MARCH 2010
PART 3
DISPOSAL OR ENDING OF AN ASSURED SHORTOLD TENANCY AGREEMENT
31.11.135 Introduction
This part deals with the ending of an assured shorthold tenancy (AST) agreement and covers ways that the tenancy may be ended by either the tenant, mortgagee or official receiver. In addition, this part deals with the disposal of the underlying property when the tenancy is continuing. The decision making process that leads up to one of these courses of action is covered in Parts 1 and 2.
31.11.136 Ways that a tenancy may be brought to an end
When the official receiver is trustee, he/she will, at some point, want to cease to be responsible for a tenanted property. The official receiver’s role as landlord of a tenanted property will be brought to an end following the occurrence of any of the following events:
1) The tenant decides to leave the property (see paragraphs 31.11.138 to 31.11.152).
2) The official receiver, as trustee, disclaims his/her interest in the reversionary interest in the property and tenancy agreement (see paragraphs 31.11.153 to 31.11.169).
3) The mortgagee takes possession action against the property (see paragraphs 31.11.170 to 31.11.180).
4) The mortgagee appoints a receiver of rents (see paragraphs 31.11.181 to 31.11.185).
5) An insolvency practitioner is appointed as trustee (see paragraphs 31.11.186 to 31.11.187).
6) The official receiver, as trustee, sells the legal and beneficial interest to a third party or back to the bankrupt (only in exceptional circumstances) (see paragraph 31.11.188 to 31.11.202).
31.11.137 Landlord and Tenant Act 1987 and disposal of tenanted property
When a property let on an AST agreement is disposed of, it is not classed as a ‘relevant disposal’ for the purposes of the Landlord and Tenant Act 1987. Part 1 of this act gives ‘qualifying tenants’ of certain premises the right of first refusal to acquire a landlord’s interest in premises, when a landlord proposes to make a ‘relevant disposal’. The official receiver does not need to be concerned with these obligations when disposing of property let on an AST because a tenant on an assured tenancy (which includes ASTs) cannot be a qualifying tenant [note 1] (see Chapter 31.3, Part 7).
31.11.138 Where tenant leaves before end of tenancy agreement
If a tenant wishes to leave the property, he/she should give proper notice to the official receiver as landlord. The notice should be in writing [note 2] and comply with the period specified in the tenancy agreement.
Where the period of the tenancy agreement has not expired, the tenant should be expected to stay until the end of the fixed term within the agreement or pay the rent until the end of that term (e.g. if the tenant has only been in a property for 2 months out of a 6 month tenancy, the requirement under the terms of the agreement is that the remaining 4 months rent should be paid). If the tenant leaves during the fixed tenancy agreement period, see paragraph 31.11.139 below.
31.11.139 Where tenant leaves without proper notice – rent
If a tenant leaves without giving the official receiver proper notice, then he/she is liable for the rent for the unexpired period of the tenancy. Where the official receiver has an address for the tenant, the official receiver should pursue the tenant for any unpaid rent. The official receiver should give consideration to instructing Moon Beever (agents appointed by The Insolvency Service under the book debt and IPA contract) to collect the outstanding rent, see http://intranet/CAD/ORBS/Contract%20Information/Moon%20Beever%20Links.htm for details of the contract.
31.11.140 Where tenant leaves after tenancy has expired
Where the initial tenancy period has expired, and the tenancy is a statutory periodic tenancy (see paragraph 31.11.17), then the tenant should give notice of one period of that tenancy [note 3]. A tenancy period is usually determined by the period that rent is paid for. Thus if the rent is paid per calendar month, the tenant should give one calendar months notice in writing to the landlord, subject to a statutory minimum of not less than four weeks notice before the date on which it is to take effect [note 4].
31.11.141 Where tenant leaves – retaining deposit for rent owed
Where the tenant leaves the property without giving proper notice, owing rent for the notice period, then the official receiver should claim an amount from the deposit for the outstanding rent. Where the deposit is held in the Deposit Protection Service scheme (see paragraph 31.11.45), the official receiver as landlord needs to make a statutory declaration at least 14 calendar days after the tenancy has ended under the Single Claim Process [note 5] either because:
Guidance on the Single Claim Process is given here https://www.depositprotection.com/Public/FAQs.htmx?section=SingleClaim
Payment should be made payable to the official receiver by name, as trustee of the bankrupt’s estate.
Where the deposit is not retained in this scheme any recovery of the deposit is unlikely.
31.11.142 Where tenant leaves – deposit
If the tenant leaves the tenanted property, either at the end of the tenancy agreement, or earlier than permitted by the agreement, and the official receiver is acting as trustee and landlord, then the deposit will need to be dealt with. 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 tenancy comes to an end, 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.
Any deduction from the deposit is not to compensate the landlord for damage; it is to pay to make good the damage. The official receiver should not normally carry out repairs at the end of a tenancy (see paragraphs 31.11.143 and 31.11.144).
Unless there is a detailed inventory from commencement, and a further one at termination of the tenancy, it is unlikely that a deduction will be accepted readily by the tenant.
31.11.143 Where tenant leaves – inspection
The official receiver should be conscious of the fact that when a tenant leaves the property, an inspection of the property will need to be funded by the bankrupt’s estate and may not result in any deduction from the deposit being made. Further, any deduction made should be used for undertaking any required repairs and an inspection and retention of deposit in a property where there is negative equity is unlikely to benefit the creditors in any way, other than the mortgagee.
It is therefore unlikely to be beneficial for the official receiver to arrange for an inspection in the majority of cases.
31.11.144 Where tenant leaves – inspection when equity in property
Where there is equity in a property, and the official receiver is trustee, the official receiver should not normally consider carrying out an inspection or repairs as it is unlikely to result in a benefit to creditors. Additionally, unless there is a detailed inventory from commencement, and a further one at termination of the tenancy, it is unlikely that a deduction from the deposit will be accepted readily by the tenant.
