DEALING WITH JOINTLY OWNED TENANTED PROPERTIES WHERE THE OFFIIAL RECEIVER IS THE RECEIVER AND MANAGER
This part deals with the initial action that should be taken by the official receiver, as receiver and manager, where a bankrupt is the joint owner of a property and is acting as a landlord in respect of an assured shorthold tenancy agreement (AST) in relation to that property (see paragraph 31.12.7). The Part deals specifically with properties let on an AST, including those which have become statutory periodic ASTs (see Chapter 31.11, paragraphs 31.11.15 to 31.11.18).
This Part provides details of the information that should be established by the official receiver in his/her capacity as receiver and manager of the bankrupt’s estate.
Where the bankrupt is the landlord under a long lease rather than an AST, reference should be made to Chapter 31.3. See Part 2 of this chapter for guidance on how to deal with a jointly owned tenanted property when the official receiver is trustee.
To assist in locating information in this Part a break down of this part of the chapter is provided as follows:
The following terms are used in the remainder of this chapter and should be interpreted as follows:
(a) A beneficial interest is an interest in the proceeds of sale of a property and in the rents and profits which could be earned from the property until its sale. It amounts to an equitable, as opposed to a legal, interest in the property. Beneficial interests often arise as a result of contributions to the purchase of, or payments for improvements made to, the property and can arise whether or not the person is the legal owner of the property (see Chapter 31.3, Part 4).
(b) The legal estate in relation to a jointly owned property is the title to the property itself which is held by both owners most usually on trust of land for themselves as beneficiaries [note 1]. That joint legal estate cannot be severed.
(c) The reversion of a property is the landlord’s interest in a property whilst a tenancy agreement is in place. After a tenancy agreement has been granted over a property, the tenant holds an interest or property right. The landlord has a reversionary interest - the right to regain possession of that property when it reverts to him/her at the end of the tenancy agreement.
(d) A covenant is a type of legal promise or term of contract to either do or not do something, which is often contained within the terms of a lease or tenancy agreement.
The standard type of tenancy agreement likely to be encountered by the official receiver is likely to be an AST. This is the standard type of tenancy agreement entered into since 28 February 1997. It was introduced by the Housing Act 1996. For further information on other types of tenancy agreements see Chapter 31.11, paragraphs 31.11.15 to 31.11.18. In addition, the official receiver may commonly encounter lodgers living with the bankrupt(s), see paragraphs 31.12.58 to 31.12.60 for guidance.
Additionally, local authorities, housing authorities, registered providers of social housing and housing action trusts can use different types of tenancies, see Chapter 30, paragraph 30.62A and Chapter 31.3, Part 8.
Unlike solely owned property where the official receiver will become the landlord when the property vests in him/her as trustee, upon the bankruptcy or one or more or all of them, the joint legal owners will remain as the landlords of a tenanted property, and retain all the legal rights and responsibilities under the terms of the AST agreement, that is after the bankruptcy or bankruptcies as it is only the bankrupt’s beneficial interest in the property which will vest in his/her trustee. The legal title of jointly owned property remains vested in the joint owners (even if all joint owners are subject to bankruptcy orders).This is because the joint legal title to the property cannot be severed and property held on trust by a bankrupt does not vest as part of a bankruptcy estate.
The only interest that will vest in the official receiver as trustee is the bankrupt’s beneficial interest in the property, which can be severed (see paragraph 31.12.6 for a definition of beneficial interest and legal title).
When the official receiver is appointed trustee of a bankrupt’s estate, where the bankrupt is a joint owner of a tenanted property, the official receiver’s interest is limited to the bankrupt’s share of the profits of the tenancy agreement and reversion of the freehold at the end of the tenancy, both being the beneficial interest. Part 2 provides guidance where the official receiver has been appointed trustee of the bankrupt’s estate.
The official receiver does not have any rights or obligations in relation to any AST agreement created on a jointly owned property as only the bankrupt’s beneficial interest in the AST agreement vests in him as trustee. The official receiver cannot seek to bring an AST on a jointly owned property to an end, and will not be required to carry out any landlord duties (see Part 3, paragraph 31.12.129).
