Rental arrears: ways to avoid ending up in the court room
In the private rented sector, there is a lot of literature about notices, eviction processes, possession proceedings, and so on, almost as if rental arrears is now strictly synonymous with litigation. However, there is always “more than one way to skin a cat” with litigation and aggressive court proceedings being the last resort; we explore some of these options in this article.
The art of communication
It was James Humes that said, “the art of communication is the language of leadership”.
The government has urged all landlords and tenants to work together; this is the starting point. This will often mean understanding your tenants' financial situation and for tenants, to talk to their landlord at the earliest opportunity.
Can the government help?
In the first instance, landlords should be seeking information about the tenant’s work and whether their employer is making good of the Coronavirus Job Retention Scheme; in place until the end of September 2021. If your tenant has been off sick, are they eligible for Statutory Sick Pay if the employer’s cover is insufficient? Is your tenant eligible for Universal Credit, Jobseekers Allowance and/or Employment and Support Allowance; all such avenues should be exhausted. Did you know that support is also available for individuals to continue paying other household bills, such as council tax? Every council has its own local council tax support scheme to provide reduced council tax bills for those least able to pay. The government has provided councils with £670 million of new funding to enable them to continue providing this support in 2021-22, for those experiencing financial hardship.
Discretionary Housing Payments are also available for tenants who need additional help to meet their housing costs, albeit, this is entirely at the local authority’s discretion, including the amount and duration of any award.
Can your lender help?
ARLA Propertymark has recognised that the build-up of unpaid rent and therefore the landlords’ ability to pay their mortgages would have long-term repercussions, including eventual repossessions of properties. As such, the “#keeptherentflowing” social campaign was launched. Landlords should discuss their financial situation with their lender. The Financial Conduct Authority has been clear that for borrowers including those with a Buy to Let mortgage, who have been impacted by Coronavirus, lenders should continue to provide support through tailored forbearance options. These could include making reduced or no payments for a temporary period, or changing the mortgage term.
Can you rely on any insurance cover?
Rent Protection Insurance policies can be useful at a time like this but the extent of their usefulness will depend on a number of things. Does the policy cover you for the full length of the eviction process? This is a very important point to check given the fluctuating notice periods that have been set in the pandemic.
Some policies will cover you until the property is re-let but others will limit this to a short period after the tenant has left i.e. two months after vacant possession. It is also worth checking what percentage of rent the policy will pay and how payments will be made (whilst you are looking or only when the property has been re-let which will obviously cause a break in cash flow).
Another important one to note is whether the policy offers nil excess to ensure uninterrupted income. A rent protection policy's excess is often equal to one or two month's rent. Even if payments kick in after this point, the rent during that excess period is lost, which may affect your management fee. If you choose a policy with nil excess, a landlord will start to receive money from day one of the process.
In the event that court proceedings do become necessary, then such a policy may include cover for legal expenses insurance.
Rent Repayment Plan
In the event that rent payments are still being missed, landlords are being encouraged to agree a rent repayment plan. Any such plan should be clear on what the terms are (what the reduced rent is and when the arrears will need to be paid off etc.) but more importantly, it must clarify that the tenant is still liable for any missed rent for the duration of the tenancy; landlords are not required to stop charging rent during the COVID-19 pandemic. BLM’s Property Litigation team can assist with the drafting of any repayment plan agreement.
The Rental Mediation Scheme is free to landlords and tenants and is designed to resolve disputes without acrimonious possession proceedings, where possible.
The parties to the mediation will be contacted and different options will be explored by the mediator, before the substantive hearing. However, neither party will be compelled to do anything unless parties enter into a signed agreement. If no resolution is reached, the process will remain confidential and will not delay the onset of any possession proceedings; mediation will run concurrently with any ongoing court litigation. At the end of May, the UK Government updated details about this scheme; the scheme itself is very much in its infancy and it remains to be seen if it really has been effective in taking the heat off the court system.
The Debt Respite Scheme
As many will already know, for struggling tenants, The Debt Respite Scheme (Breathing Space), came into effect on 4 May 2021 in England and Wales. There are two types of breathing spaces which are as follows:
- "Standard" breathing space: This will give tenants in problem debt "legal protection from creditor action for up to 60 days", with most enforcement action and contact from creditors paused, and most interest and charges frozen.
- The "mental health crisis" breathing space: This will include the same protection but over a longer period of time. For tenants in mental health crisis treatment, the breathing space will cover the whole treatment length and an additional 30 days from when the treatment ends.
Whilst the above mentioned scheme does provide a break for your tenants, the scheme is not a payment holiday! In order to obtain a moratorium, a debtor must reasonably satisfy the debt advice provider that they will be able to pay their debts in full if they are given the breathing space and that they will be able to prevent their debt position getting worse during the moratorium. Many tenants will not be able to overcome this hurdle but if they are able to, the point still stands that this mechanism does not mean that any rental arrears debts are waived but more that they will need to be paid on a scheduled basis.
During the moratorium (whichever one), tenants will still be expected to continue paying the rent that becomes due. A failure to keep up with these payments will allow their landlord to apply to have their breathing space cancelled.
Although I am not looking at notices in this article, a section 21 notice can still be served and enforced against a tenant during the moratorium and so can a section 8 notice citing grounds other than arrears of rent.
If a guarantor has been named in the tenancy agreement, landlords can seek to recover arrears from them. The NRLA believes that this is likely to increase in the coming months, particularly as more tenants apply for a debt respite scheme.
Whilst so many landlords have echoed their disappointment over the Government’s response to eviction issues, the intention of this article is to provide some comfort to landlords that they are not entirely powerless in the current circumstances.
Priya Sejpal is an Associate in BLM’s Property Litigation team.