The official receiver should ensure that proper insurance is in place when a property becomes vacant and a disclaimer is not going to be issued, see paragraph 31.11.146.
31.11.145 Where tenant leaves – dealing with deposit where there is minimal or negative equity (amended May 2011)
Where there is minimal ((£10,000 should be used as a guide figure but this may vary depending on local and general circumstances) or no equity in the property, the mortgagee should be informed that the property is empty and asked if they wish to inspect the property and to take possession. The mortgagee should be given a set time, for example, 10 days, to decide whether they wish to take possession of the property and deal with the deposit and should be informed should they fail to do so, the official receiver will authorise its release in full to the tenant. If the mortgagee does not respond within the time given, the deposit should be released to the tenant. If the mortgagee is not going to take any action, the official receiver will need to decide whether the property has become onerous and consider disclaiming his/her interest in the property within 30 days of the property becoming vacant to prevent the insurance cover from lapsing, see paragraph 31.11.146 and 31.11.147.
31.11.146 When tenant leaves – inspection for insurance purposes
Where the tenant leaves, and the mortgagee does not wish to take possession of the property, the official receiver will need to decide to either inspect and insure the property on an ongoing basis, or to disclaim his/her interest in it (assuming it has not been possible to get an insolvency practitioner appointed as trustee). Even if no deductions are going to be made from the deposit for repairs, where there is an empty property in a bankruptcy estate, there are specific insurance requirements that will necessitate an inspection and the securing of those premises (see Chapter 49, Annex 1). Insurance cover is available for unoccupied buildings from Willis Ltd, provided that within 30 days of the building becoming unoccupied the code of practice referred to in Chapter 49, Annex 1 for securing that building is followed. The official receiver should consider disclaiming the property prior to the 30 day period expiring if he/she decides to disclaim rather than insure the property on an ongoing basis at a cost to the estate (see paragraph 31.11.147 below).
31.11.147 When tenant leaves – insurance or disclaimer
Where the property is in negative equity, and the estate is no longer in receipt of rental income, the obligation to inspect and insure the property is likely to mean that the property has become onerous. If the mortgagee does not wish to take possession of the property, and where it has become onerous, the official receiver, as trustee, should consider disclaiming his/her interest in the property to protect the estate from ongoing insurance costs.
Only when there is some equity in the property should the official receiver consider the continuation of insurance. Where the official receiver decides to insure a property on an ongoing basis, rather than disclaiming it, the case should be transferred to RTLU to deal with in accordance with guidance provided in Chapter 31.3, Part 5.
31.11.148 When tenant leaves – tenant cannot withhold rent to recover deposit
If the deposit has not been retained by the bankrupt, and the tenant vacates the property at the end of the tenancy agreement, the tenant will be a creditor in the bankruptcy proceedings for the amount of the deposit (see paragraph 31.11.50).
The tenant may attempt to withhold the last month’s rent due under the tenancy agreement as repayment of the deposit. The deposit is a debt in the bankruptcy, and thus cannot be repaid in this way. The rental income due, is due to the official receiver as the landlord for occupation for the property post bankruptcy, and should be collected for the benefit of the estate (see Chapter 36). If the tenant were to retain rent in this way, the official receiver should attempt to recover it, see paragraph 31.11.139.
A deposit debt cannot be off-set against rental income as there must have been mutual dealings prior to the date of the order and the deposit was money held on trust. See Chapter 40, paragraph 40.164.
31.11.149 When tenant leaves – furnished property
The official receiver should arrange for his/her agents to dispose of any furnishings left in the property when a tenant vacates, if this is likely to produce some benefit to the estate. The tenant should be asked to confirm, prior to the agent’s instructions, that they have removed all their personal belongings from the property.
Where the property is in negative equity, and the furnishings are of no value, the official receiver should consider disclaiming his/her interest in the property and the contents (see paragraph 31.11.72).
Any furniture in a rented property would not be claimable by the bankrupt under the exempt property provisions [note 6].
31.11.150 When tenant leaves – keys to property
When the tenant leaves the property, the official receiver, as landlord, should ensure all keys for the property are returned to him/her and placed in the office safe. The tenant should not return the keys to the bankrupt who no longer has any legal interest in the property. The whereabouts of all sets of keys should be established as soon as a tenant vacates the property, including making enquiries of the bankrupt who may still retain a set. See paragraphs 31.11.146 and 31.11.147 regarding insurance if the property is not to be disclaimed. When the tenant leaves the property, if the property is not going to be disclaimed, the case should be transferred to RTLU to deal with in accordance with guidance provided in Chapter 31.3, Parts 3 and 4. Where the official receiver as trustee disclaims the property, any keys held should be returned to the mortgagee.
31.11.150A When tenant leaves – council tax (added October 2013)
Council tax is a tax set by local councils to help pay for local services. There is one council tax bill for each dwelling, whether it is rented or owned. Generally speaking, the occupier(s) of the property are the liable person(s) for payment of the tax [note 38].
When the tenant(s) vacate(s) a property and it is left unoccupied, the legal owner is, generally speaking, the person liable for payment of the council tax. A property is exempt from council tax where the liable person is a trustee in bankruptcy [note 39] or the property has been taken into possession by the mortgagees [note 40] (see paragraph 31.3.33). These exceptions apply even if the property is furnished, and will still apply if the trustee is liable with some other person (see paragraph 31.12.166A).
In a company case, the company will remain liable for the council tax where it is the owner or occupier of the property.