Whilst the official receiver is receiver and manager, his/her obligations are limited to the protection of the bankrupt’s estate [note 2]. Although the official receiver is not required to do anything that involves incurring expenditure unless directed to do so by the Secretary of State [note 3], he/she should take all reasonable steps to protect the value of the bankrupt’s interest in the property that may later be claimed by the trustee [note 4].
The holding of property as a long term investment, including the renting out of that property, is treated as an investment business by HM Revenue and Customs rather than a trading business. In an investment business the property is held to either produce income in the form of rent, long-term capital growth or a combination of both. In a property trading business property is acquired with the intention of being developed and sold for a quick profit, and the properties held are treated as stock. Where property is rented out and the underlying intention is to hold the property for the long-term, then it is generally accepted by HM Revenue and Customs that the business is one of investment rather than trade (see paragraphs 31.12.114 to 31.12.122 for information on the tax treatment of rented property).
The resulting income or gain from an investment business is taxed differently to that of a trading business (see paragraph 31.12.114).
With a property investment business (such as renting out property), joint ownership means each individual has their own property investment business and is taxed on their own share of rental profits and capital gains accordingly. Joint ownership does not affect the underlying business. It will not generally constitute a business partnership unless the joint owners also formally create such a partnership. Joint owners are not necessarily trading together – instead they are both investing in the same property.
A joint AST agreement arises where there are several tenants under the same AST agreement, with all of the tenants having exclusive possession of the entire property together. Joint tenants take a tenancy of the property as a group at a single rent for the whole property, with each tenant's interest in the property being exactly the same as that of the others.
A joint AST is not the same as 'tenants in common' or a 'licence to occupy’. 'Tenants in common' is where there are several tenants under the same tenancy, where each of the tenants has the exclusive possession of a specific bedroom in addition to the use of the other communal areas of the property. A 'licence to occupy‘ is the right to possession of the property without any of the legal rights in the property (see paragraph 31.12.59).
There are the following requirements for a joint AST:
The tenants in a joint AST are usually jointly and severally liable for the rent and damages to the property. This means that should either one or some or all of the joint tenants breach any of the terms of the AST agreement, or where there are rent arrears and/or damages to the property, the landlord can elect to claim against all of them jointly or against each one individually for the full outstanding amount. This provides some security for the landlord, as well as additional risk for the joint tenants, as well as any guarantors that the tenants may have.
Where one or more of the joint tenants wishes to leave the property, and/or there are new joint tenants wishing to occupy the place of the old joint tenants, a new AST agreement will need to be concluded. This can be done either by way of a deed of variation that will be attached to the AST agreement, or a new AST agreement can be drawn up.
If a tenant dies and the AST is a joint tenancy, the remaining joint tenant or tenants have an automatic right to stay on in the property. If it was a statutory periodic tenancy (see paragraph 31.11.18), the tenant’s husband or wife (or a person living with the tenant as husband or wife),has an automatic right to succeed if he or she were living with the tenant at the time of the tenant’s death, unless the tenant who died was already a successor themselves. Only one succession is allowed. No one else in the family has an automatic right to succession although other family members can negotiate a new AST agreement with the landlord [note 5].
When the official receiver is dealing with jointly owned tenanted property he/she will never hold the full responsibilities of landlord (see paragraph 31.12.8), but he/she may be considered to hold some residual duty of care obligations, see paragraphs 31.12.66 to 31.12.67.
On becoming aware that the bankrupt is a joint owner of a tenanted property the official receiver should seek to obtain a copy of the tenancy agreement to determine the details of the AST agreement, Annex C requests a copy of the AST agreement at the initial enquiry stage, see paragraph 31.12.28 and 31.12.29.
The official receiver needs to establish that there is an AST agreement rather than occupation under a licence (see paragraph 31.12.59).
It is important that the official receiver establishes at the earliest opportunity details of;
(a) The legal owners of the property.
(b) The beneficial owners of the property.
(c) The party(ies) understood to be acting as landlord(s) of the property.
