How does the debt respite scheme impact on landlords?
The lockdowns of 2020 brought with them a number of legislative and procedural changes, particularly in connection with recovering debt and the possession of property, both commercial and residential. The government had said that further restrictions would be lifted in June 2021, although unfortunately that remains deeply uncertain. It does, however, remain a possibility that the government might remove some of the emergency measures put in place to protect tenants.
The stated aim of the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (the “Regulations”) is to protect specific individuals who are struggling with debt whilst seeking professional advice or mental health treatment.
This briefing focuses on the potential impact of the breathing space moratorium under the Regulations on a landlord’s ability to recover arrears from its tenants.
What is the breathing space moratorium?
The moratorium was introduced under the Regulations to protect individual debtors by limiting a creditor’s ability to take enforcement action in connection with any ‘moratorium debt’ throughout the duration of the moratorium.
The breathing space moratorium (“BSM”) protects a debtor from creditor enforcement action for up to 60 days, until the moratorium is cancelled or until the debtor dies.
Who do the Regulations apply to and what sort of debt is covered?
The Regulations apply to any debtor who is an individual and domiciled or predominantly residing in England or Wales and who owes a ‘qualifying debt’ to a creditor. The debtor cannot be subject to another insolvency regime and the Regulations can only apply to a debtor once every 12 months.
The Regulations apply to qualifying debts whether or not entered into, or due to be paid, before the Regulations came into force.
A ‘qualifying debt’ is defined in the Regulations as any debt or liability provided that it is not a ‘non-eligible debt’. There is no limit on the amount of any individual debt or total debts that can be included in the moratorium. The following qualify as qualifying debts:
- Any amount which a debtor is liable to pay under or in relation to:
- An order or warrant for possession of the debtor’s place of residence or business;
- A court judgment; or
- A controlled goods agreement; and
- Any debt owed or liability payable to the Crown.
A qualifying debt can also relate to credit card debts, mortgage payment arrears, personal tax debts and benefits overpayments.
Non-eligible debts are, therefore, other debts, such as:
- A secured debt that does not amount to arrears in respect of secured debt;
- Business debts if the debtor’s business is VAT registered or if they are in a partnership and the debt relates solely to the business; and
- A debt incurred by means of fraud or fraudulent breach of trust by the debtor.
To give an example from a landlord and tenant perspective, if premises are let to an individual tenant who operates their business from the premises and they are in rent arrears, the Regulations will not apply if the tenant is registered for VAT, or in a partnership, and the rental of the property relates solely to the tenant’s business. If the Regulations do not apply, the landlord can pursue the arrears from the tenant even if they purport to have a BSM in place.
What is the effect of a moratorium?
Once the BSM is in place, neither the creditor nor his agent can require the debtor to pay interest, fees, charges or penalties. The creditor is also prohibited from taking any enforcement action in respect of the moratorium debts. This is subject to exceptions, such as where the Court or Tribunal has given permission otherwise.
It is important to note from a landlord’s perspective that the prohibitions also apply to any joint debtor. Therefore, if one joint tenant is protected by a BSM, its landlord cannot pursue the other tenant to circumvent the Regulations.
What obligations or restrictions are placed on landlords?
If a BSM applies, the landlord cannot take any step to collect a moratorium debt or enforce a judgment that relates to a moratorium debt. The landlord is even prohibited from contacting the debtor tenant for the purpose of enforcing or in connection with the moratorium debt.
For example, the landlord cannot:
- Obtain a warrant;
- Commence legal proceedings in respect of a moratorium debt;
- Serve possession notices pursuant to Section 8 of the Housing Act 1988 on grounds 8, 10 or 11;
- Take or apply for possession of a dwelling house let to the debtor based on notices served under Section 8 of the Housing Act 1988 on grounds 8, 10 or 11; or
- Take any of the prohibited actions against a joint tenant.
More importantly, there are positive obligations placed on a landlord on receipt of notice that its tenant or guarantor has a BSM. The landlord is required to:
- Carry out a reasonable search of their own records for debts owed to them by the debtor;
- Provide details of any debts owed to the debt advice provider as soon as reasonably practicable;
- Notify any agent that acts on its behalf in relation to a moratorium debt as soon as reasonably practicable;
- The landlord must notify the assignee of the debt that the BSM has started and give the assignee’s details to the debt advice provider;
- Advise the Court or Tribunal accordingly, should any proceedings be underway in respect of the debt.
The Regulations place significant obligations on landlords and it is vital that they notify any letting agent, managing agents or solicitors instructed in connection with any action prohibited under the BSM to ensure they are compliant with the Regulations.
