Natalie Ball, Solicitor in the BPE Solicitors Litigation team, discusses the Debt Respite Scheme and the impact it will have on landlords.
The Breathing Space Moratorium and Mental Health Crisis Moratorium (England and Wales) Regulations 2020 (also known as the Debt Respite Scheme), which came into effect on 4th May, aim to encourage individuals with problem debt to take professional advice and to explore appropriate solutions before matters get out of control.
Under the Scheme, Creditors are unable to take enforcement action against individual debtors who are struggling with debt, and have obtained a breathing space moratorium (BSM) to allow them to seek professional advice, or a mental health crisis moratorium (MHCM) to allow them to seek mental health treatment.
Whilst the Scheme applies to all debts other than those specifically excluded by the Regulations (which include secured debts and non-eligible business debts), this article focuses on the impact the Scheme is likely to have on Landlords, whose tenants have obtained either a BSM or an MHCM.
Who can apply and how long do they last?
To apply, the debtor has to be an individual and, as business debts are excluded, the Scheme will mainly assist residential tenants, however, it could also apply to a commercial tenant:
- who is a sole trader who is not VAT registered; or
- who is an individual who is the director of a company which operates from the premises, because the tenant is unlikely to be registered personally for VAT for the purpose of that business; or
- where an individual has guaranteed the tenant’s liability under a commercial tenancy and the guarantor obtains a moratorium.
Breathing Space Moratorium (BSM)
Any individual (including a tenant) who cannot/is unlikely to be able to repay their qualifying debts can apply for a BSM via a Debt Advice Provider, if they:
- live or usually reside in England or Wales
- are not subject to another insolvency regime
- are not currently benefiting from a BSM/MHCM; and
- have not benefitted from a BSM in the preceding 12 months.
BSMs last up to 60 days, or until it is cancelled or the debtor dies, and a creditor landlord will not be able to take enforcement action in relation to the moratorium debt during that period.
Mental Health Crisis Moratorium (MHCM)
MHCMs are available to any individual (including a tenant) who is struggling with their finances and owes a qualifying debt, receiving qualifying mental health crisis treatment, and complies with 1-4 above. Unlike a BSM, certain other parties can also apply on behalf of the individual debtor, who may be too unwell to apply themselves.
MHCMs last for 30 days after the debtor stops receiving mental health crisis treatment, or until it is cancelled or the debtor dies, and a creditor landlord will not be able to take enforcement action in relation to the moratorium debt during that period.
What debts will the Regulations apply to?
The Scheme applies to any debts that are not expressly excluded. One key exclusion under the Regulations for Landlords is “non-eligible business debts”, which are incurred in connection with a business or trade carried out by the debtor where both:
- The debtor is VAT registered when they make a moratorium application, or is a partner in a partnership with another person; and
- The debt relates solely to business carried out by the debtor.
Rent arrears and other sums due to a landlord under a residential lease are classed as qualifying debts and will be subject to the moratorium. Rent arrears and other sums due under a commercial lease appear not to come within the definition of a non-eligible business debt so again, they would be subject to the Scheme.
How will a landlord know whether their tenant has obtained a BSM or a MHCM?
The Insolvency Service maintains a register of individuals who have obtained a moratorium and notifies creditors.
If a landlord is notified, there are certain obligations which include stopping any enforcement action relation to the moratorium debt immediately, and notifying the Court if there are ongoing proceedings. Any action taken in breach of the Regulations will be null and void, and any proceedings issued will be struck out. If the notification does not include all debts owned by the debtor to the landlord, the landlord must notify the Debt Advice Provider or risk being liable for any loss caused to the debtor.
What are the positive implications for Landlords?
A Debtor who has a BSM is still required to pay ongoing liabilities, such as rent, under the Regulations, and the BSM may be terminated if they do not do so. A landlord is still allowed to contact the tenant about payment of ongoing liabilities but must be careful not to discuss moratorium debt.
It may be possible serve notices in relation to arrears which accrue during the moratorium however advice should be taken in respect of the specific circumstances and again, this should not include any debts which are subject to a moratorium.
Any court proceedings in progress may continue but the order will not be enforceable during the moratorium period. A landlord is allowed to accept payments towards a moratorium debt during a moratorium however you should be careful to ensure that you have not chased or demanded payment during this time and that the tenant makes it voluntarily.
At the end of the moratorium when restrictions are lifted, the debt will remain outstanding and must be paid. A landlord will then be able to contact the debtor to demand the debt, start to apply interest to the outstanding sum, commence or continue proceedings and enforce orders. The Debtor will not be able to apply for another moratorium for at least 12 months after the existing one ends.
It is also worth noting that there are provisions enabling creditors (including landlords) to challenge the moratorium and to have it cancelled on the grounds of unfair prejudice or material irregularity, although it remains to be seen how successful this might be.
Restrictions on landlords with tenants who have a BSM or MHCM
For a landlord whose tenant has obtained a BSM/MHCM and owes rent arrears or other sums under the lease, there will be many restrictions imposed to protect the individual during this period (and for 30 days after for a MHCM). These include not being able to:
- Charge interest/fees/penalties on the moratorium debt, even if there are provisions in the lease/tenancy to do so
- Make contact with the debtor or attempt to collect the moratorium debt
- Deduct monies from any deposits held
- Commence a money claim against the debtor, or apply for default judgment
- Serve a statutory demand
- Serve a bankruptcy petition or proceed with bankruptcy proceedings that are in progress
- Obtain a warrant or enforce security of the debt
- Serve, commence possession proceedings, or enforce a possession order made in consequence of a section 8 notice relying on rent arrears.
Even if a Court has awarded Judgment or made an Order prior to the moratorium starting, the landlord will not be able to take steps to enforce it during the moratorium period.
These restrictions also apply to any joint debtor, which will mean that even where there is a jointly liable tenant, the landlord cannot take the above steps against them.
It may still be possible for a landlord to make an application to the Court to carry out enforcement of a moratorium debt, which would otherwise be prohibited under the Regulations, however this will be under very limited circumstances as the moratorium is in place to protect the debtor at this stage and the Court is likely to view enforcement as detrimental to the debtor.
Click here to read our full analysis of the Debt Respite Scheme and its implications.
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