This information is requested in the tenanted property questionnaire (Annex C – see paragraphs 31.12.28 and 31.12.29). When the parties listed in (a) to (c) are not the same, for example, Mr & Mrs X are the legal owners of the property, but only Mrs X is understood to be the landlord, it may effect how the official receiver treats the tenancy agreement, see Part 5, paragraphs 31.12.217 to 31.12.221 for details.
If there is no AST agreement the official receiver should ascertain the following details from the bankrupt;
See also paragraph 31.12.23.
Where there is no written tenancy agreement and the tenancy was created after 28 February 1997, then by default a residential tenancy is most likely to be an AST.
Where an AST agreement is in the names of both joint owners of the property, whether both joint owners are bankrupt or not, the joint owners remain as landlords of that property, and retain all the legal rights and responsibilities under the terms of the AST agreement (see paragraph 31.12.8).
Where an AST agreement is in the name of the bankrupt only and not the other solvent owner, then the official receiver needs to establish why the agreement is only in the bankrupt’s name before a decision can be made on how to treat the agreement and rent collection. See Part 5, paragraphs 31.12.217 to 31.12.221 for further information.
Where an AST agreement is in the name of the bankrupt and a third party who is not a joint owner, then the official receiver needs to establish why the agreement is in the bankrupt and non owner’s name before a decision can be made on how to treat the agreement and rent collection. See paragraph 31.12.224 for further information.
Where an AST agreement is not in the name of the bankrupt even though the bankrupt is a joint owner, then the official receiver needs to establish why the bankrupt’s name is not on the agreement before a decision can be made on how to treat the agreement and rent collection. See paragraphs 31.12.222 to 31.12.223 for further information.
When dealing with a creditor’s petition case, a tenanted property is most likely to be discovered if contact is made with the bankrupt(s) either by telephone or face to face at the interview or on an inspection. As soon as a tenanted property is discovered then the examiner or case support officer should seek to complete the tenanted property questionnaire (Annex C). As much information as possible should be established to enable enquiry letters to be sent to all relevant parties. Where the bankrupt(s) cannot provide the information he/she should be encouraged to call back within the next 24 hours with the information needed. If the bankrupt(s) cannot provide all the information needed within 24 hours, then a copy of the questionnaire may be sent out and the bankrupt(s) asked to return it with any other information requested within 7 days.
In a debtor’s petition case it is likely that the bankrupt(s) will highlight a tenanted property at the initial contact stage when asked whether there are any assets in jeopardy, or whether there are any matters requiring immediate attention. If not, a tenanted property might be noted in the statement of affairs when the examiner reviews it on receipt from court.
Immediately on discovering the existence of a tenanted property the examiner should complete the tenanted property questionnaire (Annex C) with the bankrupt(s) over the telephone or as the case may be. As much information as possible should be established to enable enquiry letters to be sent to all relevant parties as soon as possible. Where the bankrupt(s) cannot provide the information he/she should be encouraged to call back within the next 24 hours with the information needed. If the bankrupt(s) cannot provided all the information needed within 24 hours, then a copy of the questionnaire may be sent out and the bankrupt(s) asked to return it with the other information requested in time for the interview. A case with a tenanted property would not be classed as a Type 0 case (see Chapter 11, paragraph 11.35).
At the earliest opportunity the official receiver should seek to establish the insurance position in relation to the tenanted property. The official receiver does not have the responsibility of obtaining landlord’s insurance as this responsibility remains with the joint owners of the property as landlords (but see paragraphs 31.12.31 to 31.12.33).
Enquiries must be made in all cases to obtain details of any insurance policies in force and, wherever possible, a copy should be taken of the relevant policy documents and any current certificates relating to those policies to satisfy the official receiver that that is the case. See Chapter 49, Part 2 for guidance on continuing existing insurance policies.
Where the official receiver is aware that there is no insurance in place and both owners are bankrupt, public liability insurance is required to protect the official receiver from any legal liability in case of personal injury being sustained by a third party.
Where no insurance is in place and there is equity in the property then the official receiver should also obtain sufficient buildings insurance to protect the underlying interest. Where the property has negative equity, then the official receiver will only need to obtain public liability insurance. The mortgagee should be informed where the official receiver decides not to obtain insurance. The bankrupts should also be informed that the official receiver will not be taking out buildings insurance and that it remains their responsibility as landlords to obtain landlord’s insurance.
