The Debt Respite Scheme
On 4 May 2021, the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium (England and Wales) Regulations 2020) (“the Regulations”) came into force. The Regulations aim to incentivise individuals with problem debt to access professional advice and to enter into an appropriate debt solution before it spirals out of control.
Under the Scheme, Creditors are prevented from taking 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), the remainder of 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 does the moratoria last?
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, provided 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.
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.
The requirement under both moratoriums for the debtor to be an individual, and the exclusion of business debts (see below) will mean the Scheme mainly assists 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 (see further below).
As stated, the Scheme applies to any debts that are not expressly excluded by the Regulations.
One of the most relevant exclusions under the Regulations for Landlords is the exclusion of “non-eligible business debts”, which are debts 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 on the creditor including 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 take certain steps including notifying the Debt Advice Provider, or risk being liable for any loss caused to the debtor.
What implication will the Scheme have on Landlords?
A Debtor who has a BSM is expressly 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 may contact the tenant about payment of ongoing liabilities but must be careful not to discuss moratorium debt (see below). As arrears that accrue during the moratorium would not form part of the moratorium debt, a landlord may still be entitled to serve a section 8 notice and potentially commence possession proceedings in respect of those arrears only. There is, however, there is no equivalent provision with a MHCM.
A moratorium does not prevent the landlord serving a section 21 notice on the tenant, and then commencing possession proceedings based on the section 21 notice, provided the landlord is not also seeking to recover unpaid rent arrears which form part of the moratorium debt. However, it is unclear as to whether a possession order obtained via a section 21 notice could then be enforced.
Any court proceedings in progress may proceed to final order or judgment, but the order will not be enforceable during the moratorium period (see below).
There is also some respite from the Regulations for those landlords who required the lease to be guaranteed, as guarantors of a moratorium debt do not benefit from the protections and the landlord will be at liberty to pursue them for the moratorium debt, although of course, the guarantor could apply for a BSM/MHCM if they meet the criteria. Further, it should be noted that if there are joint guarantors, and one obtains a moratorium, a landlord will not be able to enforce against the other guarantor.
In the event that the tenant makes any payments of the moratorium debt during the moratorium, the landlord is free to accept it, although again, the landlord would need to be very careful that he could not be construed as having demanded or chased for it.
The moratorium does not give the tenant a rent-free period and once the moratorium comes to an end and the restrictions are lifted, the debt will remain outstanding and must be paid. This will mean that at the end of the moratorium a landlord will be at liberty 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 such an application might be.
The Bad and the Ugly
The Regulations are likely to have far-reaching negative consequences for a landlord whose tenant has obtained a BSM/MHCM and owes rent arrears or other sums under the lease, as during the lifetime of the BSM / MHCM (which could be some time for the latter since it lasts for 30 days following treatment, which could be lengthy), many of the enforcement steps that a landlord would normally pursue will be unavailable. For example, a landlord will not be 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 – this will include sending letters of demand (automated or not), letters before claim or general communication which involves the mention of them needing to pay or negotiating the 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 – this will mean that a landlord could not apply for a charging order, third party debt order, attachment of earnings order or an order for sale or take steps to seize goods
- Serve, commence possession proceedings, or enforce a possession order made in consequence of a section 8 notice relying on rent arrears.
Even where 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, even if the Judgment states that it is payable forthwith.
Unfortunately there is more bad news for landlords, in that the above prohibitions 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, despite them not having a BSM or a MHCM in place.
Whilst it is 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, the Court will only grant permission if it is reasonable to do so, is not detrimental to the debtor and does not undermine the Scheme. Given that most enforcement action is highly likely to be detrimental to the debtor in some shape or form, it is likely that the threshold will be extremely high.
It remains to be seen how the Debt Respite Scheme will work in practice, but it will no doubt be welcome relief for tenant debtors who need some time and headspace to find a sustainable solution to its debts, particularly during the current economic climate. With the additional obligations the Scheme places on landlords, it is likely that many will be of the view that the Scheme is yet another hurdle to jump over, and irresponsible debtor tenants should not be afforded protections in addition to those already implemented due to the Covid-19 pandemic. There will also no doubt be concerns that the Scheme will be exploited by debtor tenants and used as a delay tactic as opposed for the purpose it is intended, although it is hoped that the 12 month rule will prevent this to some extent.
For more information about the Debt Respite Scheme contact Natalie Ball (email@example.com 01242 248223) or another member of the Litigation team.
These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.