Landlords and Bankruptcy – the Clash of the Titans

Sharples v PPHL and Godfrey v A2 Dominion Homes [2011]EWCA Civ 813

An assured tenant gets in arrears of rent and then goes bankrupt, or has a Debt Relief Order made. Can the landlord get a possession order despite the fact that the Insolvency Act 1986 prohibits most actions against debtors?

This has been disputed for many years, with no authoritative decisions by the courts. On one side the tenants say that the landlord must take his place with the other creditors and prove for his debt. All he can insist on is that rent accruing after the bankruptcy is paid. The landlords say that taking possession is merely enforcing their security for the rent, and there has long been an exemption for the enforcing of security – eg by a mortgagee.

Both sides put forward the social arguments as well. The tenants say that losing ones house is socially undesirable and as assured tenancies do not generally pass to a Trustee in Bankruptcy parliament intended them to be protected. Landlords say that if there is no way to recover rent then social landlords will be at the mercy of tenants who run up arrears and then go bankrupt, and they will be unable to afford to provide the housing at all.

The Court of Appeal has now decided the matter decisively in favour of the landlords in this case, holding that they could recover possession under mandatory ground 8 of the Housing Act 1988 (8 weeks arrears of rent) despite the tenant going bankrupt. And they could also get a suspended possession order under ground 10 (discretionary rent arrears) against a tenant who had obtained a Debt Relief Order.

Key points are:
• No money judgement for the arrears can be given – the landlord has to take his chances with the other creditors for this.
• An SPO cannot be conditional on payment of pre-bankruptcy arrears. It can cover on-going rent and the landlord’s costs.
• If no money claim is made then leave of the court (under s 285(3)9b) IA 1986 is not needed before issuing proceedings.
• Landlords’ claims should not be stayed under the discretionary powers.

The practical result is:
• Shared ownership cases are simple: the mortgagees can be made to pay up any arrears or lose their security, without the landlord having to make an expensive application to the bankruptcy court for permission to sue.
• Ordinary assured tenancies change little from a practical point of view. Bankrupt tenants have rarely if ever been able to clear any arrears. Now they can’t be made to, but the landlord can still recover the property if they go under ground 8, or if the tenant fails to pay the on-going rent, or the Judge makes an outright discretionary order.

The secret is to keep proper control over the level of arrears and start legal action early, while the tenants can still afford to pay them. Easier said than done sometimes, but the only real answer.

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Author: Coventry Man

A perspective from a litigation lawyer in the Midlands. After many years in Coventry I am now with David Lee Solicitors in Kenilworth, helping people with all sorts of litigation, especially property and landlord & tenant problems.

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