Reference should be made to Chapter 49, Part 3 for advice on how to obtain cover under the Willis Insolvency Open Cover Insurance Facility.
Where there are one or more joint owners of the tenanted property, who are not subject to bankruptcy proceedings, the official receiver should inform the bankrupt and joint owners that it is their responsibility to obtain landlord’s insurance, including public liability insurance.
Where there is equity in the property and the official receiver establishes that there is no current buildings insurance in place the official receiver should seek to obtain buildings insurance to protect the bankrupt’s beneficial interest.
Where there is no equity in the property no insurance should be obtained and the official receiver should inform the mortgagee that there is no insurance in place.
Jointly owned – solvent joint owner
Jointly owned – both owners bankrupt
Full buildings insurance only to be obtained
Buildings and public liability insurance to be obtained
No insurance to be obtained
Public liability insurance only to be obtained
Generally speaking, provided that the property is used for residential purposes and certain limits are not exceeded, then the case will be suitable for the premium bordereau for smaller non-trading cases under the Willis Insolvency Open Cover Insurance (see Chapter 49, Annex 3 for details on the exclusions to this). If a case is eligible for this cover, then the official receiver is required to add the case to the office bordereau form (Annex 2 to the Willis Insolvency Manual available in paper format in each office). In order for an asset to be covered by Willis it must be put on the office bordereau as soon as the official receiver becomes aware of its existence. Only where a case does not fall into these criteria is it necessary to telephone Willis to agree individual insurance cover (see paragraph 49.28). Generally speaking, this will be property rented out to a business for commercial purposes. Where a property subsequently becomes vacant, see paragraphs 31.12.164 to 31.12.165.
(Amended February 2014)
The official receiver’s insurance must be cancelled when the property is:
The official receiver should follow the guidance in paragraph 49.27B when cancelling insurance.
As soon as the official receiver has received the completed questionnaire (Annex C) from the bankrupt, letters should be sent to the following:
(a) The bankrupt(s) (see paragraph 31.12.36).
(b) The tenant (see paragraph 31.12.38).
(c) The joint owner (see paragraph 31.12.39).
(d) The mortgagee and any other chargeholder (see paragraph 31.12.40).
(e) The letting agent (if applicable) (see paragraph 31.12.46).
A letter should be sent to the bankrupt (Annex D) following the initial contact or initial enquiries enclosing copies of the letters sent to the tenant and letting agent if appropriate (see paragraph 31.12.38 and 31.12.46). The letter states that the bankrupt and joint owner will retain joint legal responsibility for the tenancy agreement, and that the official receiver will not carry out any landlord’s duties, even if both owners are bankrupt. The letter also states that when a trustee is appointed, he/she will be entitled to the bankrupt’s share of the rent after deducting any direct expenses under the terms of the AST, which do not include the capital element of any mortgage payments (see paragraph 31.12.148 -148A). The letter also asks the bankrupt to hold any rent received pending the appointment of a trustee.
The official receiver should be aware that if the bankrupt declines to set aside the rent for the trustee and continues to pay the capital element of the mortgage debt (see paragraph 31.12.148 -148A), the trustee will need to consider whether to take any action to enforce cooperation, see paragraph 31.12.214.
If the bankrupt refuses to set aside the rent, the bankrupt should be reminded that any disposition of property that he/she makes prior to the appointment of a trustee will be void [note 6]. In such circumstances to avoid any difficulties in recovery later on, the official receiver as receiver and manager should ask the bankrupt to forward the relevant part of the monies on to him/her immediately [note 4].
Whilst acting as receiver and manager, the official receiver should send an initial enquiry letter to the tenant (Annex E) informing them of the position of the joint owners in relation to the bankruptcy and the property. The letter should make it clear whether or not the joint owner is also subject to bankruptcy proceedings. The letter asks for a copy of the tenancy agreement to be sent to the official receiver if one has not already been obtained from the bankrupt.
The letter tells the tenant that the joint owners retain legal responsibility and will remain as their landlords. It also tells the tenant to continue making payments as usual to the joint owners or letting agents.