31.11.151 Position of bankrupt in relation to vacant property
When a trustee is appointed, the bankrupt no longer has a legal interest in the property owned by him/her at the date of the bankruptcy as the property vests in the trustee on appointment (see paragraph 31.11.66). When the tenant vacates the property, the official receiver should not permit the bankrupt to move into the property. The reasons behind this are:
31.11.152 When bankrupt moves back in without permission
Should the official receiver discover that the bankrupt has moved back in to the property without permission, and an insolvency practitioner has not been appointed because there is minimal (£5,000 or less), or no equity in the property, then the official receiver needs to consider the most appropriate course of action. The official receiver could consider taking court action to obtain possession of the property from the bankrupt as a trespasser (see paragraph 31.11.151) but the costs of such proceedings would have to be paid for by the estate and consequently such action may not be in the best interests of creditors. Instead, the official receiver should write to the mortgagee informing them that the bankrupt has moved back in to the property and asking if they, the mortgagee, intend to take any action. If the mortgagee does not take any action ,then it is unlikely that the official receiver will take any further action in relation to the bankrupt. The official receiver can rely on the bankruptcy restriction registered on the property at HM Land Registry as security for any equity in the property (see Chapter 31.3, paragraph 31.3.61). If the property later becomes onerous, the official receiver would then need to consider disclaiming his/her interest in the property (see paragraphs 31.11.153 to 31.11.169).
As the property is not a family home, it is not capable of re-vesting in the bankrupt at any point (see paragraph 31.11.10). A letter should be sent to the bankrupt informing him/her that although he/she has moved back in to the property, it will not re-vest in him/her but will remain as part of the bankruptcy estate until the interest is sold. Upon sale, any surplus will be paid to the bankruptcy estate. The letter to the bankrupt should explain the situation and potential loss to the estate and suggest that the bankrupt consider seeking legal advice. Consideration should be given by the official receiver to any potential misconduct for the purposes of a BRO.
If there is equity in the property it is likely that the case will have been handed over to an insolvency practitioner to act as trustee.
31.11.153 Disclaimers - general
Disclaimer of tenanted property should only be considered by the official receiver, as trustee, where the tenancy agreement and property when considered together are onerous [note 7] (see paragraph 31.11.154). Onerous property is defined as any unprofitable contract or any other property which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act [note 8].
Where a tenanted property is found to be onerous, the proper course of action is to disclaim it unless the mortgagee is going to take urgent action (see paragraphs 31.11.55 to 31.11.56). See Chapter 34 for further information on disclaimers. If the property has any equity, or a paying tenant, then the decision should be taken with care and with regard to the creditors. The bankrupt should provide information regarding equity and rental income when completing the initial questionnaire (Annex C see paragraphs 31.11.25 to 31.11.26). See paragraph 31.11.54 for a list of issues which may cause a property to be onerous.
31.11.154 When is a solely owned tenanted property onerous?
Tenanted properties are not usually onerous on the basis that the tenancy agreement simply imposes certain covenants (see paragraph 31.11.65) on the official receiver as landlord, e.g. to ensure the exterior of the property is kept in good repair (see paragraph 31.11.73). These covenants are not usually particularly onerous. If a tenancy agreement is producing rent which is greater than the outgoings in relation to that agreement, it cannot be considered to be onerous even if the underlying freehold/leasehold property is in negative equity. The official receiver will need to balance the benefits of the reversionary interest in the property and the tenancy agreement against the detriments to decide whether the agreement is onerous [note 9].
A tenanted property will generally only be considered onerous when the obligation to pay monies in carrying out the landlord’s obligations (see paragraph 31.11.73) exceeds any equity in the property and any expected rental income (less expenses). See Technical Manual Chapter 34 for more information on disclaimers and Chapter 34, Part 3 for the process for issuing one.
31.11.155 Mortgagee to appoint receiver – onerous property
A disclaimer should not be issued where the mortgagee has indicated they are going to appoint a receiver. When dealing with onerous property, it is imperative that it is dealt with quickly and so the mortgagee should be pressed for a time by which they will appoint a receiver or take possession. Onerous property should not be left whilst the mortgagee makes a decision on how to proceed. The mortgagee should be warned that if they have not dealt with the property by a certain date, a disclaimer will be issued.
31.11.156 Tenanted property becomes onerous in the future
A solely owned tenanted property which cannot be considered by the official receiver to be onerous initially, as the rental income exceeds any outgoings, may become onerous at a future point in time. This may occur where the official receiver is notified of a required expensive repair in a property with no equity e.g. the roof of the property requires extensive repair. As soon as the property and tenancy agreement, when considered together, become onerous, the official receiver is then able to consider disclaiming the property. See examples in paragraphs 31.11.158 to 31.11.160 below.
31.11.157 Disclaimer cannot be against tenancy agreement only
Should the official receiver decide to proceed with a disclaimer, care should be taken to disclaim both the freehold/leasehold reversionary interest in the property and the tenancy agreement, as legal advice suggests that to disclaim only the tenancy agreement would not fully protect the official receiver from liability. Reference in the Insolvency Act to an “unprofitable contract” is considered to be to pure contract, in contrast to other forms of property [note 10]. By disclaiming a tenancy only, the trustee would be destroying someone else’s property, rather than his/her own. Instead, it is thought that all the trustee can do is to disclaim the bankrupt’s property, which in the case of tenanted property is the freehold reversion and any interest held in the tenancy agreement as landlord (see paragraph 31.11.65). Where a tenancy agreement has ended, and the property is vacant, or the bankrupt has moved back in, any disclaimer would be against the freehold/leasehold property only.
