any arrears under 90 days if possible,  to protect themselves from any landlord CRAR action during lockdown. With the June quarterly rent payment only weeks away and potentially the lockdown lifting around the same time, this is likely to become more challenging for many tenants who may then have 6 months’ rent outstanding on their premises. Additional government intervention has been called for by certain sectors. The government published non statutory guidance on 7 May 2020 encouraging ‘responsible contractual behaviour’ in performing and enforcing contracts (see guidance here) but does not appear to have the appetite to legislate further to restrain enforcement of contractual or statutory rights during the COVID-19 emergency, but this cannot be ruled out.

Please note that this guidance reflects the law at the time it was written on 14 May 2020. The amount of unpaid rent which needs to be outstanding to exercise CRAR has since increased from 90 days to 189 days and may be subject to further change.

 

Contact our experts for further advice

View profile for Helen WheddonHelen Wheddon, View profile for Adam CreaseyAdam Creasey

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