CALCULATING A BANKRUPT’S BENEFICIAL INTEREST IN A JOINTLY OWNED TENANTED PROPERTY
To assist in locating information in Part 3 a break down of the part is provided as follows:
The interest of the official receiver, as trustee, in a jointly owned tenanted property where there is a jointly owned AST agreement, is limited to the bankrupt’s beneficial interest, see paragraph 31.12.72. This beneficial interest comprises the bankrupt’s interest in the proceeds of sale on the reversion of the freehold/leasehold at the end of the tenancy and the bankrupt’s share of any profits from the AST.
The interests of the parties in a jointly owned property are normally declared in the conveyance or in a trust deed executed at the time of the purchase of the property. HM Land Registry has since April 1988 provided for a box on the relevant form (note Form TR1) for the transferees to declare how the beneficial interest in a property are held. Generally where the property is a jointly owned property it defaults to a beneficial joint tenancy. Such declarations are conclusive of the interests of the parties unless there has been a mistake or fraud.
The usual declaration will be that the bankrupt and joint owner are joint trustees of the property in equal shares. When dealing with a property owned by two joint owners, of which only one is subject to bankruptcy, unless evidence is shown to the contrary, the official receiver as trustee should claim 50% of the rent after the direct costs of the AST have been paid (see also paragraphs 31.12.217 - 31.12.221). If one party claims a larger share of the beneficial interest it is for that party to produce evidence to show that the original intention of an equal split of the beneficial interest has changed or did not accurately reflect the intentions at the date of purchase [note 1] and [Note 2]. Case law indicates that it will be an exceptional case where the beneficial interest was found to be different to that originally intended.
On the making of the bankruptcy order the beneficial interest in the property will be severed and any increase in value of the property as a result of expenditure by a solvent joint owner should be taken into account to calculate the respective beneficial interests of the parties [Note 3].
In order to calculate the bankrupt’s beneficial interest in the jointly owned tenanted property, the official receiver, as trustee, will need to establish the amount of any equity in the property. The official receiver should obtain a valuation of the property from the bankrupt and consider the accuracy of the valuation taking into account the property market and his/her own knowledge of housing prices in the area concerned (see also paragraph 31.3.96). In calculating the bankrupt’s interest in a property, consideration should be given to the amount due in respect of mortgage loans or charges and other debts secured on the bankrupt’s interest in the property. Any interest in an assigned endowment policy must also be taken into account when calculating the interest.
The official receiver, as trustee, will also need to calculate how much of the bankrupt’s share of the rental income from a jointly owned tenanted property that he/she is entitled to collect as trustee. This should be calculated as the total rent paid by the tenant less any allowable direct costs (see paragraphs 31.12.129 to 31.12.147) covering the landlord’s obligations to arrive at a net profit figure.
The total net figure should then be divided into the appropriate percentage between the joint owners depending on the percentage of the beneficial interest each joint owner is entitled to (see paragraph 31.12.125).
The bankrupt and joint owner retain all of the landlord’s obligations as an AST granted on a jointly owned property does not vest in the official receiver as trustee [note 4]. These obligations are prescribed by the tenancy agreement and legislation, and are considered to be allowable direct costs of the tenancy agreement. Under an AST the landlord’s obligations will usually be to:
(b) Hold any deposit paid by the tenant in a government authorised tenancy deposit scheme (see paragraph 31.12.130).
(c) Insure the property and any fixtures or furniture provided by the landlord, and provide a copy of the insurance policy to the tenant (specific landlord insurance including public liability is needed, see paragraph 31.12.131). This should already be in place so a copy of the policy should be obtained, held, and renewed if it expires (see Part 1, paragraphs 31.12.30 to 31.12.34).
(d) Keep the exterior structure in good repair and repair and keep in good working order the installations in the property relating to heating, gas and sanitation [note 6] (see paragraphs 31.12.132 to 31.12.139).
(f) Ensure the electrical installation complies with legislation (a certificate is valid for between 1 and 5 years, depending on the electrician’s recommendations) and ensure smoke alarms are fitted [note 6] [note 8] (see paragraphs 31.12.142 and 31.12.144).
The bankrupt and joint owner must ensure that where a deposit was taken since 6 April 2007 and it has been retained, that it is preserved in one of the government schemes for rental deposits (see paragraph 31.12.49). All reasonable costs associated with maintaining the tenant’s deposit in a tenancy deposit scheme should be allowed as a deduction from rental income (see paragraph 31.12.128).
The bankrupt and joint owner remain responsible for obtaining landlord’s insurance (see paragraph 31.12.30), and all reasonable costs of obtaining and continuing suitable landlord’s insurance should be allowed as a deduction from rental income (see paragraph 31.12.128).