31.11.158 Disclaimer – example of onerous tenanted property
A bankrupt solely owns a negative equity property with a tenant, on a statutory periodic assured shorthold tenancy (see paragraph 31.11.17) the rent being £300 a month. The property was not considered to be onerous initially as the rental income from the property exceeded the costs in renting the property. The tenant has paid two months rent (£600). The tenant calls the official receiver and informs him that the boiler has broken. A subsequent quote from a gas safe engineer is that the boiler cannot be fixed and should be replaced at a cost of £2,000. As his tenancy agreement is a statutory periodic tenancy renewable monthly (as the original 6 month agreement has expired), the tenant can leave with 1 months notice. The obligation to replace the boiler has made the property onerous for the first time, as there is no guarantee that funds will become available from the rental income to recoup the costs of replacing the boiler. The official receiver decides to disclaim his interest in the reversion of the property and tenancy agreement.
31.11.159 Disclaimer – further example, roof repairs
The official receiver is trustee in a case where the bankrupt solely owns a property let on an assured shorthold tenancy agreement (AST). The AST still has four months to run and the rent is £500 a month. The tenant is therefore contracted to pay a further £2,000 under the terms of the tenancy agreement. One months rent has so far been collected by the official receiver. The bankrupt has stated that the property has £5,000 equity. The case has been offered to an insolvency practitioner but they have declined the appointment. On initial investigation, the property and tenancy are profitable and so disclaimer action by the official receiver, as trustee, is not appropriate. Shortly after the official receiver becomes trustee the tenant notifies the official receiver that the roof is in need of repair as it is dangerous. Following a storm there are several slipped slates which have fallen off narrowly missing the tenant on two occasions and there is also rain water leaking into the house causing damp.
31.11.160 Disclaimer – roof repairs example, action to take
Because of the equity in the property, and the potential future rent, the official receiver cannot disclaim the reversionary interest in the property without further enquiries to see if the costs of repairing the roof will cause the property to become onerous or not, see paragraphs 31.11.154 and 31.11.156. The official receiver obtains three quotes from roofing contractors for the work, and all three contractors recommend the roof is replaced at a cost of approximately £4,000.
The official receiver has no guarantee that the tenant will not default on future rent payments and given the current state of the housing market, and the costs involved in any sale of the property, there is no guarantee that the £5,000 equity will be realised. The official receiver therefore decides that the property has become onerous and decides to disclaim his interest in the reversion of the property and the tenancy agreement.
31.11.161 Disclaimer following collection of rent
The collection of rent does not preclude the official receiver, as trustee, from disclaiming his/her interest in the reversion of the property and tenancy agreement at a later date. Irrespective of an intention to disclaim the tenanted property, the official receiver should arrange initially for the collection of the rent for the benefit of the insolvent estate. Once the disclaimer has become effective, the right to collect rent, including any rent arrears, comes to an end.
Disclaimer brings to an end the official receiver’s interest in the tenancy and reversion in the property from the date of the disclaimer. It will also bring the tenant/landlord relationship to an end and discharge the trustee from all personal liability in respect of the property as from the commencement of his/her trusteeship [note 11].
31.11.163 Disclaimer – effect on tenant’s rights
The disclaimer does not bring to an end the rights and obligations of any third parties interested in the property. The tenant will not lose his/her rights of occupation under the tenancy. As the disclaimer brings to an end the trustee’s rights and obligations under the tenancy, the official receiver will no longer have the right under the tenancy agreement to seek possession of the property or to collect rent.
After a disclaimer has been served, the rental income does not revert to the bankrupt who has no remaining interest in the property. The tenant may still wish to pay the rent to preserve his/her rights under the tenancy agreement, if so, the official receiver should inform the tenant to contact the mortgagee, who still retains security on the property post disclaimer, to request that the mortgagee accept the rent.
A copy of the disclaimer should be served on the tenant and anyone else known to be living in the property or with a right to occupy it [note 12] (see also paragraph 34.57).
31.11.164 Disclaimer – effect on guarantor of tenant
Disclaimer of the freehold/leasehold reversionary interest in the property and tenancy agreement by the official receiver does not affect the rights or liabilities of any other person. It has been held that a guarantor of a tenant remained liable notwithstanding disclaimer [note 13].
31.11.165 Disclaimer – property vests in Crown Estate
Disclaimed land vests in the Crown Estate by escheat. The Crown Estate does not incur any liability in respect of land unless it takes possession of, or exercises control over it. Where a property is mortgaged for more than its value, the Crown Estate is unlikely to take any action as in doing so it may become liable for that property. By accepting rent, the Crown Estate would most likely be exercising some control and so become liable for the property. Instead, the most likely course of action is that the mortgagee will exercise control to protect their interest (see paragraph 34.80).
31.11.166 Disclaimer – effect on mortgagee’s rights
As a disclaimer does not end third party rights or liabilities, the mortgagee will retain its security over the property, and its right to appoint a receiver of rents or take possession [note 14]. If the mortgagee enters possession of the property after the tenancy agreement has been disclaimed, it would be a matter between the mortgagee and the tenant whether a new agreement is created. It would also be the mortgagee’s responsibility to deal with any deposit still held.
A copy of the disclaimer should be served on the mortgagee [note 12] (see also paragraph 34.57).
31.11.167 Disclaimer – vesting orders
Where the official receiver disclaims a freehold or leasehold reversion, then any person with an interest in it may apply for a vesting order [note 15], (see Chapter 34, Part 5). This will include the tenant, any other occupiers and the mortgagee, but not the bankrupt.
31.11.168 Disclaimer – insurance
Following disclaimer, the official receiver, as trustee, will no longer be the landlord of that property or have any rights or liabilities in respect of it. Any insurance taken out by the official receiver on the tenanted property should therefore be cancelled.
31.11.169 Disclaimer – letter to tenant (amended July 2013)
Along with serving notice of the disclaimer on the tenant, the official receiver should also write to the tenant stating that the official receiver is no longer the landlord and is no longer responsible for the property using the template letter provided at Annex R.