A letter should be sent to the joint owner (Annex F) following the initial contact or enquiries, enclosing a copy of the letter sent to the tenant. The letter informs the joint owner that they will retain joint legal responsibility for the tenancy agreement, and that the official receiver will not carry out any of the landlord’s duties. It also explains that when a trustee is appointed, the trustee will be entitled to the bankrupt’s share of the rental income (usually 50% - see paragraph 31.12.125) less allowable direct expenses, which do not include any capital element of the mortgage payments.
The letter suggests that they may want to obtain independent legal advice.
Any mortgagee with a charge over the jointly owned tenanted property should be sent notice (Annex G) in order to protect the official receiver’s interest in respect of the charged asset and to make early enquiries into the value of the asset. The notice in tenanted property differs to the standard mortgagee enquiry letter [note 7], as it asks for a response within 7 days on the most urgent queries. The official receiver needs to know urgently whether or not the mortgagee;
(a) has consented to the property being let,
(b) wishes to appoint a receiver of rents,
(c) wishes to, or has already taken, any possession proceedings.
This information will assist the official receiver in deciding whether or not to consult creditors and apply for an urgent Secretary of State appointment of an insolvency practitioner trustee, see paragraphs 31.12.61 to 31.12.65. If the mortgagee intends to appoint a receiver of rents or take possession proceedings quickly then, without more, it is unlikely that it would be a suitable case for the appointment of an insolvency practitioner as trustee.
It is important to let the mortgagee know at an early stage that if the official receiver does collect the bankrupt’s share of the rent from the tenant, this will not be used in meeting any capital element in respect of the mortgage payments due in relation to a mortgage loan on the property (see paragraph 31.12.148). This information is contained in the initial letter, Annex G. See paragraphs 31.12.97 to 31.12.105 for information on the collection of the bankrupt’s share of the rent.
It is important that the mortgagee is clear of their position as such information will assist the mortgagee in deciding whether or not to appoint a receiver of rents or to commence possession proceedings in relation to the property
The mortgagee is bound by the terms of the AST agreement and so cannot evict the tenant if they repossess the property without giving proper notice [note 8] in the following situations:
(a) If the tenancy has been granted with the consent of the mortgagee, either on;
1) a buy-to-let mortgage, or,
2) a residential mortgage where the mortgagee has subsequently consented to the mortgagor renting out the property.
(b) If the tenancy was already in place prior to the mortgage being granted [note 9].
(c) Where the mortgagee has acknowledged a tenancy by their actions after it being granted without their consent [note 10].
An AST agreement is not binding on the mortgagee when the following criteria are met:
(a) Where a property is rented out after a mortgage is obtained on the property, without the mortgagee’s consent, and
(b) The mortgagee has not acknowledged the tenancy by any positive action (for example, receiving rent directly from tenant). Inaction by the mortgagee with the knowledge that there is an unauthorised letting on the property of the bankrupt does not amount to positive action [note 11].
If both the above criteria are met, the mortgagee is free to sell the property with vacant possession [note 12], and without giving the tenant proper notice [note 8]. How that is achieved is, of course, for the mortgagee to consider.
It is unlikely that a mortgagee will appoint a receiver of rents when they have not given the bankrupt permission to rent out the property. This is because to do so may bind the mortgagee to a tenancy that they are not currently bound by [note 13] (see paragraph 31.12.43). The likely action, if any action is to be taken by the mortgagee, will be to commence possession proceedings in relation to the property.
Some mortgage deeds may contain a clause entitling the mortgagee to security over the rent. In practice this is usually the right to collect the rent directly from the tenant. This is only likely where a specific buy-to-let mortgage has been obtained. Official receivers should proceed on the basis that the mortgage does not contain such a clause. If the initial letter to the mortgagee (Annex G) prompts them to notify the official receiver of such a clause, a copy of the mortgage terms and conditions should be requested for verification.
Letting agents assist a landlord in finding a suitable tenant for a property and in drawing up a tenancy agreement and other related matters. If a letting agent has been appointed by the bankrupt, the type of service provided will depend on the terms of the contract. The services range from the collection of rent only, to a full management service where the agent is responsible for arranging any repairs, safety inspections (see paragraphs 31.12.132 to 31.12.142), and dealing with tenants. Generally the charges of a letting agent are deducted as a percentage of the rental income received. A letter should be sent to the letting agent (Annex H) to ascertain details of the rental agreement, including whether the agent holds any rent or other money.
