JOINTLY OWNED PROPERTY - DISPOSAL OR ENDING OF AN ASSURED SHORTHOLD TENANCY AGREEMENT
This part deals with the ending of an AST and covers ways that the tenancy may be ended by either the tenant, mortgagee, bankrupt or joint owner. In addition, this part deals with the disposal of the bankrupt’s interest in the jointly owned property when the tenancy is continuing.
When the official receiver is trustee, he/she will, at some point, want to dispose of his/her interest in a jointly owned tenanted property. An AST agreement and/or the official receiver’s interest in a jointly owned tenanted property will be brought to an end following the occurrence of any of the following events:
1) An insolvency practitioner is appointed as trustee (see paragraphs 31.12.154 – 31.12.155).
2) The tenant decides to leave or is evicted from the property (see paragraphs 31.12.156 – 31.12.166).
3) The official receiver, as trustee, sells the bankrupt’s interest in the property to a solvent owner, third party or back to the bankrupt (see paragraph 31.12.168 – 31.12.179).
4) The mortgagee takes possession action against the property (see paragraphs 31.12.180 – 31.12.190).
5) The mortgagee appoints a receiver of rents (see paragraphs 31.12.191 – 31.12.195).
6) The official receiver, as trustee, disclaims his/her interest in the bankrupt’s beneficial interest in the property (exceptional circumstances only) (see paragraphs 31.12.196 – 31.12.209).
When a jointly owned 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).
When there is a tenanted property (with or without equity), the solvent owner or third party has not expressed a desire to purchase the interest, and the official receiver believes an insolvency practitioner may accept an appointment as trustee, the case may be offered to an insolvency practitioner on the bankrupt landlord rota (see Part 1, paragraph 31.12.63). Where there are other assets that would attract the appointment of an insolvency practitioner as trustee, then the official receiver should give consideration to calling a meeting of creditors.
Where there are other assets that would attract the appointment of an insolvency practitioner to act as trustee, but disputes or ongoing issues relating to the AST agreement are ongoing, necessitating a more urgent trustee appointment, then a Secretary of State appointment of an insolvency practitioner trustee from the primary rota should be considered (see paragraph 31.12.61). See Chapter 17 for guidance on Secretary of State rota appointments.
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 of rents or to take possession proceedings in relation to the property (see paragraph 31.12.40). 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 future rental income will no longer be available for collection by the trustee.
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 2] 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 Chapter 31.11, paragraph 31.11.206) or during the running of the agreement (see paragraph 31.11.207), 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.
As the official receiver is not the landlord of jointly owned tenanted property, he/she cannot serve a section 21 notice evicting the tenant.
Where the bankrupt or joint owner serves notice on a tenant bringing a tenancy to an end, the official receiver as trustee should continue collecting the bankrupt’s share of the profit from the rent until the tenant vacates the property. Once the property is empty, the bankrupt and joint owner are free to deal with the property as they wish including entering into a new AST, moving into the property, or handing the keys to the property to the mortgagee. The official receiver retains a beneficial interest in the bankrupt’s share of property, which in the absence of rent, is the value of the reversionary interest (see paragraph 31.12.6) in the underlying property, see paragraphs 31.12.124 to 31.12.128 of Part 3 and Chapter 31.3, Part 4 for calculating the value of a bankrupt’s beneficial interest.
If a tenant wishes to leave the property, he/she should give proper notice to the bankrupt and joint owner as landlords. The notice should be in writing [note 3] and comply with the period specified in the tenancy agreement. If a tenant leaves without giving the landlord proper notice, then he/she is liable for the rent for the unexpired period of the tenancy. When those monies are paid to the landlords, the official receiver, as trustee, should claim the bankrupt’s share of the profits from the rent for the benefit of the estate (see paragraphs 31.12.124 to 31.12.128).
Where the initial tenancy period has expired, and the tenancy has become a statutory periodic tenancy (see paragraph 31.11.18), then the tenant should give notice of one period of that tenancy [note 4]. 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 5].
Where the tenant leaves the property without giving proper notice, owing rent for the notice period, then the bankrupt and joint owner as landlords can claim an amount from the deposit for the outstanding rent.
