JULY 2010
PART 5
UNUSUAL CURCUMSTANCES
31.12.210 Company in liquidation as joint landlord of a tenanted property
In company cases, assets do not vest in the liquidator unless a specific order is sought from the court vesting the assets in the liquidator [note 1]. This is an extremely rare occurrence. The assets remain as property of the company (in liquidation). The company and joint owner will remain as landlords of the property. As the official receiver is the liquidator of the company, it is prudent to act appropriately to protect him/her from any residual liability as ultimately, he/she will be responsible for the company’s actions. A letter should be sent to the tenant giving written notice that the company (in liquidation) and joint owner remain as landlords, but that the official receiver is the liquidator of the company and has the powers of liquidator as provided by legislation to deal with the company’s assets [note 2]. The official receiver, as liquidator, should ensure that the company, as joint landlord, complies with the duties and obligations as landlord (see Part 3) or otherwise seeks to end the tenancy agreement (see Part 4).
Also see Chapter 50, paragraph 50.73 for guidance on registering a form J restriction to protect the company’s interest in a jointly owned property.
31.12.211 Dissolution of company
A company that owns property is not suitable for early dissolution and indeed, the official receiver will not be able to apply for his/her release as liquidator until any property owned by the company is sold (or otherwise dealt with) and, thereafter, the proceeds of sale dealt with (see Chapter 36). Where the company is joint owner of a freehold or leasehold property, the asset that belongs to the company is the beneficial interest. Where a receiver of rents is appointed, or the mortgagee takes possession, dissolution should be deferred to prevent the beneficial interest becoming bona vacantia (see Chapter 38, Parts 5 and 7).
31.12.212 Tenanted property abroad
When the official receiver encounters a tenancy where the property is overseas, reference should be made to Chapter 43.0, Annex F for some guidance on establishing the value of the property. The law that governs the tenancy will be that of the country in which the property is located. As only the beneficial interest vests in the official receiver as trustee, the joint owners remain as the landlords of the property, and so the property should be dealt with similarly to any other property held abroad, i.e. seek to appoint an insolvency practitioner, or failing that register the official receiver’s interest in the property, or sell that interest (see Chapter 43.0, Annex F). The only real difference is that the official receiver as trustee has the right to the bankrupts share of rental profits, which the bankrupts remain responsible for collecting. The following website provides a useful reference point for information on renting property in France, Germany, Italy, The Netherlands, and Spain
http://www.monetos.co.uk/service/rental-guide/de/
31.12.213 Bankrupt failing to cooperate with the official receiver (amended October 2013)
The official receiver is entitled to the bankrupt’s share of the rental profits as they form part of the beneficial interest which vests in the official receiver as trustee (see Part 2, paragraphs 31.12.71 to 31.12.73). The bankrupt is obliged to deliver up his/her share of the rent collected (less expenses) as part of his/her duty to deliver possession of his/her estate to the trustee [note 3]. See Part 3 on calculating the bankrupt’s beneficial interest.
Where the bankrupt defaults in the payment of rent to the official receiver, a letter should be sent to the bankrupt chasing payment and attempting to ascertain the reasons for non payment. Where the bankrupt continues to default on rental payments, without reasonable explanation, a further letter should be sent warning of the consequences of failing to pay the rent (see paragraph 31.12.214) and the bankrupt should be advised to seek legal advice if they are in any doubt as to the position of the official receiver’s entitlement to their share of the rent. See paragraph 31.12.148 - 148A regarding the payment of amounts in relation to a mortgage loan on the property.
31.12.214 Action to be taken to enforce cooperation (amended October 2013)
Where the bankrupt continues to fail to cooperate after a letter has been sent chasing unpaid rent, and refuses to hand over his/her share of the rent (less expenses), the official receiver should take appropriate enforcement action, depending on the reasons for the default in payment (see paragraph 31.12.215 below). The bankrupt has a duty to deliver possession of his/her estate to the official receiver [note 3], failure to do so is contempt of court.
Where the bankrupt is landlord of a jointly owned tenanted property, and is failing to cooperate with the official receiver, reference should be made to Chapter 13 and Chapter 22, Part 4. Where the bankrupt insists on meeting mortgage payments which include a capital element in respect of any mortgage loan on the property from the rental income (see paragraph 31.12.148 - 148A) then the official receiver should contact Technical Section for advice.