The letter explains that the AST agreement and the agreement between the letting agent and the joint owners will not vest in the trustee when one is appointed. Instead the joint owners will remain as landlords of the property.
The official receiver, as receiver and manager, should be careful when dealing with letting agents of jointly owned property that he/she does not interfere with the collection of rent. If the official receiver interferes with the collection of rent, he/she may inadvertently create a new tenancy agreement between the official receiver and the tenant on similar or completely new terms to that of the original agreement. This may occur if the official receiver allows the letting agent to become his/her agent, by asking them to collect rent on behalf of the official receiver.
It is a common requirement of an AST agreement that the tenant pays a security deposit to the landlord. The security deposit is a refundable charge and is usually one months rent. The deposit will normally be held to protect the landlord against any damage caused by the tenant during the tenancy.
Tenants have a responsibility to make sure that the property is in as good a condition when they move out as it was when they moved into it, subject to normal/fair wear and tear. When the tenant leaves, the landlord is entitled to check the condition and contents of the property, and if all is well the full amount of the deposit should be returned to the tenant. Where damage, other than usual wear and tear, has occurred the landlord may be entitled to withhold all or part of the deposit to restore the property to the original position.
Where the tenancy agreement has been entered into after 6 April 2007, the landlords must protect the deposit within a tenancy deposit scheme. This applies to all AST agreements where the annual rent does not exceed £25,000 [note 14]. The deposit must be protected within 14 days of the landlord receiving it.
If the landlords reside in the same property as the tenant, the tenancy cannot be an AST and so any deposit taken in these situations does not need to be placed in a tenancy deposit scheme (see paragraphs 31.12.59 to 31.12.60 on licences).
For further information on tenancy deposit schemes see Chapter 31.11, paragraphs 31.11.44 to 31.11.47).
Where both joint owners are bankrupt, legally it remains the responsibility of those joint owners as landlords to protect the deposit. The joint owners should be left to arrange any inspection of the property and the return of the deposit to the tenant. If the deposit monies are not protected, the tenant will have a claim in the bankruptcy proceedings [note 15]. As the bankrupts remain responsible for the tenancy, the official receiver should not take control of the deposit (see paragraph 31.12.52).
Where there is a solvent joint owner who is also landlord, both the joint owners remain jointly and severally liable for the deposit to the tenant. If the deposit monies are not protected, the solvent joint owner will be liable for the repayment of the deposit, and the tenant will also have a claim in the bankruptcy proceedings [note 15]. As the bankrupt and joint owner remain responsible for the tenancy, the official receiver should not take control of the deposit (see paragraph 31.12.52).
If an agreement about how much of the deposit should be returned cannot be reached, tenancy deposit schemes offer a free service to help resolve disputes. Dealing with disputes and the return of the deposit remains the responsibility of the bankrupt(s) and any joint owner.
Where possible the official receiver, as receiver and manager, needs to obtain sufficient information for the trustee, once appointed, to make an immediate decision on how to best proceed with the property. See flowchart (Annex A) for guidance on the decision making process.
The official receiver should attempt to ascertain:
The official receiver, as trustee, cannot disclaim a jointly owned property as the legal title remains vested in the joint owners (see paragraph 31.12.8), and it is unlikely that the bankrupt’s beneficial interest, which will vest in the trustee, will be onerous. Therefore the official receiver, as receiver and manager, should not make enquiries of the bankrupt, any solvent joint owner or the tenant at the initial stages regarding any onerous obligations which the bankrupt(s) may have.
The decision as to whether or not to disclaim the bankrupt(s) beneficial interest lies with the trustee, see paragraphs 31.12.196 to 31.12.209.
To assist the official receiver on his/her appointment as trustee, the official receiver, as receiver and manager, should ascertain if the mortgagee intends to appoint a receiver of rents or commence possession proceedings in relation to the property (see paragraph 31.12.40).