When the bankrupt and joint owner recover rent from the tenant’s deposit, the official receiver, as trustee, should claim the bankrupt’s share of the profit from that rent (see paragraphs 31.12.124 to 31.12.128 for guidance on calculating the bankrupt’s share).
If the tenant leaves the tenanted property then the bankrupt and joint owner will need to deal with the return of the deposit. 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 claim any portion of a deposit that is withheld by the bankrupt and joint owner, as the monies will normally be used to affect repairs (see Part 3, paragraphs 31.12.132 and 31.12.139).
If the deposit has not been retained by the bankrupt or joint owner, 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 any deposit lost (see paragraphs 31.12.50 and 31.12.51). The solvent owner, if any, also remains jointly and severally liable to the tenant for the lost deposit.
The tenant may attempt to withhold the last month’s rent due under the tenancy agreement to recoup the lost deposit. As the official receiver is not the landlord, only the bankrupt and joint owner can pursue the tenant for the outstanding rent.
The bankrupt and joint owner may carry out or arrange for an inspection of the property when the tenant leaves. 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 31.12.147).
Where the tenant of a jointly owned property leaves the official receiver will need to review the insurance position regarding the property, see paragraphs 31.12.30 to 31.12.34. Where there is a solvent joint owner, insurance should only have been obtained by the official receiver when there is equity in the property. When there is a solvent joint owner, insurance remains the responsibility of that solvent owner. The official receiver does not need to consider disclaiming the bankrupt’s beneficial interest in the property in this instance (see paragraph 31.12.196).
Where the tenant leaves the official receiver will need to review the insurance position regarding the property, see paragraphs 31.12.30 to 31.12.34. Where there is an empty property in a bankruptcy estate, there are specific insurance requirements that may necessitate an inspection and the securing of those premises. Where both joint owners are bankrupt the official receiver will need to ascertain what public liability insurance is in place (and buildings insurance where there is equity in the property) (see Chapter 49, Annex 1). Where there is no insurance in place relating to an empty building and the bankrupts’ have indicated it is not their intention to obtain insurance, the official receiver will need to seek the permission of the bankrupts to gain access to and possibly secure the property to meet insurance requirements, as the official receiver is not the legal owner, and is unlikely to have a set of keys. This should only be considered when both joint owners are bankrupt as only then would the official receiver have a potential public liability risk as the owner of 100% of the beneficial interest (see paragraph 31.12.31).
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 bankrupt’s beneficial interest in 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 31.12.166 below).
Where the property is in negative equity, both joint owners are bankrupt, and the estate is no longer in receipt of rental income, the obligation on the official receiver to obtain public liability insurance on the property may mean that the property has become onerous (see paragraph 31.12.198). In the first instance, the mortgagee should be asked to take responsibility for the insurance. Only if the mortgagee does not wish to take possession of the property or obtain insurance, and where the property has become onerous, should the official receiver, as trustee, consider disclaiming his/her beneficial interest in the property to protect the estate from ongoing insurance costs.
Where the property has some equity, both joint owners are bankrupt, and the estate is no longer in receipt of rental income, the obligation on the official receiver to obtain public liability insurance may not mean that the property has become onerous (see paragraph 31.12.198). In the first instance, the mortgagee should be asked to take responsibility for the insurance. Only if the mortgagee does not wish to take possession of the property or obtain insurance, an insolvency practitioner cannot be found to act as trustee, and where the property has not become onerous, should the official receiver, as trustee, consider obtaining buildings and public liability insurance on an ongoing basis. A jointly owned tenanted property is not suitable for transfer to RTLU.
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 31].
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 (legal owner) is a trustee in bankruptcy [note 32] or the property has been taken into possession by the mortgagees (see paragraph 31.3.33) [note 33]. When dealing with jointly owned property, the official receiver only holds the bankrupt’s beneficial interest (see paragraph 31.3.21), although this is most likely sufficient to be considered a “material interest” [note 34] and so a jointly owned property will be considered an exempt property and not chargeable where no one is in occupation of the property.