31.12.215 Tenant defaults in payment of rent to joint owners
Where the bankrupt claims that the tenant has defaulted in the payment of rent to the joint owners, the official receiver will have to consider asking if the bankrupt has any evidence of non payment, such as letters from the tenant explaining his/her situation. The default in payment may be as a consequence of a change in circumstances of the tenant since the date the tenancy agreement was signed (e.g. the tenant is no longer in employment). Where the bankrupt notifies the official receiver of a change in the tenant’s circumstances, and subsequent difficulty in meeting rental payments, the official receiver will need to take these reasons into consideration before commencing any enforcement action against the bankrupt in respect of the non collection of rental profits. See paragraph 31.12.103 on rent arrears, and Part 4 for information on dealing with the disposal or ending of an AST.
31.12.216 Tenant paying mortgagee directly
Where the tenant pays rent directly to the mortgagee whilst the official receiver is entitled to receive the bankrupt’s share of that rent, the official receiver can recover the bankrupt’s share of the rent directly from the mortgagee [note 4] who are not entitled to receive the rent unless they appoint a receiver of rents or take possession proceedings in relation to the property under the terms of the mortgage loan. By attempting to collect the bankrupt’s share of the rental profit from the mortgagee, it may prompt the mortgagee into taking early action under the terms of their charge to protect their security.
31.12.217 Jointly owned property, AST agreement in sole name of bankrupt or joint owner
Technical Section has received legal advice as to whether or not one of two owners of a property can enter into an AST on the property. Advice received is that one owner cannot, as all positive dealings with the land require both joint owners. It is possible that arguments can be raised that one party had the authority on behalf of both of them or, was acting as an agent for the other.
Where the bankrupt jointly owns property with another, but the AST agreement is in the bankrupt or joint owner’s sole name, how the official receiver treats that AST depends on the intention of the joint owners as to how the beneficial interest in the property would be split between themselves at the time the agreement was created (see paragraph 31.12.125). Enquiries need to be made by the official receiver to establish why the AST agreement is in the sole name of one party, and evidence sought to back up those claims. Case law indicates that it will be an exceptional case where the beneficial interest was found to be different to that originally intended at the date of purchase of the property [note 5] and [note 6].
31.12.218 Jointly owned property, AST agreement in sole name – payment of mortgage loan
When deciding how to treat an AST agreement, the official receiver should consider what the rental income received so far has been used for. If the rental monies have been used to discharge a debt in the bankrupt and joint owner’s name (e.g. the mortgage loan is in joint names and the rent has historically been used to pay the mortgage loan), and the monies were not used by the person solely named as landlord on the AST agreement, this is an indication that the beneficial interest in the property and profits from the AST are held in equal shares by both parties. The official receiver should therefore, in the absence of other information, give consideration to treating the agreement as though it is jointly owned by the bankrupt and joint owner (i.e. the AST will not vest in the official receiver as trustee). In this instance, both parties would be benefiting from the rental income up to the date of the bankruptcy order, as it is being used to discharge a debt they are both liable for jointly and severally.
31.12.219 Jointly owned property, AST agreement in sole name – claim of sole beneficial interest in property
Where the property is jointly owned by the bankrupt and a solvent owner, but the AST agreement is in the sole name of one party, it is possible that the beneficial interest in the property belongs to one party only. If this is the case, both parties hold that interest on trust for the beneficiary. A claim to the sole beneficial interest is the most likely reason for a valid claim to the entitlement to the sole rental profits, as the entitlement to receive rent follows the reversionary interest in that property [Note 7]. It will be for the individual who is claiming the sole beneficial interest to evidence that the beneficial ownership is different to the legal ownership [note 5] (see also paragraph 31.12.217).
The official receiver will need to investigate any claim to a sole beneficial interest in the property in considering whether to accept the AST agreement as a sole agreement or a joint agreement in both parties names. If there is a valid reason for the beneficial interest in the property to be owned by one party (see paragraph 31.12.218), then it may be considered to be a sole AST and the official receiver should treat the AST as a solely owned AST agreement. Where this is the case and the bankrupt is considered to have the sole interest in the AST, the official receiver would seek to claim all the rental income and act as landlord (see Chapter 31.11).
31.12.220 Factors to consider in calculating beneficial interest
In considering the beneficial interest held by each party the ‘whole’ of the parties’ conduct in relation to both the property and the AST should be considered [note 5]. Factors to consider will include the initial contributions made to the purchase price of the property (see Chapter 31.3, Part 4) and any amounts paid by either party to significant improvements to the property. The critical question to be answered is whether or not it can be inferred from the parties conduct a joint intention that, over time, the original split (usually 50:50) has changed (see paragraph 31.12.217).
31.12.221 Jointly owned, no claim to beneficial interest
If there is no claim to the sole beneficial interest in the property by one party, the official receiver should question why the AST agreement was placed in that parties’ sole name and, if there is no valid reason, treat the agreement as though it is held in equal proportions by the bankrupt and joint owner. Where this is the case, the official receiver, as trustee, should seek to collect the bankrupt’s 50% share of the rent (in the absence of any information to the contrary regarding the share held by each party) less allowable expenses notifying the other joint AST owner as appropriate (see paragraph 31.12.128).