The official receiver should provide the tenant with the mortgagee’s contact details and inform him/her that contact may be made by the mortgagee shortly regarding the tenancy. If the official receiver is aware of a deposit being held, he/she should inform the tenant of its whereabouts and how to obtain the funds when the tenancy ends.
31.11.169A Disclaimer – letter to bankrupt (added July 2013)
Along with serving notice of the disclaimer on the bankrupt, the official receiver should send a letter confirming the implications of the disclaimer using the template letter provided at Annex Q.
31.11.170 Mortgagee’s right to take possession
A mortgagee usually has the power to take possession of a property over which they hold a secured charge when the borrower (mortgagor) breaches the terms of his/her mortgage loan [note 16]. Where the mortgagor has not obtained permission from the mortgagee to grant a tenancy over that property, he/she is usually in breach of the mortgage terms and so granting an unauthorised tenancy is usually sufficient grounds for repossession. Failing to make mortgage payments will also make the mortgagor in breach of the terms of his/her mortgage.
31.11.171 Mortgagee’s right to actual possession when consent to let granted
When a mortgagee has given a bankrupt consent to let his/her property out, or the mortgage is a buy-to-let mortgage, their right to repossess the property is the same as above (paragraph 31.11.170), although they are bound by the tenancy agreement. This prevents the mortgagee from obtaining vacant possession (i.e. evicting the tenant), without following the proper notice period [note 17]. See paragraphs 31.11.203 to 31.11.208.
31.11.172 What constitutes possession
Where a mortgagee takes actual possession of a property, there is no doubt as to his/her intention to take possession and he/she assumes the liabilities of a mortgagee in possession (see paragraph 31.11.174). Where the mortgagee gives notice to the tenant to pay rent to them, it is also clear that they intend to go into receipt of rents and profits. This is equivalent to taking possession [note 18]. This is also the case if they give notice to the tenant not to pay rent to the mortgagor [note 19]. The mortgagee must either take possession or leave the mortgagor in possession [note 20].
31.11.173 Mortgagee not in possession
A mortgagee cannot be said to be in possession when they merely receive a sum equal to the rent from the mortgagor’s agent, when the agent has not served on the tenant any notice on the mortgagee’s behalf [note 21]. The mortgagee must act in such a manner to substitute themselves for the mortgagor in the control and management of the property. The mortgagee does not assume possession by insuring the property or by making arrangements with the tenant if the tenant does not recognise the mortgagee as landlord [note 22].
31.11.174 Landlord’s duties when mortgagee in possession
When a mortgagee is in possession of a tenanted property, the official receiver, as trustee, is no longer actively in control of that property, and is no longer entitled to collect rent. The mortgagee will assume the role of manager of that property [note 23], effectively becoming the landlord. When a mortgagee takes possession of a tenanted property, they also take on responsibility for that tenancy, including the collection of rent [note 24].
31.11.175 Mortgagee’s right to rent arrears
When a mortgagee enters possession, they are entitled to collect any rent arrears that exist at the date of possession [note 25]. The mortgagee is entitled to arrears of rent whether falling due before or after the mortgage was granted. The are also entitled to receive rents held by a letting agent not yet paid over to the official receiver, as trustee. Any rent collected by the mortgagee in possession should be used firstly in paying the current outgoings such as insurance, repairs and taxes. The balance is then used in payment of the interest on the mortgage loan, followed by the capital [note 26].
31.11.176 Mortgagee’s right to sell when tenancy not binding
When a mortgagee in possession exercises its right to sell the property, and a tenancy was granted by the mortgagor without the mortgagee’s consent, then the tenancy is void against the mortgagee. Where a tenancy agreement is void against the mortgagee, it is also void against any purchaser from the mortgagee [note 27]. The mortgagee would normally obtain vacant possession prior to selling a property either by peaceful entry of the property or by obtaining an order for delivery of the land. See paragraphs 31.11.178 and 31.11.179 below on the repossession process. The mortgagee may choose to sell a property with a sitting tenant.
31.11.177 Mortgagee’s right to possession when tenancy is binding
Where a tenancy is binding on a mortgagee, the mortgagee must give a minimum of two months notice to the tenant to evict him/her [note 17] see paragraph 31.11.203.
31.11.178 Repossession process – overview
Before a mortgagee can obtain actual possession of a property by evicting a tenant, the mortgagee must obtain a court order. If the mortgagee is not aware of the tenant’s details, notice needs to be served on the property addressed to “the occupiers” of the hearing date, at least five days before the hearing. There are various options open to the court at the possession hearing, but if the mortgagee proves grounds for possession, and the application is not defended, the court will most likely make a possession order.
The possession order will give the occupier a date by which they should leave, which is usually 28 days after the hearing, although it may only be a few days in some cases. If the occupants have not left by the date on the possession order, then the mortgagee will need to go back to court and obtain a warrant for possession before they can evict the occupants. This usually occurs only one or two weeks after the date to leave on the possession order.
31.11.179 Repossession process – enforcing the order
The court’s bailiffs will execute a warrant for possession and will change the locks to secure the property. They can break into the property if it is empty at the time they attend.
31.11.180 Mortgagee in possession entitled to appoint receiver
(amended August 2013)
A mortgagee in possession may relieve itself of its position and responsibility by appointing a receiver under its statutory power [note 28] and the court may appoint a receiver after a mortgagee has taken possession if the circumstances render it just and convenient. The receiver would be the agent of the mortgagee not the mortgagor in this instance (see paragraph 31.11.182).