Should the official receiver discover that the bankrupt or joint owner has moved into the property without the mortgagee’s permission, then the official receiver should write to the mortgagee informing them. There is no restriction upon the bankrupt or joint owner moving into the property after a tenant vacates the property, provided that the mortgagee consents. The official receiver should not get involved in any negotiations as he/she does not hold the legal title to the property.
As a tenanted property would not normally be a family home at the date of the bankruptcy order, the bankrupt’s beneficial interest will not re-vest in the bankrupt at any point (see paragraph 31.12.85). A letter should be sent to the bankrupt and joint owner informing him/her that although he/she has moved back in to the property, the bankrupt’s beneficial interest will not re-vest in him/her but will remain as part of the bankruptcy estate until the interest is sold [note 6], see paragraph 31.12.85. Upon sale, any surplus will be paid to the bankruptcy estate.
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.
The main point to remember when dealing with a jointly owned tenanted property is that it is not a qualifying property under section 283A [note 6] if the bankrupt (or his/her family) did not live in it at the date of the bankruptcy order (see paragraph 31.12.85). There is no reason for the official receiver to consider selling a tenanted property back to the bankrupt or joint owner as a matter of routine, as he/she does not need it for living in. See paragraph 31.12.86.
The official receiver, as trustee, can sell the bankrupt’s beneficial interest in the property to a solvent owner or third party. 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. A sale of the bankrupt’s beneficial interest under the low cost conveyancing scheme will not apply as it is an investment property (see paragraph 31.3.174 and Chapter 31.3, Annex C). In the absence of alternative local arrangements, a separate quote from TLT Solicitors (solicitors appointed by The Insolvency Service under the property conveyancing scheme) for their fees can be obtained by the official receiver (see paragraph 31.3.180). The purchaser will either need to take out a new mortgage loan for the purchase of the property, (where the existing mortgagee will not allow the legal title to be sold without the mortgage loan being redeemed), or will need to take on responsibility for the current charges secured on the property (see paragraph 31.12.176), depending of the circumstances of the sale.
Where the property is jointly owned by the bankrupt and another person, it is only the bankrupt’s beneficial interest in the proceeds of sale (and rent and profits until sale) which vests in the trustee. The legal estate remains vested in the joint owners. If the property is to be sold, it will be necessary for the bankrupt and co-owner to convey the legal estate under their own signatures. If, as is likely, the official receiver as trustee is not arranging the sale, he/she may be asked by the solicitors dealing with the sale to sign a deed of concurrence to confirm that, as one of the beneficial owners, or otherwise (as necessary) in his/her capacity as trustee, he/she agrees to the sale. Such a deed is not strictly necessary but the official receiver may sign it if he/she is satisfied that the sale is in order, to facilitate the sale and, in particular, that the arrangements for the payment to him/her of any surplus on the sale which is due to the estate are satisfactory. The official receiver should seek a small fee for dealing with the transfer, based upon his/her time costs, unless an asset realisation will accrue (See Chapter 36, Part 1 for more information on fees) [Note 7].
Before the transfer of the legal title or beneficial interest to a solvent owner or third party can proceed (subject to contract), the official receiver has to agree on the value of the interest being transferred. For details on how to calculate the bankrupt’s beneficial interest in the property see paragraphs 31.12.124 to 31.12.128.
Once the official receiver, as trustee, has established the bankrupt’s beneficial interest in the sale proceeds of the property and has established the bankrupt’s interest in the profits from the AST (see paragraph 31.12.128), consideration will need to be given to the remaining term of the AST. The payment from the solvent owner or third party will need to compensate the estate for the loss of this rental income. For example if there is six months left to run on an AST and the tenant has been a reliable payer of the rent then the official receiver should look to receive the bankrupt’s share of the proceeds of any likely sale of the property and the profit from that six months rent. 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.
A bankrupt is the joint owner of a property let on an AST. The property was purchased by both owners in equal shares. The solvent owner has expressed an interest in buying the bankrupt’s beneficial interest in the property valued at £200,000 with a mortgage loan charge of £175,000 (£25,000 equity). The monthly rent on the AST is £500 per month and there are 4 months remaining on the agreement. Allowable costs in relation to the AST have been calculated at £50 per month (see paragraphs 31.12.129 to 31.12.147). The tenant is a reliable payer and there is no reason to consider he will default in the payment of rent.
