How might a landlord preserve their right to forfeit a lease when taking commercial rent arrears recovery action? It is possible. This article explains how.
What is CRAR and when can it be used?
Commercial rent arrears recovery (“CRAR”) is a method of enforcement action available to landlords of commercial property when their tenant falls into rent arrears. CRAR action may be taken in relation to commercial arrears, VAT and interest only, and is not available for insurance rent, unpaid service charges or for any other sums due under the lease that are not rent.
The procedure involves the instruction of an enforcement agent, and the enforcement agent must first serve 7 days’ written notice on the tenant, after which the agent can attend the leased property to take control of the tenant’s goods and sell them to discharge the debt owed to the landlord.
CRAR only applies to commercial leases, and there are limitations on when it can be used, including the requirement for the lease to be in writing. If there is no written lease, CRAR action cannot be taken. The rent must still be unpaid at the time the 7 days’ notice is served, as well as immediately before any goods are seized.
Preventing waiver of the right to forfeit – drafting the lease
If a landlord takes CRAR action in relation to commercial rent arrears owed by the tenant, the process of exercising CRAR will typically waive any right the landlord had to forfeit the lease due to breach(es) of the lease by the tenant.
It is, however, possible for the landlord to preserve their right to forfeit the lease, so that this is still available even after CRAR action is taken. There is an opportunity to do so when the lease is drafted. If the commercial lease contains an appropriately worded clause which, crucially, treats CRAR action as an ‘insolvency event’, the landlord can still forfeit the lease once CRAR action has been taken. This provides additional security to the landlord in terms of still being able to forfeit if, after CRAR action has been taken, the landlord remains concerned about the tenant’s financial position and wishes to forfeit the lease.
If the lease contains a clause treating CRAR action as an ‘insolvency event’, and the landlord subsequently takes CRAR action, the landlord should also ensure (during and after CRAR action is pursued) that they do not take any other steps that would constitute waiver of the right to forfeit. Waiver will occur if the landlord, with knowledge of the tenant’s breach, performs an unequivocal act that recognises the lease as continuing to exist and communicates that act to the tenant.
Once a breach of the tenant’s covenant to pay rent has occurred, any rent that falls due after the date of breach must not be accepted, as accepting new rent will waive the right to forfeit the lease in respect of the arrears owed. The landlord would then need to wait for a new forfeiture event to occur before they could forfeit the lease.
How Moore Barlow can help
Advice should be taken to ensure that CRAR action can be taken and that there is no breach of the CRAR provisions (which could entitle the tenant to claim damages). Advice should also be taken on wording the lease appropriately to permit the landlord to take CRAR action without forfeiting the lease and – if CRAR action is anticipated – to ensure no actions are taken that would constitute waiver of the right to forfeit the lease.
At Moore Barlow we have a specialist real estate disputes team able to advise on drafting the lease to protect the right to forfeit if CRAR action is taken, and on undertaking CRAR action and forfeiting commercial leases.
Please contact Charlotte Ward in our Real Estate Disputes Team for further details.