31.11.181 Mortgagee’s right to appoint a receiver of rents
A mortgagee has the right to appoint a receiver of any rents and profits of a property on which they hold a secured charge when the borrower (mortgagor) breaches the terms of his/her mortgage, see paragraph 31.11.170. This right is enshrined in the Law of Property Act 1925 [note 29] and it is also normally contained in the terms of the mortgage deed. Failing to make mortgage payments will make the mortgagor in breach of the terms of his/her mortgage loan. Where the mortgagor has not obtained permission from the mortgagee to grant a tenancy over that property, the mortgagee will not normally appoint a receiver as to do so will be acknowledging and giving validity to that tenancy.
31.11.182 Receiver of rents is agent of mortgagor
It is worth noting that when a receiver is appointed either by the mortgagee (under the terms of the mortgage) or by the court (under the Law of Property Act 1925), they act for the mortgagor (the borrower) and not the mortgagee [note 30]. The receiver is therefore unable to bring possession proceedings against the mortgagor being the same person. Instead, if possession proceedings are taken following the appointment of a receiver, it will be in the name of the mortgagee.
31.11.183 Receiver’s duties to repair property
Where a receiver is appointed by the mortgagee, he/she is responsible for paying the running costs of that property from the rents received as follows [note 31];
1) All rents, taxes, rates and outgoings whatever affecting the mortgaged property,
2) Keeping down all annual sums or other payments, and the interest on all principal sums, having priority to the mortgage of which he is receiver,
3) In payment of his commission, and of premiums on fire, life and other insurances, and the cost of executing necessary repairs directed by the mortgagee,
4) In payment of the interest accruing in respect of any principal money due under the mortgage,
5) Towards discharge of the principal money, if so directed by the mortgagee.
31.11.184 Receiver’s duty to manage property
The receiver’s duty of care was tested in a case where the receiver had failed to serve notice under a rent review clause in a lease, which meant that the rent was not increased and income was lost [note 32]. The judge found that the receiver had failed to come up to the standard of care required of a receiver. The receiver had regarded his function as to do what he was told by the lender but that was an unhappy misapprehension of the function of a receiver; for although he was appointed by one party, his function was to look after the property of which he was receiver for the benefit of all those interested in it. The receiver took over the management of the properties from the borrowers and it was held that failure by the borrowers to take steps to alert the receiver to the rent review clause did not amount to contributory negligence.
31.11.185 Checking validity of receiver appointment
Where the official receiver receives notice of the appointment of a receiver of rents, he/she should request a copy of the relevant appointment document. This may take the form of a court order or of a document signed by the mortgagee provided the power of sale has become exercisable [note 33]. When the official receiver is satisfied the appointment is valid, he/she should write to the mortgagee and receiver confirming that he/she has accepted that the appointment is valid and that he/she is no longer responsible for the tenancy or property from the date of the appointment. The official receiver should also write to the tenant providing information of the appointment of the receiver and stating that the receiver will deal with all further tenancy queries as landlord.
See Chapter 69 for further details on Law of Property Act receivers.
31.11.185A Transfer of case to LTADT following appointment of receiver (inserted September 2013)
Where a receiver of rents is appointed and the property is the only outstanding asset matter, the case may be transferred to LTADT where it is unlikely that the property will be sold within 12 months (probable where rents are being received). If the property is likely to be disposed of by the receiver of rents within 12 months, the case should remain with the local official receiver to deal with. The official receiver will need to consider each case on an individual basis.
The official receiver should check that a bankruptcy restriction has been registered against the property in every case, and prior to any transfer to LTADT (see Chapter 50, paragraph 50.28 and 50.28A).
31.11.186 Appointment of insolvency practitioner
When there is significant equity in a tenanted property, the case should be offered to an insolvency practitioner as a property with a tenant in occupation does not classify as a straightforward asset realisation, see paragraph 17.3. It is unlikely that the case will be suitable for appointment of an insolvency practitioner trustee via a meeting of creditors as there is a need for a trustee to be in office as soon as possible to deal with any landlord responsibilities and rights under the tenancy agreement (see Part 2). See Chapter 17 for guidance on Secretary of State rota appointments.
Where there is little or no equity in a tenanted property, but the property is still producing an income for the estate, an appointment from the bankrupt landlord rota should be considered (see paragraph 31.11.59).
31.11.187 Appointment of insolvency practitioner, mortgagee enquiries
Prior to seeking the appointment of an insolvency practitioner to act as trustee, enquiries should be made of any mortgagee to ascertain whether they intend to appoint a receiver or take possession (see paragraph 31.11.34). If the mortgagee is going to take imminent action, an insolvency practitioner is unlikely to accept the appointment unless there is significant equity in the property or there are other assets in the bankrupt’s estate, as any rental income will no longer be available for collection by the trustee.
31.11.188 Sale of the legal and beneficial interest
The main point to remember when dealing with a solely owned tenanted property is that it no longer belongs to the bankrupt, it vests in the official receiver as trustee. Neither is it a qualifying property under section 283A [note 34] if the bankrupt (or his/her family) did not live in it at the date of the bankruptcy order (see paragraph 31.11.10). There is no reason for the official receiver to consider selling a tenanted property back to the bankrupt as he/she does not need it for living in.
31.11.189 Legal and beneficial interest to be sold in exceptional circumstances only
For the reasons in paragraph 31.11.188 the official receiver should only consider selling a solely owned tenanted property back to a bankrupt in exceptional circumstances (see paragraph 31.11.194). It is possible to sell the legal and beneficial interest to a third party if the sale is for the financial benefit of the estate (see paragraph 31.11.192).
31.11.190 Position of mortgagee if bankrupt allowed to move back
The bankrupt should not be allowed to move into a formerly tenanted property, see paragraph 31.11.111. If the official receiver allows the bankrupt to move back in to the property after the date of the bankruptcy order, it is likely to compromise the position of the mortgagee as the value of the property will be effected. When there is an unauthorised tenancy, or a vacant property, there is considered to be vacant possession which makes selling the property in the event of repossession more straightforward for the mortgagee. Where there is not vacant possession the mortgagee will have to obtain vacant possession through court proceedings, the costs of which will be deducted from any equity in the property, see paragraphs 31.11.178 to 31.11.179 above.