Repairs of a cosmetic nature, such as redecorating, should not be considered as being essential. The landlord’s responsibility in relation to repairs to a tenanted property is provided for in legislation [Note 6] and includes;
(a) to keep in good repair the structure and exterior of the property (including drains, gutters and external pipes),
(b) to keep in repair and proper working order the installations in the property for the supply of water, gas and electricity and for sanitation (including basins, sinks, baths and sanitary conveniences, but not other fixtures, fittings and appliances for making use of the supply of water, gas or electricity),
(c) to keep in repair and proper working order the installations in the property for space heating and heating water (the heating including pipes, radiators and boiler).
If the tenancy agreement contains a covenant that the tenant be responsible for these things rather than the landlord, it has no effect [Note 11].
In determining the standard of repair required, regard must be had to the age, character and prospective life of the property and locality in which it is situated [Note 12]. Repairs of a cosmetic nature, such as redecorating, should not be considered as being essential.
Reference should be made to the terms of any AST agreement in place to see if there are any further repairs specified in the agreement that the landlord is responsible for according. For example, this may include arranging for an alarm service engineer to attend and rectify a fault in a burglar alarm system fitted to the property. The cost of rectifying the fault should be met from the rental income.
Paragraphs 31.12.135 to 31.12.136 give some guidance on what type of repairs are considered essential for the bankrupt and joint owner to arrange and so what type of repairs should be an allowable deduction, by the official receiver as trustee, from rental income prior to calculating the bankrupt’s share of rental profit.
(a) to carry out works or repairs for which the tenant is liable by virtue of his duty to use the premises in a tenant-like manner, or would be so liable but for an express covenant on his part;
(b) to rebuild or reinstate the premises in the case of destruction or damage by fire, or by tempest, flood or other inevitable accident; or
(c) to keep in repair or maintain anything which the tenant is entitled to remove from the property.
For a definition of covenant, see paragraph 31.12.6.
The repair of the structure and exterior includes the reinstatement of decorations damaged by the work of repair [note 14], but not damage to decorations and furnishings caused by condensation which was not due to structural damage [note 15]. Saturation of the plaster is considered to be damage to the structure [note 16].
'The structure of the dwelling house' has been said to 'consist of those elements which give it its essential appearance, stability and shape' but not to extend to 'the many and various ways in which the dwelling house will be fitted out, equipped, decorated and generally made to be habitable'; it is not limited to load-bearing elements; it does not include a separate garage, gates, internal plaster and door furniture but does include windows, including their sashes, cords, frames and essential furniture [note 17]. Floor joists included in the lease of the flat were part of the 'main structure' of the building and so within the landlord's repairing obligations [note 18].
In addition, repairs to slabs in a back yard were found to not be covered [note 19].
The bankrupt cannot claim an allowance from future rent to refund the costs of repairs already paid for prior to the bankruptcy order. Only payments made after the date of the bankruptcy order should be allowed to be deducted from the rent received from the tenant post bankruptcy.
The bankrupt cannot claim monies that have already been paid into the estate account back from the official receiver towards future expenses. Instead the bankrupt should be allowed to deduct the monies from future rental payments until sufficient funds have been recovered to pay for the expenses.
Where the bankrupts or a bankrupt and solvent joint owner either cannot afford to pay for repairs or refuse to pay for repairs, the official receiver, as trustee, is not required to provide any funds already collected as rental profit towards the cost of repairs. The bankrupt’s share of rental profits which have already been collected are held for the benefit of creditors and there is a risk that if the official receiver releases some of these funds, it will put the creditors in a less favourable position. The bankrupt and any joint owner are legally responsible for the property and any repairs, and the official receiver is not liable if the repairs are not carried out.
A tenant is paying £500 a month rent to 2 joint owners, one of whom is bankrupt. After allowing for monthly insurance and letting agent’s fees, the net income is £400, of which the bankrupt is entitled to £200 a month which he is paying to the official receiver, as trustee of his bankruptcy estate, as his share of the beneficial interest. The bankrupt notifies the official receiver that the boiler needs repairing at a cost of £1,000, and provides a written quotation to evidence this. The cost of this will be met from the next two and a half months rent (2 x £400, plus £200 in the third month). The bankrupt would not need to send any monies in to the official receiver for the next two months, and in the third month only £100 would be due.
Where the bankrupt/joint owner has maintained a service agreement on something such as the heating system or a burglar alarm system, the official receiver should allow the reasonable cost of maintaining that agreement as a deduction from the rent when calculating the bankrupt’s share of rental profit.
The bankrupt and joint owner as landlords are required to ensure that all gas appliances and flues are in good order so as to prevent the risk or injury to any person lawfully occupying the premises. The official receiver should allow for the cost of an annual safety check to be carried out by a ‘Gas Safe Register’ registered tradesman [note 20] (see www.gassaferegistrer.co.uk). A copy of the issued safety certificate should be issued to the tenant within 28 days of the check.
