Tuesday, 16 March 2021

Breathing Space for Debtors – How will the New Scheme affect Landlords, Tenants & Property Owners?

The Debt Respite Scheme (Breathing Space) comes into force on 4 May 2021 and will give someone in debt the right to legal protections from their creditors for a limited moratorium period.

The scheme will only apply to individuals, not anything else with legal personality (for example companies), and although the focus is on consumer debts, it will also apply to mortgage and rent arrears.

The scheme will pause enforcement action and contact from creditors in relation to an existing debt and freeze any interest and late payment charges.

The FCA explains that the intention is to give people in problem debt the time to receive advice and potentially enter an appropriate scheme to resolve their debt.

There is no maximum amount of debt that can be included in a breathing space.

There will be two types of breathing space:

·       Standard Breathing Space – available to anyone with a problem debt, giving them legal protection from creditor action for up to 60 days, with a midway review. A debtor can only benefit from one breathing space in any 12-month period.

·       Mental Health Crisis Breathing Space – only available to someone who is receiving mental health crisis treatment, certified by an Approved Mental Health Professional, and will last for as long as the treatment lasts, plus 30 days (no matter how long the treatment lasts). There is no limit on the number of Mental Health Crisis Breathing Spaces.

Anyone who cannot or is unlikely to be able to repay their debts can apply to a debt adviser authorised by the FCA for a Standard Breathing Space, or they can apply to a local authority where they provide debt advice to residents.

It includes joint debts even if only one debtor applies.

The debt adviser will initiate a breathing space if they consider that the debtor meets the eligible criteria; the requisite conditions are met; and the debts are qualifying debts. The government website sets out more detail on how these tests are to be satisfied.

The Insolvency Service will send an electronic notification to creditors telling them about each debt owed to them in a breathing space and the date the breathing space started.

It will also keep a register of people whose debts are in a breathing space, and a date a breathing space ended or was cancelled in the last 15 months.

The breathing space is not a payment holiday.

Creditors cannot enforce a breathing space debt during a breathing space or charge interest or fees on it, but the debtor is still legally required to pay their debts and liabilities. They should continue to pay what they can, and the creditor can continue to accept payments.

A debtor must also pay certain ongoing liabilities if they can. 

If a debtor doesn’t pay an ongoing liability during the breathing space, the debt advisor might decide to cancel a Standard Breathing Space.

A creditor can challenge a breathing space moratorium within 20 days of it being granted and ask for it to be reviewed. 

Where a debt adviser refuses to cancel the moratorium following a challenge, the creditor may apply to court. Where a court has cancelled a moratorium, they can require the debtor to pay any interest, fees or charges that accrued during the moratorium period in respect of the debt.

Landlords and tenants

Landlords are already prevented from evicting residential tenants until 31 May 2021 under the latest government extension of the temporary Covid-19 ban.

From 4 May 2021, if a landlord is notified its tenant has the benefit of a breathing space, they must not, during the breathing space, contact the tenant under any circumstances for the enforcement of a paused debt, or seek to enforce the debt by any means, including serving notice under grounds 8, 10 or 11 of the Housing Act 1988, or taking possession having served a notice.

This is not a cancellation of the rent arrears, simply a temporary moratorium on enforcement.

However, it’s important to remember that no interest or other charges may be added to a debt that has been paused under a breathing space, and so the relevant provisions of a lease that enable the landlord to charge interest and other charges relating to the arrears will be temporarily suspended in respect of the qualifying arrears.

A landlord will still be able to contact a tenant about any other matter, which includes ongoing liability for rent and other payments.

There is an important distinction in the new scheme between debts accrued prior to the breathing space (which may benefit from the moratorium) and debts incurred during it (which may not).

If a tenant falls behind with its ongoing liabilities during the moratorium, its landlord can inform the debt adviser, who has the power to cancel the breathing space.

A 60-day moratorium is not that long in the context of a landlord and tenant relationship, and as there can only be one breathing space in any 12-month period this does not seem to be an unreasonable fetter on landlords’ powers, although many landlords won’t see it that way having had to endure over a year of the forfeiture ban.

The period may of course be much longer under a Mental Health Crisis Breathing Space.

Landlords with large portfolios will have to ensure they have systems in place to ensure that interest and charges do not accrue during a moratorium, and that any automated action that might otherwise be taken in respect of arrears is paused.

Mortgage Debt

Mortgage payments are treated similarly to rental payments where the mortgage is secured on the debtor’s primary residence.

You can include arrears on mortgage payments that exist at the date of an application for a breathing space, but not ongoing mortgage payments. If an ongoing payment is missed, then it could mean the debt adviser stops the mortgage payer’s breathing space.

Business Debts

Business debts owed by sole traders who are not registered for VAT may qualify for a breathing space, and so the scheme may apply to a commercial tenant who otherwise qualifies and where the lease is in their own name.

Business debts do not qualify if the debt only relates to the business (not the debtor personally) and the debtor is VAT registered, or the debtor is a partner in a business with someone else.

Guarantor loans can be included in a breathing space, but the protections do not automatically extend to the guarantor. The guarantor can apply for their own breathing space if they are eligible.

Council Tax and Business Rates

Council tax and business rates are both treated in the same way.

If all instalments of council tax or business rates for that financial year have fallen due and have not been paid, they will qualify for breathing space relief. If a debtor has been served with a “further notice”, the remaining liability for that financial year is also a qualifying debt.

Any council tax or business rates that have not fallen due however are not qualifying debts.

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