Current economic conditions are making for interesting times for landlords. The lettings market continues to be buoyant in the face of an uncertain wider property market, but at the same time, with families struggling to make ends meet, landlords face the increasing risk of tenants defaulting.
With the number of individuals petitioning for their own bankruptcy increasing, landlords will no doubt welcome the Court of Appeal’s recent decision that landlords do not require permission of the court in order to enforce a tenancy possession order against an undischarged bankrupt defaulting on their rent.
Bankrupts are protected from distress from creditors (including landlords) under the Insolvency Act 1986. The Act provides undischarged bankrupts (s 285), and individuals subject to debt relief orders (DRO) (s 251), with a moratorium preventing creditors from enforcing “a remedy in respect of a debt”. It also requires creditors to apply to court before taking any action against a debtor in respect of the debts owed to them.
In ‘Sharples v Places for People Home Ltd’ and ‘Godfrey v A2 Dominion Homes Ltd’, Sharples and Godfrey (the tenants) were subject to a bankruptcy order and a debt relief order respectively. Landlords in both cases applied to court to exercise their right to repossess the tenants’ property on the grounds the tenants had failed to pay rent for a period of at least 8 weeks (schedule 2, Housing Act 1988).
Sharples and Godfrey argued the repossession orders requested by the landlords’ were a remedy against the debtor and should be caught by the restriction on creditor action. The tenants argued that it was wrong to take a narrow view of the law which limited “remedy in respect of a debt” to only those remedies that allow a creditor to recover outstanding debts.
It was argued that whilst the repossession orders are not direct recovery actions themselves, they are effectively recovery remedies as they would have the effect of compelling the debtor to pay the outstanding rent or lose their home, effectively putting the landlord in a preferential position compared with other creditors.
The court held that landlords are able to exercise their right to repossess a property let by way of an assured tenancy to a defaulting bankrupt. Exercising the right of repossession was a proprietary right. It did not give the landlord any greater chance of recovering the debt owed to them by the bankrupt’s estate but did protect the landlord from future losses resulting from repeated default. The court also stated that whilst the threat of repossession may well compel the debtor to pay future rent, these payments would not come from the bankrupt’s estate but from their income. These payments would therefore from part of the bankrupt’s reasonable domestic expenditure.
Despite this decision, landlords should note that they are not able to suspend a repossession order subject to payment of rent arrears. Suspending repossession subject to such a demand places the landlord in an advantageous position compared with other unsecured creditors and is therefore prohibited under the Insolvency Act 1986.
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