If the mortgagee intends to appoint a receiver of rents or take possession quickly then without more, it is unlikely that an insolvency practitioner trustee will be appointed in the place of the official receiver, unless there is significant equity in the property see paragraph 31.12.61.
If a receiver of rents has been appointed then a letter should be sent to the mortgagee asking for a copy of the document of appointment. The receiver should be informed that as the property is jointly owned, the legal interest in the property and tenancy agreement do not form part of the bankruptcy estate, and that any future queries regarding the tenancy agreement should be addressed to the bankrupt(s). Where the official receiver has become trustee the letter should also state that as the official receiver considers that the mortgagee has the right to receive the rent and the bankrupt(s) do not act as landlords he will be taking further no action. See Chapter 9, Part 3 and Chapter 69 for more information on receivers.
All income receivable from an AST agreement forms part of the beneficial interest that will vest in the official receiver if he/she is appointed as trustee of the bankrupt’s estate. Investment income which forms part of the beneficial interest cannot be treated as the bankrupt’s income for IPA/IPO purposes as it will vest in the trustee and should therefore be collected by the official receiver upon appointment as trustee. All rent and other income from an investment property should be apportioned between the bankrupt and joint owner and the bankrupt’s share collected from the bankrupt by the official receiver in accordance with the guidance contained in paragraphs 31.12.96 to 31.12.105. See Chapter 31.7 for guidance on IPA/Os.
Income received by the bankrupt from a lodger residing in the bankrupt’s property under licence (see paragraph 31.12.59), does not form part of the beneficial interest and so does not vest in the official receiver if he/she becomes trustee. This is because a licence is not a property right, but is an agreement between the licensee and licensor. Such a licence cannot be sold. If the property were to be sold, the licence would terminate. Payments made by a lodger should be classed as income when calculating the disposable income of the bankrupt for the purposes of an IPA/IPO, see Chapter 31.7 for guidance.
A licence is not a type of tenancy agreement (which is a property right), instead it is a contractual right to occupy space for a period of time. A licence does not give the tenant any legal interest in the land; it is simply the permission to occupy the land for an agreed term and will usually come about when there is no right to exclusive possession. When someone lets a room in their house out to a lodger, this is under licence rather than a tenancy. The main difference between a tenancy and a licence is that as a tenancy gives the tenant an interest in the land that interest is binding on any subsequent purchaser of the property. With a licence, if the landlord sells the property, then the tenant no longer has any right to occupy, as his/her agreement was with the landlord, and not attached to the land [note 16].
See paragraph 31.12.58 for information on rent received from a lodger.
The general rule as to whether an arrangement is a tenancy or a licence is whether the occupier has a right of exclusive occupation, that is, whether he or she can keep other people, including the landlord, (unless the landlord is exercising rights to enter under the terms of the tenancy) out of defined premises. There can be no tenancy without the granting of exclusive possession. This means that a tenancy can only be granted over whole lockable premises rather than just a room in a home which the landlord has promised not to enter; the ability to secure the premises is essential in defining exclusive possession. Also see paragraphs 31.12.13 to 31.12.18 regarding joint AST agreements where more than one person rents a property.
Where the only asset in a case is a tenanted property with or without equity, then an appointment of an insolvency practitioner trustee should be sought as soon as possible via the bankrupt landlord rota (see paragraph 31.12.63). Where there are other assets in a case which would attract an insolvency practitioner along with a tenanted property, then an appointment should be sought via the Secretary of State primary rota (See Chapter 17, Part 5). An appointment of a trustee may be considered urgent if the property (including the AST agreement) can be regarded as an asset in jeopardy. When dealing with jointly owned tenanted property, the bankrupt and joint owner remain as landlords with the ability to deal with the property including collecting the rent and ending the tenancy. There is a risk that the bankrupt(s) will not cooperate in handing over their rent, and so an early insolvency practitioner appointment is considered to be the most appropriate course of action.
A mortgagee in relation to the property should be given seven days to reply to the initial letter (Annex G, see paragraph 31.12.40) as to whether or not they wish to appoint a receiver of rents or to take possession proceedings in relation to the property. If the mortgagee has not replied within seven days, the letter should be followed up with a telephone call to be certain that the mortgagee has been given sufficient opportunity to consider the contents of the letter prior to an insolvency practitioner being appointed trustee.