What is the effect on existing legal proceedings?
Any pending action can continue until final order or judgment. Once this is obtained, the matter cannot progress to enforcement. The Court must hold up progress of proceedings beyond the point of judgment subject to the creditor’s right to apply to the Court to challenge the BSM.
The Court can still, of course, send out correspondence to the debtor in connection with the administrative side of proceedings.
Challenging a moratorium
A landlord as creditor can request a review within 20 days of the start of the BSM based on unfair prejudice to its interest or a material irregularity. This application must be made in writing containing a statement of the grounds relied upon together with supporting evidence.
Alternatively; the creditor can apply to the County Court under Part 23 of the Civil Procedure Rules but only if the review has been unsuccessful. This must be done within 50 days of the commencement of the BSM. If successful, the debtor can be required to pay interest, fees and charges accrued throughout the BSM.
The creditor can also make an application for permission to take enforcement action at either the Tribunal or County Court. The Court or Tribunal can grant the same where it thinks it would be reasonable to do so and that it would not be detrimental or significantly undermine the protections of the BSM.
Should a landlord seek to challenge the BSM, which only lasts for 60 days, it is crucial to act quickly to institute a review or subsequently make a Court application. The need for prompt action stems from risk that the Court may not be able to list the matter for a hearing before the BDM has come to an end. This could, therefore, result in wasted time and Court fees.
What happens at the end of the moratorium?
The landlord can start or resume proceedings or enforcement action and begin to apply interest fees, penalties and charges from the date the BSM ends.
What does this mean for the future of debt recovery by landlords?
Whilst it may raise concerns for many landlords that most tenants will attempt to obtain a BSM, there is a significant limiting factor in that the debt advice providers cannot charge for their services despite the significant amount of work involved. This could limit the number of individuals who would be willing to offer this service.
In addition, for the BSM to be granted to the tenant, there is a necessity that the tenant will be in a position after the BSM to clear the debt. It is most likely to apply to individuals who have accumulated some arrears as a result of the lockdowns, which impacted their income, and they will be in a position to settle the debt once their income returns to normal.
Guarantors are specifically excluded from the BSM and can remain liable for the debt during the tenant’s BSM. They can, of course, apply for the same for themselves but, if they do not, it is possible to pursue the guarantor for the debt.
Whilst it is prohibited to make contact with the tenants in connection with the moratorium debt, it is still permitted to contact the tenant for other matters that do not relate to the debt, such as access requirements or disrepair.
Should a landlord fail to comply with the Regulations, any action taken would be null and void together with a risk of financial loss if the landlord has not searched and notified as required. There is no express sanction should contact with the tenant be in breach of the non-contact provision in the Regulations. However, it is vital to consider how the Courts may perceive any breach of the Regulations should the landlord make an application to the Court for permission to take prohibited enforcement steps.
Residential property implications
A BSM is not a rent holiday for tenants. Rent for the debtor’s primary resident is a specified ongoing liability and the failure to make payment of this can lead to the cancellation of a BSM.
A landlord cannot obtain possession under grounds 8, 10 or 11 of a section 8 notice, the landlord can rely on the other grounds under section 8 or a section 21 notice for possession. However, the Regulations include legal proceedings against a debtor relating to, or as a consequence of, non-payment of a moratorium debt. Therefore, any other notice served, particularly a section 21 notice, could be argued to be brought against the tenant in response to the protected arrears.
It is also important to note that a new form of section 8 notice must now be used.
Commercial property implications
Unlike with residential property, the implications of the Regulations on commercial property are limited, as most tenants are corporate or the debt would amounts to a non-eligible business debt.
However, should a landlord have a commercial tenant, who is an individual and a company director of the company who operates from the premises, the Regulations may apply to the tenant, as they are unlikely to be registered for VAT and the debt would not solely relate to business carried on by them, as it is the company, not the individual, who would be carrying on business.
Overall, the Regulations do seem to provide breathing space for those who are not able to manage problem debt in the short term. The Regulations do not seem to have been intended to restrict landlords from recovering arrears that are due to them in the long run. Whilst it is easy to focus on the prohibitions a landlord is subject to under the Regulations, it is important that the obligations are considered and noted.
A landlord should ensure that its managing agents and lettings agents have implemented policies for notifying and searching and for not taking prohibited steps to ensure compliance with the Regulations. Especially, larger, institutional landlords whose agents may implement automated pre-action processes to chase tenant debts and arrears.
This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.