If the bankrupt informs the official receiver that there is no current gas safety certificate, the official receiver should write to the bankrupt and joint owner informing them that as landlords they are legally responsible for obtaining one. Where the property being inspected is an average size home, (e.g. one domestic boiler, one gas fire and one gas cooker), where the equipment passes the safety check, the cost of obtaining a certificate should not be greater than £200.
The bankrupt and joint owner as landlords are required to ensure that any electrical system and appliances supplied is safe when a tenancy begins, and remain safe throughout the tenancy [note 6] [note 8]. This is usually achieved by obtaining a periodic electrical certificate on the property from a qualified electrician, normally every 1 to 5 years depending on the electrician’s recommendation [note 21].
If the bankrupt informs the official receiver that there is no current electrical safety certificate, the official receiver should write to the bankrupt and joint owner informing them that as landlords they are legally responsible for obtaining one. The cost of the assessment and certificate should not cost more than £200 in an average home and is an allowable deduction from the rental income (see paragraph 31.12.128).
Legislation provides for levels of fire resistance for domestic upholstered furniture, furnishings and other products containing upholstery, including the measures to be taken to improve the fire safety of materials [note 10]. Fire resistant furniture carries a symbol that confirms that it is fire resistant. It remains the responsibility of the bankrupt and joint owner to ensure any furniture complies with current regulations.
Where the AST agreement is in relation to a furnished property and the bankrupt/joint owner are aware that furniture does not reach the fire safety requirements the costs of replacing the required furniture is an allowable cost in the calculation of the bankrupt’s beneficial interest in the AST.
All properties built post June 1992 are required to be fitted with a mains powered smoke alarm on each floor level. There is no legislation requiring smoke alarms to be fitted in older tenanted property but it is considered that common law duty of care means that landlords could be held liable should a fire cause injury or damage in a tenanted property. It remains the bankrupt and joint owner’s responsibility as landlords to ensure the property is fitted with smoke alarms. Reasonable costs in relation to the supply and fitting of smoke alarms in the property should be treated as an allowable expense.
When dealing with jointly owned leasehold property, the lease usually contains a requirement to pay ground rent, either annually or monthly and may also require the payment of a service charge in relation to the upkeep of communal areas (see paragraphs 31.12.112 and 31.12.113). The official receiver, as trustee, should allow the payment of ground rent and any service charge as a deduction from the rental income when calculating the bankrupt’s beneficial interest in the AST on a jointly owned leasehold property.
Ground rent differs from payments in respect of a mortgage loan secured on the property, where the capital element of the mortgage repayment is not an allowable cost (see paragraph 31.12.148-148A), in that it is a requirement for payment which is attached to the leasehold property.
Where the bankrupt and joint owner receive a notice from the Local Council [Note 22] requiring the landlord to put a hazard in relation to the property right, the cost or rectifying the hazard should be considered as an allowable cost by the official receiver, as trustee, in calculating the bankrupt’s beneficial interest in the tenancy agreement (see paragraph 31.12.109).
Where the bankrupt and joint owner have employed a letting agent (see paragraph 31.12.46), reasonable costs under the terms of the contract with the letting agent should be allowed by the official receiver, as trustee, when calculating the bankrupt’s beneficial interest in the AST.
Where a letting agent is acting for the landlords, the official receiver should allow a reasonable amount as a deduction from the final rent to pay for a final inspection and inventory (see paragraph 31.12.163).
A distinction needs to be drawn between the capital repayment element on a mortgage loan and the interest repayment element. Most jointly owned tenanted properties are purchased as an investment and financed with a buy-to-let mortgage, which are usually interest only mortgages. The interest only element of a mortgage payment in respect of a mortgage loan is an expense for which the borrower receives no benefit.
The capital element of the mortgage goes towards paying off the borrowers’ debt. As the debt has been reduced by the same amount as the capital repayment element, the borrowers have benefitted by that amount and at the end of the mortgage loan period the borrowers will own the property. By contrast the interest element of the repayment has no corresponding benefit and so it may be treated as an expense that can be deducted from the rental payment.
The official receiver, as trustee, is able to collect the bankrupt’s share of the rent, after deductions for the allowable costs of letting the property under an AST agreement for the benefit of the bankrupt’s creditors. Allowable costs would include the interest element of the mortgage repayment made but should not include any payment in respect of the capital element of the mortgage loan payments.
This is consistent with HMRC, who allow the mortgagee interest element as an allowable expense when calculating the tax due on a landlord’s rental profit.
If the joint owner of a tenanted property is solvent and the bankrupt fails to pay any mortgage loan payment due in respect of a mortgage loan on the property from his/her share of the rent, then in practice the whole of the mortgage loan payment will fall to be paid by the solvent owner.
Where both owners of a jointly owned tenanted property are bankrupt then 100% of the rental income, less the allowable costs of renting the property under the terms of the AST agreement (but not the including any capital element if any payments in respect of the mortgage loan on the property – see paragraphs 31.12.148-148A) should be collected by the official receiver, as trustee, for the benefit of the insolvent estates.