If the official receiver believes the AST agreement is a jointly owned, then he/she will need to give the joint owner and the bankrupt, written notice of the official receiver’s decision to treat the agreement as if it were in joint names. The official receiver, as trustee, should also give written notice to the bankrupt and joint owner that he/she will be seeking to collect the bankrupt’s 50% share of the rent less allowable expenses, and that they remain responsible for the landlord’s duties (see Part 3).
31.12.222 AST agreement in name of third party
Where an AST agreement, on a jointly owned property is created in the sole name of a third party, whilst it is not likely to be a legal lease (tenancy) as it was not created by the legal owners of the property, it is probably what is known as an equitable lease and the tenant is likely to be considered by the courts to have a valid AST agreement.
Where an AST is created in the name of a third party, the official receiver should only consider treating the agreement as though that third party is the sole landlord entitled to the full benefits of the rent, when that third party has clearly evidenced ownership of 100% of the beneficial interest in the property, and the owner of the legal title simply holds the property on trust for that third party (see also paragraphs 31.12.125 and 31.12 217). If this is the case, the official receiver should treat the property as though it is held in trust and consequently it would not form part of the bankruptcy estate. Legal advice may be needed to verify the third party’s claim to 100% of the beneficial interest. Also see Chapter 31.11, paragraph 31.11.223 on tenancy by estoppel.
Such an agreement is unlikely to be legally binding on any mortgagee of the property unless the consent of the mortgagee to the agreement was obtained prior to it being granted.
31.12.223 AST agreement in name of third party – action by official receiver
The official receiver should seek to ascertain the reason why an AST agreement on a jointly owned property was placed in the name of a third party. The factors discussed in paragraphs 31.12.125, 31.12.217 to 31.12.221 should be considered. Where no underlying reason can be established for the agreement to have been placed in the name of a third party, the official receiver should inform the third party, as trustee, that in his/her opinion the bankrupt has a beneficial interest in the property and that includes an interest in profits from any AST agreement granted on the property, and as such, the official receiver is entitled to the appropriate proportion of the rental profit (see Part 2). The official receiver should treat the AST agreement as though it was created in the names of the joint owners and claim the bankrupt’s share of the profits from the rent income from the person who actually collects the rent.
31.12.224 AST agreement in name of bankrupt and third party
Where an AST agreement, on a jointly owned property is created in the name of the bankrupt and a third party who is not the joint owner, whilst it in not likely to be a legal lease (tenancy) as it has not been created by the legal owners to the property, it is probably what is know as an equitable lease and the tenant is likely to be considered by the courts to have a valid AST agreement.
Enquiries need to be made by the official receiver to establish why the AST agreement is in the name of the bankrupt and a third party, and evidence sought to back up those claims. The official receiver should only consider treating the agreement as though that third party has a valid interest as joint landlord, when that third party can evidence that he/she owns a share of the beneficial interest in the property, see paragraphs 31.12.218 to 31.12.221. The beneficial interest held by the non bankrupt joint owner will also need to be taken into consideration.
Such an agreement is unlikely to be legally binding on any mortgagee of the property unless the consent of the mortgagee to the agreement was obtained prior to it being granted.
31.12.225 Tenancy created post bankruptcy
Where a bankrupt or solvent joint owner creates a new AST agreement after a bankruptcy order is made, the agreement is valid as the legal estate remains vested in the joint owners. This is the case whether the AST agreement is created before or after a trustee is appointed, and whether both joint owners are bankrupt or not. As soon as the official receiver becomes aware of such an agreement he/she should attempt to ascertain details of the agreement so that he/she may collect the bankrupt’s share of the profits from the rental income. See Part 2 for guidance on collecting rent.
Where the agreement is created by a solvent owner only, and they claim the bankrupt is not entitled to any of the rent, see paragraph 31.12.223.
31.12.226 New AST agreement is not a disposition of property
Where the bankrupt disposes of property between the presentation of the bankruptcy petition and the vesting of the estate in the trustee, this disposition is void unless made with the consent of, or ratified by, the court [note 8]. It is not considered that the creation of a new AST agreement, which is in itself a property right, is a disposition of the bankrupt’s share of his/her beneficial interest in the property. The bankrupt’s beneficial interest in the property still vests in the trustee upon his/her appointment, the difference is that the bankrupt’s share of the rental profits will also forms part of that beneficial interest. As the legal title to the property remains vested in the joint owners, they remain free to deal with the property as they wish.
