A recent case (Thirunavukkrasu v Brar and another  EWHC 2461 (Ch)) has confirmed what property litigators have long suspected – that is, if a commercial landlord exercises the “CRAR” procedure (see below for further detail), and then attempts to forfeit the lease for the same arrears, the forfeiture will be unlawful, the lease will continue and the tenant will have a claim for damages against the landlord.
What is CRAR? What is forfeiture?
Two of the most common remedies available to commercial landlords when dealing with a tenant who has failed to pay its rent are “CRAR” and forfeiture.
CRAR – CRAR (short for Commercial Rent Arrears Recovery) is a statutory procedure contained in Part 3 of the Tribunals, Courts and Enforcement Act 2007 (“2007 Act”). Essentially, it allows a landlord of a commercial property to instruct enforcement agents to enter the property, seize goods belongings to the tenant and sell them in order to recover the value equivalent to the rental arrears. There are various statutory requirements which must be satisfied.
CRAR is similar to the common law remedy of distress (which was abolished by the 2007 Act).
Forfeiture – most commercial leases contain a provision which allows the landlord to forfeit the lease in the event of rental arrears or other breaches of covenant. The effect of forfeiture (provided it has been undertaken correctly) is that the lease terminates. A landlord can forfeit a lease either by issuing proceedings or by peaceable re-entry (i.e. by changing the locks at the premises).
Waiving the right to forfeit
Forfeiture can be tricky to get right. Once the right to forfeit has arisen, then the landlord must not do anything which acknowledges the continuation of the lease. If they do, they will waive their right to forfeit. This would render any subsequent attempt to forfeit unlawful.
For example, if a tenant is in arrears of the March quarter’s rent and the landlord then makes a demand for the June quarter’s rent, the landlord is likely to have waived its right to forfeit for the March quarter’s rent because the June quarter demand acknowledges the lease is continuing. However, if the tenant fails to pay the June quarter (and provided the landlord does nothing to acknowledge the continuance of the lease), the landlord may still be able to forfeit for the June quarter’s rent.
It was previously accepted that distress would waive the right to forfeit for the arrears in question. A question mark remained over whether exercising CRAR would have the same effect.
In this case, the parties had entered into a lease in 2013 which provided, amongst other things, that rent was payable quarterly. The lease also contained a forfeiture clause allowing the landlord to forfeit the lease if any rent remained unpaid 21 days after it was due.
The tenant failed to pay the rent due on 25 December 2015. In January 2016, the landlord instructed enforcement agents to recover the arrears by means of CRAR. On 1 February 2016, CRAR was exercised. In the meantime, on 12 February 2016, the landlord purported to forfeit the lease by attending the premises and changing the locks.
The tenant brought a claim against the landlord seeking a declaration that the landlord had unlawfully forfeit the lease (because it had exercised CRAR) and damages for trespass.
The tenant was successful at first instance and the landlord appealed. The High Court found that although there are material differences between CRAR and distress, the exercise of CRAR amounts to an election by the landlord to treat the lease as continuing and thus the right to forfeit had been waived.
Where a tenant is in arrears of rent it is always worth a landlord considering its options carefully before taking any action.
Taking action to recover arrears may well mean that they cannot then forfeit the lease.
If a landlord is considering forfeiting the lease, then they would be well advised to take legal advice before doing so to ensure that there is no possibility of a claim by a tenant.