Implications of the new Debt Respite Scheme Regulations for Landlords

The Government has recently published guidance on a breathing space for debtors that will come into effect on 4 May 2021: The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020. As a creditor, if you are told that a debt owed to you is in a breathing space, you must stop all action related to that debt and apply the protections. These protections must stay in place until the breathing space ends.

There are two types of breathing space: a standard breathing space and a mental health crisis breathing space. Both have the same effect to prevent creditors from taking action to recover qualifying debts while the Regulations are in force.

A standard breathing space is available to anyone with a problem debt and will give them legal protections from creditor action for 60 days. A mental health breathing space is only available to someone who is receiving mental health crisis treatment and it lasts as long as the person’s mental health crisis treatment plus 30 days.

Process

Debtors can only access a breathing space by seeking debt advice from a debt adviser, who is responsible for the administration of a breathing space.

To qualify for a standard breathing space, the following criteria must be fulfilled:

• The debtor must be an individual domiciled or ordinarily resident in England and Wales
• The debtor must owe a "qualifying debt" to a creditor
• The debtor must not have a debt relief order (DRO), an individual voluntary arrangement (IVA), an interim order, or be an undischarged bankrupt at the time they apply
• The debtor must not already have a breathing space or have had a standard breathing space in the last 12 months at the time they apply
• The debtor must be unlikely to be able to repay some or all of their debt as it falls due

Effect of the Regulations

During a breathing space, a creditor may not do any of the following:

• Require the debtor to pay interest that accrues on the debt during the moratorium period.
• Require a debtor to pay fees, penalties or charges in respect of the debt that accrues during the moratorium period.
• Take enforcement action in respect of the debt.

Implications for Residential Landlords

The Regulations have significant implications for residential landlords as residential tenants are more likely than their commercial equivalents to satisfy the eligibility criteria.

The enforcement steps which are prohibited by a moratorium include serving notice to take possession on the basis of rent arrears under grounds 8, 10 and 11 of Schedule 2 to the Housing Act 1988, or taking possession having served such a notice. Where such a notice has been served before a moratorium, the landlord will be prevented from commencing possession proceedings based upon the notice served previously, or enforcing an order for possession based upon it, once the moratorium is in place.

Landlords who suspect that a tenant in arrears may be insolvent will need to factor in the possibility of an additional two-month delay when deciding whether to serve a section 8 notice and start possession proceedings.

Tenants will remain fully liable for ongoing rental and other payments due under the lease, regarding which landlords may continue to contact them. Failure to satisfy ongoing liabilities is grounds for cancellation of the moratorium, although a debt advisor may decline to cancel it if they consider that the debtor’s personal circumstances would make cancellation unfair or unreasonable.

Where tenants are jointly liable for rent and one of them initiates a moratorium, their landlord will be barred from taking steps to collect any arrears from the other joint tenant(s). However, the guarantor of a moratorium debt will not be protected by a moratorium initiated by the principal debtor. This will leave open an important route to recourse for some residential landlords affected by the Regulations (although a guarantor can apply for their own moratorium if they meet the criteria).

Implications for Commercial Landlords

The impact of the Regulations on commercial landlords is likely to be limited because only individuals are eligible for a moratorium, and many commercial tenants are corporate entities.

Additionally, there is an exclusion of "non-eligible business debts" from qualifying debt status: these are debts incurred in connection with a business carried on by a debtor, where both of the following apply:

• The debtor at the point of the application for a moratorium, and for the purpose of that business, is (i) VAT-registered or (ii) a partner in partnership with any other person (that is, carrying on business with another person other than through a company).
• The debt solely relates to the business carried on by the debtor.

One important exception to the above is that a moratorium may be available to an individual tenant who is the director of a company which operates from the rented premises, because such a tenant is unlikely personally to be registered for VAT for the purpose of that business.

Like with residential tenancy debts, a director or other individual who gives a personal guarantee for a company debt may be entitled to a breathing space, even if the company itself is not.

Even where their tenants’ debt is non-eligible business debt, commercial landlords would be well-advised to familiarise themselves with the Regulations.

For further advice please contact Johanne Spittle on York 01904 71000 or Wetherby 01937 593210 or Malton 01653 692247. For any debt recovery matters please contact us on 01904 716000.