Additionally, as the beneficial interest already forms part of the estate, the official receiver as trustee does not need to claim the bankrupt’s share of the rent as after acquired property [note 9].
31.12.227 AST agreement created post bankruptcy – action to take
Where the joint owners enter into a new AST agreement post bankruptcy the official receiver should consider informing the mortgagee of the new agreement to ensure that the mortgagee is kept informed.
Where a new AST has been entered into, the official receiver, as trustee, will need to consider the insurance position, see paragraphs 31.12.30 to 31.12.34.
A letter should be sent to the bankrupt requiring him/her to send in his/her profits from the rental income on a monthly basis, see paragraph 31.12.82.
31.12.228 Tenancy created post bankruptcy – protection of deposit
It remains the bankrupt and joint owner’s responsibility as landlords to protect any tenancy deposit taken from the tenant (see paragraphs 31.12.50 to 31.12.51).
31.12.229 Annulment applications
The official receiver may be informed that the bankrupt, as joint owner of a tenanted property, has made an application to court for an annulment of the bankruptcy order (see Chapter 6A). Where the official receiver is trustee he/she will need to consider, on a property by property basis, what action needs to be taken pending the outcome of the hearing.
31.12.230 Stay of advertisement
Where a stay of advertisement (Chapter 6, Part 2) is ordered pending the annulment hearing, the official receiver should ask the bankrupt to hold his/her profits from the rental income to the order of the trustee pending the outcome of the hearing. If the official receiver considers the stay of advertisement will jeopardise the collection of the bankrupt’s share of the rent, he/she can apply to the court for directions [note 10] (see paragraph 6.26).
31.12.231 Houses of Multiple Occupancy - definition
A building or part of a building is a ‘House of Multiple Occupancy’ (HMO) [note 11] if it meets one of the following conditions:
1) It meets the “standard test” which is;
a) it consists of one or more units of living accommodation not consisting of self contained flats,
b) the living accommodation is occupied by persons who do not form a single household,
c) the living accommodation is occupied by those persons as their only or main residence or they are to be treated as so occupying it,
d) their occupation of the living accommodation constitutes the only use of that accommodation,
e) rents are payable or other consideration is to be provided in respect of at least one of those persons’ occupation,
f) two or more of the households who occupy the living accommodation share one or more basic amenity for example student accommodation or a shared house, or the living accommodation is lacking one or more basic amenity (a toilet, personal washing facilities or cooking facilities).
2) It meets the “self contained flat test”, i.e. it consists of a self contained flat, and meets conditions 1) a) to f) above.
3) It meets the “converted building test”, i.e. it is a converted building, and meets conditions 1) a) to e) above.
4) A HMO declaration is in force.
5) It is a converted block of flats, i.e. a building or part of a building which has been converted into and consists of self contained flats, if the building work undertaken did not comply with the appropriate building standards, and still does not comply with them, and less than two thirds of the self contained flats are owner occupied [note 12].
31.12.232 Landlord’s additional obligations in relation to HMO
All HMOs are subject to additional regulation such as maintenance of the common parts, a duty to display the landlord’s details in the common parts, and compulsory mains electric smoke alarms. The landlord needs to be a fit and proper person and there needs to be adequate amenities in place [note 13].
31.12.233 Mandatory licensing of HMOs
Since 6 April 2006 mandatory licensing of certain higher risk HMOs came into force [note 14]. Under the national mandatory licensing scheme an HMO must be licensed if it is a building consisting of three or more storeys and is occupied by five or more tenants in two or more households.
31.12.234 Selective compulsory landlord licences in certain areas
In addition to certain HMO’s requiring a licence, certain areas of the country which suffer from low housing demand and significant and persistent anti-social behaviour can also introduce local regulation requiring compulsory licensing of all private rented accommodation [note 15]. The local authorities which currently contain such areas are:
31.12.235 Selective compulsory licenses and HMO licences
When the official receiver encounters a jointly owned rented property in one of the areas referred to in paragraph 31.12.234, or a jointly owned property requiring a mandatory HMO licence as specified in paragraph 31.12.233, it remains the responsibility of the joint owners to obtain such licences. The bankrupt and joint owner should hold an appropriate licence issued by the local authority, and are responsible for ensuring the property complies with all requirements imposed by the local authority. A letter should be sent to the bankrupt and joint owner confirming that the requirement to obtain and maintain a licence remains their responsibility as landlords of the property.
Where the bankrupt and joint owner need to make an application for a compulsory licence or HMO licence, the fee can be deducted from the rental income prior to calculating the bankrupt’s share of the rental profits (see paragraph 31.12.128).
[Back to Part 4 – Disposal or ending of an AST]