One of the remedies for rent arrears in commercial tenancies is a process known as forfeiture.
Another is a more recently available remedy known commonly as CRAR – Commercial Rent Arrears Recovery. CRAR is a successor to an earlier and somewhat Draconian process known as Distress for Rent, which was abolished 6th April 2014.
It is important to note that there are currently special restrictions on recovering possession and rent under emergency measures passed because of Covid – landlords should seek legal advice.
This article refers to English law. It is not a definitive interpretation of the law. Every case is different, rules change over time and only a court can decide – always seek expert advice before taking action or not.
Whereas with distress, bailiffs could enter a tenant’s business premises without notice, demand arrears in full on the spot, and threaten to distrain (seize) goods within the premises In additions to the embarrassment felt by the tenant, especially if customers were present, the action could effectively shut the business operation down. It usually had the desired effect, as the tenant would need to find funds very quickly, if the business was to be saved.
Unlike Distress which was a common low solution, (CRAR) is a rather more restricted statutory procedure which still allows landlords of commercial premises to recover rent arrears by taking control of the tenant’s goods and selling them, but it is carried out in a much more tenant friendly manner with a period of notice.
In order to use CRAR, a landlord must provide the tenant with a minimum of 7 days’ notice of enforcement action. After this period only Certificated Enforcement Agents – as opposed to commercial bailiffs – can only enter a property using an open or unlocked door in order to seize goods.
Forfeiture or CRAR?
The point of the case here in Brar & another v Thirunavukkrasu (2019) is that it’s an either or situation: landlords cannot use forfeiture if they have used CRAR. In any case, forfeiture is a last resort as landlords, especially under the current circumstances with Coivid, but also with the turmoil going on on the high street. Take back control and landlords take on all the liabilities and cost of a vacant building – business rates, insurance, service charges missed, and the uncertainty of when it will be occupied again.
Landlords have a right to proceed with forfeiture providing there is a clause in the lease to enable the landlord to forfeit or re-enter the premises under certain circumstances. Serious non-payment of rent is deemed sufficient grounds for the landlord to use the right to forfeit as a remedy. The process brings the lease to an end following the tenant’s breach of the terms of the lease. In practice this must be a serious breach otherwise the tenant may get the lease reinstated by appeal to the courts.
Enforcement of forfeiture is by the landlord communicating an unequivocal intention to bring the lease to an end, and either proceeding with forfeiture by peaceable re-entry or by issuing court proceedings, the latter being the safer option.
Peaceable re-entry is the act of re-entering and securing the premises. This would usually be enforced by a certified bailiff, attending the premises with a locksmith to change the locks and affix notices. Breaches of the lease other than rent arrears would require the service of a 146 notice (Landlord & Tenant Act 1954) before the landlord can forfeit, for example for the serious breach of a repairing covenant.
CRAR, rights and obligations
Unlike forfeiture, CRAR can be used whether or not reference is made to it in the lease and landlords can require any sub-tenants to pay rent directly to clear off any rent arrears, using another statutory procedure similar to CRAR, but with 14 days instead of 7 days’ notice.
There are some restrictions. CRAR applies only to premises which are wholly commercial in use, not to residential or mixed use premises and it cannot be used to recover service charges. At lease 7 days rent must be outstanding and a prescribed notice must be given. Landlords may ask the court to reduce the 7 clear days’ notice if there is a risk of tenants removing goods.
The case – Brar & another v Thirunavukkrasu (2019)
This was an appeal court hearing in The Chancery Division dismissing the landlords’ appeal against a previous case judge’s ruling that their purported forfeiture of a lease, after enforcement agents had used the CRAR procedure, in respect of the tenant’s goods, had been unlawful.
The landlords had waived their right of forfeiture by exercising CRAR said the judge. The court upheld the decision in a previous hearing that, among other things, that the landlords’ use of CRAR had contained an “unequivocal representation that the lease was continuing”, and that the previous judge had not erred in his conclusions.
The case history
The tenant ran a convenience store under a 20-year lease. The lease contained a break clause that either party could exercise and the tenancy enjoyed security of tenure protection under the Landlord and Tenant Act 1954. The tenant fell into arrears, was obviously in financial difficulties and had accrued serious rent arrears.
The landlord initially engaged agents to exercise the landlord’s right under CRAR who seized goods from the tenant. The tenant subsequently made a payment intended to cover the amount of arrears together with the agent’s fees.
However, the landlord had miscalculated the agent’s fees and concluding that there were arrears still outstanding, had changed the locks and retook possession of the premises. The tenant then brought a claim for damages, arguing that the landlord had waived its right to forfeiture by exercising CRAR.
The first trial found that the landlord, through excising CRAR, had waived the right to forfeit. The High Court subsequently upheld this decision on appeal, and a further appeal was brought by the landlord in the Court of Appeal.
The Court of Appeal upheld the earlier decisions, finding that the landlord had indeed waived its right to forfeit the lease under the law by exercising CRAR. The landlord’s argument was that a formal statutory notice had not been served prior to execising CRAR and therefore the CRAR process was not a valid one.
The Court of Appeal could finding was that there was no merit in the landlord’s argument confirming that CRAR was exercised by the physical arrival of the enforcement agents at the premises.
This test case is useful in that it gives fair warning to landlords that there is a clear choice when facing serious arrears and that is to use one or the other remedy, you cannot use both.
Landlords are advised to seek legal advice prior to any enforcement action. There needs to be a sensible long term strategy in place and to think about the impact of any actions on the tenants’ ability to make up any shortfall in rent.