To mark the first anniversary of CRAR, leading intelligence and debt recovery specialists Debt Squared Group reflect on the impact the new legislation has had on the industry and its own part in the debt recovery process.
Following the implementation of the Ministry of Justice’s Commercial Rent Arrears Recovery (CRAR) programme on 6th April 2014, landlords no longer have the right to use Distress for Rent against commercial tenants to recover outstanding rent arrears.
The abolishment of Common Law Distress for rent has meant that rates, council tax, services, repairs, maintenance and insurance are no longer recoverable by landlords (even if these amounts are reserved as rent in the lease), creating a major change in the debt recovery process for commercial property management agents and landlords.
It would be presumptuous to think that the industry had prepared– research from Debt Squared Group just a few months prior to the changes becoming effective (February 2014), showed that 67% of randomly selected commercial managing agents were unaware of the pending legislative changes, let alone having a plan to amend their debt recovery procedures. Even now, some landlords and managing agents are only just adjusting their own internal processes to bring forward instructions to maximise their recovery under the new reforms.
Rupert Atkinson, CEO, Debt Squared Group, comments:
“Prior to the commencement of CRAR we engaged with clients to explore the operational changes to their business and timings in which CRAR would be instigated. Within the last year we’ve seen an increase in clients issuing Warrants of Control earlier after Quarter Day in order to factor into the cycle the seven day Enforcement Notice.
“In line with the reforms, Debt Squared Group launched a debt recovery process for Landlords to recover the portion of debt excluded under CRAR, namely the Service Charge and insurance. This new service for Service Charge Arrears Recovery (SCAR) is exclusive to Debt Squared Group and has had a significant impact for clients, allowing them to reclaim a larger portion of the debt owed to them, without increasing the need for extra administration time on their part.Within the last year, we’ve seen SCAR instructions increase significantly and recovery rates for this service are in excess of 60% and rising each quarter.”
In fact, over the last 12 months, Debt Squared Group has seen a considerable shift in client behaviour, with the number of instructions being issued earlier increasing every quarter. Not only that, of the total number of instructions in the last year, 30% were paid at compliance stage, with a further 55% moved to Enforcement, signifying the need to act promptly when accounts become overdue, in order to maximise the recovery. Tracking the current quarter, almost half of all instructions (47%) are being recovered in full within 14 days.
There have been some early adopters among Debt Squared Group clients who have come to formulate their own new internal processes to account for the legislative changes.
One such client, Paul Delany, Associate Director in DTZ’s Property Management team, a market leader in property credit control, comments:
“DTZ has embraced the changes and adapted to CRAR successfully and this has been quantified by the fact that our tenant and client base has expanded. The Rent collection performance in the four quarters inclusive of March 2015 has shown no deterioration against a benchmark which we have set. Our KPI is regularly exceeded, and the credit control team continue to achieve in excess of 99% of collectable rent recovered within 10 working days of the quarter day.
“The changes have created a stronger bond between landlords and occupiers, due to the increased level of communication from occupiers over what CRAR is and how they now deal with their own financial liabilities in property occupation.
“For DTZ the CRAR procedure kicks in fully four weeks before the quarter day in identifying the likely problem tenants and engaging in pre quarter activity to negotiate with and advise our tenants of the consequences of late payment both financially and in terms of their landlord relationship.
“As a result of this process, we are ready to act swiftly and decisively after the quarter day, having eliminated many of the potential problems along the way. Working on the basis that ‘prevention is better than cure’ makes absolute sense to our clients, who are not committed to an unnecessary seven day waiting period except where this is absolutely unavoidable. The strategy enhances tenant/client/agent relationships with no detriment to our client’s performance.
“We are very pleased with how we are continuing to perform and over the next few quarters will have a clearer picture of CRAR’s long-term impact.”
How the industry continues to adapt going forward is critical. As with any new legislation, the practical implementation is still being tested, with new situations and queries arising all the time. Debt Squared Group continues to lead the market, by discussing and investigating the application of the law under various circumstances for the benefit of property managers, landlords and enforcement agents alike.
One way of sharing this knowledge in the market has been via an ongoing roll out of CPD seminars, both direct to clients and via a number of industry groups and associations, the aim of which is to educate the industry around the specifics of CRAR and the debt recovery process.
Rupert Atkinson concludes: “It’s been an interesting 12 months seeing how the industry has reacted and adopted the changes. For the main part, Landlords and Property Managers understand the need to account for the impact of the seven day enforcement notice. There are still a few hurdles to overcome and our role is to keep clients advised of the most practical procedural approaches to adopt that will ensure that we can continue to maximise their debt recovery.”
Article Courtesy of: Debt Squared Group