An insolvency practitioner appointment may be appropriate even if the mortgagee has indicated that they are going to appoint a receiver of rents or take possession (see paragraph 31.12.55) if they have not indicated when they will take that action although this state of affairs should be explained to the insolvency practitioner nominee when they are offered the case.
Where the initial enquiries made by the official receiver establish that the property has no or very little equity, then the case should still be offered to the next insolvency practitioner on the bankrupt landlord rota which is maintained by each office (see paragraph 31.12.63). An insolvency practitioner may accept the appointment purely on the basis of the bankrupt’s share of the profits from the ongoing rental income (see paragraph 31.12.128) and possible future increases in property prices.
If the mortgagee has indicated that they are going to appoint a receiver, then the case should not be offered to an insolvency practitioner on the bankrupt landlord rota.
When offering a case to the next insolvency practitioner on the bankrupt landlord rota the same process should be followed as when dealing with the primary rota (see Chapter 17, Part 5). The official receiver must first become trustee for an insolvency practitioner to be appointed in his/her place by the Secretary of State, see paragraph 17.50. Where the main creditors cannot be contacted to seek their views, or where they decline to make an immediate decision, then an appointment may still be possible. It should be reported to Insolvency Practitioner Unit when requesting the appointment that the office has not been able to contact the majority of creditors but that an appointment is being sought due to operational needs.
When an insolvency practitioner accepts an appointment, as trustee, via either the primary or bankrupt landlord rota, then it is not necessary to send any (further) initial letters to third parties. The insolvency practitioner should be provided with a copy of the tenanted property questionnaire (Annex C) relating to the property as a matter of urgency so that they are in possession of all relevant information relating to the property and the tenancy agreement.
Where contact is made with any third parties such as the tenant or mortgagee, then care should be taken that the third party is not led to believe the official receiver will become trustee, and that a certain course of action will be taken. If an insolvency practitioner is appointed at a later date, he/she may take an alternative course of action to that of the official receiver.
A duty of care is owed between an occupier of premises and his/her lawful visitors [note 17], and an occupier also owes a limited duty of care to trespassers [note 18]. The question of who is an occupier depends upon the particular facts of each case but generally it would be the person who is in actual occupation for the time being, or who has possession or physical control of the premises. Accordingly, it will normally be the tenant that has the duty of care.
The official receiver should establish whether or not public liability insurance is held by the bankrupt(s), as landlord, and should ensure that where all joint owners are bankrupt, such insurance is put in place where none is in existence, see paragraphs 31.12.30 to 31.12.34. When both joint owners are bankrupt it could be argued that the official receiver is in control of the premises and so liable for any breach of the duty of care, legal action could then be taken against the official receiver as trustee. Where there is a remaining solvent owner, that person would be liable for any breach of the duty of care as they would be in control of the premises with the official receiver’s interest only being in part of the beneficial interest rather than the full beneficial interest.
In all cases where the insolvent and joint owners are a landlord there is likely to be a duty of care upon them in relation to defective premises [note 19]. Legislation provides that a duty of care is owed by a landlord to visitors, and possibly trespassers, where the premises are let under a tenancy agreement, which places the landlord under an obligation to the tenant for the maintenance or repair of the premises or where the landlord has the right to enter the premises and carry out such repairs. The duty arises when there has been a breach of that obligation to repair (or failure to exercise the right of repair) which has led to the defect in the premises which caused an injury to, or damage to the property of, the tenant or visitor or any other person who might reasonably be expected to be affected by defects in the premises. This duty only applies if the landlord knew, or ought in the circumstances to have known, of the relevant defects. When both joint owners are bankrupt it could be argued that the official receiver is in control of the premises and so liable for any breach of the duty of care, legal action could then be taken against the official receiver as trustee. See Chapter 8, Part 7 for more information.
The official receiver should ensure public liability insurance is held by the bankrupt(s), and if not, it should be obtained as a matter of urgency on all tenanted properties when all joint owners are bankrupt, see paragraphs 31.12.30 to 31.12.34 for further information.