CRAR: Distressing Times for Landlords
Published: 29 January 2015
2014 was a year which saw significant change for landlords faced with insolvent commercial tenants. In April 2014, the Commercial Rent Arrears Recovery (‘CRAR’) regime came into force which abolished the ancient remedy of distress and left landlords looking for ways to mitigate the loss of this weapon in the armoury.
Whilst landlords have long enjoyed the ability to enter premises and seize the goods of a defaulting tenant, it has been an anomaly in a legal system which seeks to put creditors on an equal footing when a business falls into insolvency.
CRAR does not remove the landlord’s ability to seize goods, it just requires the landlord to give seven clear days’ notice of his intention to seize goods. This will give the tenant an opportunity to pay, seek professional insolvency advice or, for the more cynical of us, remove the goods to a place of safety!
A commercial tenant with a viable business (albeit with cash flow issues) will most likely continue to prioritise its landlord over other trade creditors, so seizure of goods will still remain a short term threat.
However, where CRAR is most likely to deprive landlords of their advantage is where the business of the commercial tenant is unviable and past the point of no return. The inability to pay rent is the alarm bell for both the landlord and the tenant, with the landlord racing to mitigate his loss by seizing goods and the tenant seeking professional advice on his options.
The 7 day notice period gives the tenant an opportunity to seek the advice of an insolvency practitioner and if appropriate put in place an insolvency regime which gives effect to the principle that all unsecured creditors should share in the company’s assets, (such as an administration).
This brings us onto the second significant change for commercial landlords of 2014:
From 1990 until 2009, landlords faced with a tenant in administration would adopt a ‘pay as you go’ system where their premises were used by the administrator for the purposes of the administration. Whilst landlords would have to accept that sums owed to them as at the date of administration were unsecured claims, they were paid rent in accordance with the lease during the administration. However, this established ‘pay as you go’ principle was abandoned by a judgment in the High Court in 2009 where it was ruled that if the quarter day fell during the administration, the entire quarter was payable in full and in priority to the administrator’s fees even if the premises were not used for the entire quarter.
In 2012, a further decision made clear that if the quarter day fell before administration, the entire quarter’s rent fell as an unsecured claim in the administration even if the administrator used the premises for the rest of the quarter.
This led to administrators being routinely appointed immediately after the quarter day thus avoiding rent for the full quarter. The issue was compounded for landlords where the administrator sold the business to a third party (usually connected to the directors of the tenant company) together with a licence to occupy the premises for the rest of the quarter rent free.
This continued until the administration of the Game Stores Group, tenants of several hundred retail stores. On 25 March 2012, about £10M became due to landlords. The Group went into administration the day after the quarter day and the administrator sold many stores to a purchaser together with a licence to occupy the stores rent free for the quarter. Landlords were prevented from forfeiting leases due to the moratorium of legal action which is central to the process of administration.
The landlords challenged this and the case reached the Court of Appeal last year where it was held that the ‘pay as you go’ principle applied and the rent was payable by the administrators as an expense of administration during the period in which the premises were used by the administrators for the purpose of administration. This also included the period during which the purchaser occupied the premises. The status quo pre 2009 has therefore now been restored and all commercial landlords faced with an insolvent tenant can breathe a sigh of relief.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.