31.11.191 Mortgage debt in the bankruptcy
The unpaid element of the mortgage loan (including any negative equity) is provable in the bankruptcy. Even if the monthly mortgage payments are up to date at the date of the bankruptcy order, no further mortgage payments will be made from future rental income, except if the mortgagee goes into possession of the property, there are likely to be future liabilities relating to the mortgage loan and the costs of any subsequent repossession which would be provable in the bankruptcy.
The mortgage loan is a contributing reason not to sell the legal interest in the property back to the bankrupt, as to sell the legal interest in the property may entail the mortgage company insisting that the bankrupt acknowledge the mortgage loan as a post bankruptcy debt, leaving the bankrupt fully liable for the mortgage debt post discharge (see paragraph 31.11.198).
31.11.192 Sale of legal and beneficial interest to a third party
The official receiver, as trustee, can sell and transfer the beneficial interest and legal title to a third party (but this should only take place in exceptional circumstances – see paragraphs 31.11.188 to 31.11.189 and 31.11.193). As a rule, and as the property is an investment rather than the bankrupt’s home, it should only be sold if to do so would benefit the creditors over and above what would be achieved by the official receiver retaining the property. Where the property is solely owned, the transfer will need to be a transfer of the legal title, and the low cost conveyancing scheme will not apply (see paragraph 31.3.174 and Chapter 31.3, Annex C). A separate quote from TLT Solicitors (solicitors appointed by The Insolvency Service under the property conveyancing scheme) for their fees will need to be obtained by the official receiver. It is likely that the purchaser will need to take out a new mortgage loan for the purchase of the property, as the existing mortgagee is very unlikely to allow the legal title to be sold without the mortgage loan being redeemed (as occurs in the usual sale of a property).
31.11.193 Sale to third party – calculating value
Before the transfer of the legal title to a third party can proceed (subject to contract), the official receiver has to agree on the value of the interest being transferred. To do this, the official receiver will need to see an up to date valuation of the property prepared by an independent valuer or agent and up to date details of the amounts owed to creditors claiming mortgages and other charges over the property. The official receiver will also need details of how much rent is likely to be achieved for the estate over the remaining period of any tenancy agreement in place or a suitable period calculated on a case-by-case basis. The payment from a third party will need to compensate the estate for the loss of this rental income (e.g. if the rental income is £400 per calendar month and there is four months left on the tenancy, the official receiver may expect £1,600 plus all the costs), plus any equity in the property. The official receiver may consider accepting a lower amount for the rental income as there is no guarantee that the tenant will not default on rental payments. Ultimately, the best should be done for the creditors.
31.11.194 Sale to bankrupt (exceptional circumstances)
In exceptional circumstances the official receiver may consider selling the legal interest back to the bankrupt. Provided all of the following grounds are met it may be possible:
If the tenant is still resident in the property, it is very unlikely to be practical as the property is not available for the bankrupt to move in to and he/she would not be able to afford the mortgage loan payments as well as their own accommodation costs.
31.11.195 Bankrupt encouraged to seek independent legal advice
Whenever the bankrupt expresses a desire to purchase the legal and beneficial interest from the official receiver, as trustee, he/she should be strongly encouraged to seek independent legal advice. Where a property is in negative equity, or has little equity, the purchase of the legal title may not be in the bankrupt’s best interest. If the bankrupt agrees to take on the mortgage debt post bankruptcy, and he/she subsequently defaults on the mortgage loan following the purchase of the legal and beneficial interest, the mortgagee could take action to recover the debt against the bankrupt outside the current bankruptcy proceedings.
31.11.196 Discussion between mortgagee and bankrupt
The official receiver should distance him/herself from any negotiations between the bankrupt and the mortgagee in relation to the bankrupt’s intention to purchase the legal and beneficial interest in the previously tenanted property. The official receiver should ensure that he/she is not a party to any negotiations between the mortgagee and the bankrupt to avoid any future criticism.
31.11.197 Mortgagees consent to sale
Prior to the official receiver agreeing to sell the legal and beneficial interest in the property to the bankrupt, he/she will need to obtain consent from the mortgagee to the sale of the legal and beneficial interest from the official receiver to him/her. The mortgagee may require the bankrupt to come to an arrangement in relation to the existing mortgage debt (see paragraph 31.11.198).
31.11.198 Bankrupt to take over mortgage post-bankruptcy
Should the mortgage company be prepared to consent that the bankrupt purchase the legal and beneficial interest in the property and therefore to move into the property, it is highly likely that the bankrupt will be asked to sign an agreement to take over the mortgage debt post bankruptcy. This effectively means the bankrupt will not be released from the mortgage debt on discharge from bankruptcy. It is for this reason that the official receiver should strongly encourage the bankrupt to seek independent legal advice before proceeding in this way see paragraph 31.11.195.
31.11.199 Process for selling interest to bankrupt
If the bankrupt obtains the mortgagee’s written consent in relation to the property transfer (see paragraph 31.11.97), the official receiver should then proceed to sell the legal title and beneficial interest to the bankrupt on the basis that the bankrupt pays for the costs of the transfer and £1, if there is no equity in the property (see paragraph 31.11.192).
The bankrupt may contact the official receiver seeking to move back into the property as a matter of urgency, only when the official receiver is in receipt of the funds for the transfer and permission from the mortgagee, should the bankrupt be allowed to move into the property.
