With Covid-19 restrictions eased but restrictions on commercial landlords continuing, more landlords are turning their attention to taking action to recover commercial rent arrears, perhaps encouraged by recent favourable court decisions.
Where landlords are looking to recover rent arrears from tenants who are individuals they should be mindful of the new debt moratorium for individuals introduced by The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020, which came into force in England on 4 May 2021.
What is a breathing space?
A breathing space is a debt moratorium, during which a creditor cannot take enforcement action for a Qualifying Debt. It is not a payment holiday, and a debtor is still required to meet their ongoing liabilities including paying the rent, but the moratorium is designed to give individuals a period of time to obtain professional debt advice and find a long-term debt solution.
A debtor is not automatically entitled to a breathing space, and can only be granted one by a debt adviser authorised by the FCA, or by a local authority. There are two types of breathing space:
- Standard – available to anyone with problem debt
- Mental health crisis – available to those receiving mental health crisis treatment
A standard breathing space will last for 60 days unless cancelled before, while a mental health crisis breathing space will last as long as the treatment continues, plus 30 days.
Who is eligible?
To be eligible for a standard breathing space, a debtor must:
- be an individual
- owe a Qualifying Debt to a creditor
- live or usually reside in England or Wales
- 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
- not already have a breathing space or have had a standard breathing space in the last 12 months at the time they apply
The debt adviser must also be satisfied that the debtor cannot, or is unlikely to be able to, repay all or some of their debt and that a breathing space is appropriate.
To be eligible for a mental health crisis breathing space, the debtor must meet the criteria for a regular breathing space and be receiving mental health crisis treatment at the time that an application for a moratorium is made. There is no limit on the number of times an individual can enter a mental health crisis breathing space.
What is a Qualifying Debt?
A breathing space can be applied to most personal debts, including rent arrears and any business debts owed by sole traders who are not registered for VAT. A breathing space can also apply to joint debts where one debtor has a breathing space. However, it will not apply to secured debts or new debts incurred during the breathing space.
How will I know if my tenant has entered one?
You will be notified by email, personal service or post. The breathing space will start on the day after the debtor’s details are entered onto the breathing space register, which is not publically available. The letter from the Insolvency Service should provide details to help you to identify the relevant debt.
What must I do if I am notified?
Once notified, you must first review and identify the debt subject to the breathing space, and any other debts owed by the tenant. If you identify more than one debt, you must notify the debt adviser and should consider applying the breathing space protections to all of them.
For each debt subject to the breathing space, you must:
- Stop all interest, fees, penalties or charges during the breathing space.
- Stop any enforcement or recovery action to recover the arrears or other debt (including bringing new legal proceedings), and inform any enforcement agent (such as a bailiff or solicitor). Residential landlords cannot serve a ‘Section 8’ eviction notice, apply for a warrant, seek a money judgment or a possession order during the breathing space.
- Inform any assignee and provide their details to the debt adviser.
- Inform the court in any existing proceedings in writing as soon as you receive the notification. Any existing bankruptcy proceedings will be stayed, although other court proceedings already underway can continue until judgement. Any judgement from these proceedings cannot be enforced.
- Stop contacting the debtor to request repayment of that debt. You may contact the debtor if they ask to speak to you about the breathing space debt or a debt solution, or to respond to a query/complaint from the debtor. You can contact the debt adviser to discuss the debt owed.
As the debtor is still required to pay the debt, you can continue to accept payments. If you need to contact the tenant to request payment of the debt or to attempt to enforce a judgement, you must apply to court for permission to do so.
If a limitation period would expire during the breathing space, it is extended until eight weeks after the end of the breathing space.
What are the consequences of failing to comply with my obligations?
Any action taken will be null and void and the landlord may be liable for the tenant’s costs and losses. Where the debt has been assigned (for example to a debt collection firm), the landlord may have to indemnify the assignee for any losses claimed by the debtor if it failed to inform them of the breathing space when assigning the debt.
Can I challenge this?
You can request a review by the debt adviser within 20 days of the start of the breathing space. If you do not agree with a debt adviser’s decision, you can then apply to court within 50 days of the start of the breathing space.
What can I do once the breathing space ends?
Once the breathing space ends, a landlord can:
- Start to apply interest, fees, penalties and charges to the debt. Interest, fees, penalties or charges that accrued, or would have accrued, during the breathing space cannot be backdated.
- Take any action to enforce the debt, including contacting the tenant.
- Start or continue any legal proceedings regarding the debt.
What does this mean for landlords?
Landlords reviewing their options over unpaid commercial rent in light of the further extension to tenant protections should have this on their radar. A breathing space can cause further delay, if taking court action over any commercial rental debt owed by private individuals. If rent arrears under a commercial lease are included in a breathing space, one of the few current options open to a landlord of issuing court proceedings for the arrears won’t be available during any breathing space period.
Official government figures show that up to 31 July 2021, there were 17,297 breathing space registrations. These were comprised of 17,098 standard breathing space registrations and 199 mental health crisis breathing space registrations. How widely used the breathing space will be going forwards remains to be seen, but it is another important consideration for landlords while reviewing their options over unpaid rent, while we await further details from the government of the promised "binding arbitration" scheme for rental debt announced in June.