31.11.200 Selling interest to bankrupt post discharge
The bankrupt may wish to buy back the legal and beneficial interest in the property after discharge for various reasons, for example, his/her credit rating may restrict future mortgage products being available to him/her. If there is still a tenant in the property, it may be possible to sell the legal and beneficial interest back to the bankrupt following his/her discharge, provided he/she is not subject to an IPA/O which will restrict the amount of available income the bankrupt has. In addition to the payment for the legal fees and any equity (or £1 if negative equity), the discharged bankrupt will also need to pay an amount equal to the rent that will be lost to the insolvent estate. The official receiver should ensure that the bankrupt is strongly encouraged to get independent legal advice before proceeding with the transfer (see paragraph 31.11.195). The bankrupt will also need to obtain the necessary permission of the mortgagee, see paragraphs 31.11.196 to 31.11.197.
31.11.201 When bankrupt allowed to move back in, IPA/O calculation
The official receiver needs to make it clear that if the bankrupt were to move back into the property after purchasing the legal and beneficial interest, and then take on a lodger to help with the mortgage payments, the official receiver would assess the rent received from that lodger as income, available for inclusion in any calculation for an IPA/IPO entered into before discharge, or in any variation of the amount to be collected under an existing IPA/IPO.
31.11.202 Termination of insurance after sale of interest
If the legal and beneficial interest is sold to a third party or the bankrupt, the official receiver no longer holds any responsibility for that property, and should ensure that any insurance taken out is cancelled to prevent further costs accruing.
31.11.203 Eviction under Housing Act 1988 Section 21
Under the Housing Act 1988, a landlord who has granted an AST has a legal right to get his/her property back at the end of the tenancy. To legally terminate an AST in England and Wales at the end of a fixed term, the landlord must serve a section 21 [note 17] possession notice personally on the tenant and must give the tenant a minimum of two months notice. The notice can be served in one of two circumstances, either at the end of the agreement (see paragraph 31.11.205) or during the running of the agreement (see paragraph 31.11.206), provided that it does not seek to terminate the tenancy any earlier than the day the agreement ends. If the tenant fails to vacate the property after proper notice, possession action is needed to evict them. Not until an order for possession is made by the court would the tenancy actually terminate.
31.11.204 When to serve section 21 notice to quit
The official receiver should not normally consider bringing a tenancy to an end by evicting a tenant. The most appropriate course of action is to either allow a tenancy to continue where the tenant is paying rent, or to disclaim the reversionary interest in the property and tenancy agreement where it subsequently becomes onerous (see paragraphs 31.11.153 to 31.11.169). If the official receiver were to evict a tenant, he/she would be left with an empty property and a public liability insurance risk for which insurance would be required. See paragraphs 31.11.23 and 31.11.146.
If the official receiver considers that it would be appropriate to serve a section 21 notice on a tenant of a property of which, as trustee, he/she is landlord advice should be sought from Technical Section who may seek legal advice depending on the circumstances of the case. Failure of the tenant to vacate the property following service of a valid section 21 notice is contempt of court and will allow enforcement action to be taken by the trustee (see paragraph 31.11.203).
31.11.205 Service of notice to quit on a tenant – after AST comes to an end in exceptional circumstances only (Amended July 2010)
A section 21 notice to quit can be served after the AST has come to an end, provided no further assured tenancy is in existence other than a periodic tenancy [note 35]. An AST will become a statutory periodic tenancy if it continues after the expiration of the fixed term see paragraph 31.11.17. For a section 21 notice to be effective:
(a) Two months notice should be given in writing that the landlord wants possession of the property on the termination of the agreement.
(b) The section 21 notice has to expire the last day of a period of the tenancy, which is usually the day before rent is due for a new period. To find out what the period of the tenancy is, the original AST agreement will need to be referred to.
(c) The notice should be served by post or in person, but when served by post it should be sent by recorded delivery and three working days should be allowed for receipt.
There is no prescribed form for a section 21 notice but it must comply with statutory requirements. The official receiver should only consider issuing a section 21 notice in exceptional circumstances, and should consult Technical Section before issuing one (see paragraph 31.11.204).
31.11.206 Service of notice to quit on a tenant – during life of AST in exceptional circumstances only (Amended July 2010)
A section 21 notice requiring a tenant to quit the premises can be served during the running of the AST [note 36] to expire after the tenancy has ended. For notice to be served under this section:
(a) Two months notice should be given in writing that the landlord wants possession of the property on the termination of the agreement.
(b) The two month period cannot expire before the end of the tenancy agreement.
(c) The section 21 notice should be served by post or in person, but when served by post it should be sent by recorded delivery and three working days should be allowed for receipt.
There is no prescribed form for a section 21 notice but it must comply with statutory requirements. The official receiver should only consider issuing a section 21 notice in exceptional circumstances, and should consult Technical Section before issuing one (see paragraph 31.11.204).
31.11.207 Service of notice to quit on a tenant – action after expiry of notice
If following the expiry of the two months notice mentioned in either paragraphs 31.11.205 or 31.11.206, the tenant has not vacated the property, court action may be taken to evict the tenant. The official receiver would need to seek legal advice before commencing any further action. Taking court action to evict a tenant may be costly and time consuming.
31.11.208 Service of notice to quit when deposit not retained
When the deposit paid by the tenant is not being held in an authorised tenancy deposit scheme, then a section 21 notice evicting the tenant may not be served until such time as the deposit requirements are complied with [note 37]. Where the official receiver wishes to serve a section 21 notice and the deposit has not been retained, he/she would need to rectify the breach by providing such deposit funds from the estate, but see paragraph 31.11.204. This is not an option that the official receiver should consider, instead disclaimer action is likely to be more appropriate (see paragraph 31.11.153 onwards).
[Back to Part 2 – Official receiver as trustee and landlord] [On to Part 4 – Unusual circumstances]