The bankrupt’s beneficial interest in the property is £13,400 (£12,500 + £900). The solvent owner offers the official receiver £12,000. The official receiver, as trustee, accepts this offer as there is no guarantee that all the rent will be received or that a sale price of £200,000 would be achieved.
Whenever the solvent owner or a third party expresses a desire to purchase the beneficial interest from the official receiver, as trustee, they and the bankrupt should be encouraged to seek independent legal advice. This is particularly appropriate where the bankrupt is likely to keep the mortgage loan in his/her name following the sale (see paragraph 31.12.176), or where the bankrupt wishes to buy the interest back after his/her discharge (see paragraph 31.12.178).
Where a property is in negative equity, or has little equity, the purchase of the beneficial interest may not be in the best interests of the bankrupt, solvent owner or third party. If the bankrupt agrees to acknowledge the mortgage debt post bankruptcy, and he/she subsequently defaults on the mortgage loan following the purchase of the beneficial interest by a third party, the mortgagee could take action against the bankrupt to recover the debt (see paragraph 31.12.176).
If the bankrupt wishes to take on joint responsibility for the mortgage post bankruptcy when a solvent owner or third party intends to purchase the bankrupt’s interest in a tenanted property, the official receiver should distance him/herself from any negotiations between the bankrupt and the mortgagee to avoid any future adverse criticism.
Prior to the official receiver agreeing to sell the bankrupt’s beneficial interest in the property to a solvent owner or third party, the solvent owner or third party will need to obtain consent from the mortgagee to the transfer of the legal title. The mortgagee may require the bankrupt or solvent owner/third party to come to an arrangement in relation to the existing mortgage debt (see paragraph 31.12.176 below).
Should the mortgagee be prepared to consent that the bankrupt’s beneficial interest in the legal title be transferred to the solvent owner or third party, it is likely that the bankrupt and/or solvent owner will be asked to sign an agreement to take over the mortgage loan. Should the bankrupt sign such an agreement this effectively means the bankrupt will not be released from the mortgage debt on his/her discharge from bankruptcy. For this reason the official receiver should encourage the bankrupt to seek independent legal advice before proceeding in this way (see paragraph 31.12.173).
The official receiver needs to make it clear that if the bankrupt were to move into the property after he/she or the joint owner purchase the 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 part of the bankrupt’s 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 continuing post discharge (see paragraph 31.12.178 below).
The bankrupt (or bankrupts) may wish to buy back the beneficial interest in the property after discharge from bankruptcy for various reasons, for example, his/her credit rating may restrict future mortgage products being available. Whether there is still a tenant in the property or not, it may be possible to sell the 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 the bankrupt’s share of any equity (or £1 if negative equity), the discharged bankrupt will also need to pay an amount equal to his/her share of any rent that will be lost to the insolvent estate where the property is still being rented out post discharge. The official receiver should base this calculation on the bankrupt’s share of rental profits over a reasonable period (see paragraphs 31.12.170 to 31.12.172 above). The official receiver should ensure that the bankrupt is encouraged to get independent legal advice before proceeding with the transfer (see paragraph 31.12.173). The bankrupt will also need to obtain the necessary permission of the mortgagee, see paragraphs 31.12.174 to 31.12.176.
If the bankrupt’s beneficial interest in a jointly owned property is sold the official receiver should ensure that any insurance taken out is cancelled to prevent further costs accruing. See paragraphs 31.12.30 to 31.12.34 on insurance.
A mortgagee usually has the power to take possession of a property over which they hold a secured charge when the borrowers (mortgagors) breach the terms of the mortgage loan [note 8]. Where the mortgagors have not obtained permission from the mortgagee to grant a tenancy over that property, they are 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 mortgagors in breach of the terms of their mortgage loan.
When a mortgagee has given consent to the mortgagor to let a property to tenants, or the mortgage is a buy-to-let mortgage, the mortgagee’s right to repossess the property is set down in the terms of the mortgage loan (paragraph 31.12.180), but they are bound by any AST agreement. This prevents the mortgagee from obtaining vacant possession (i.e. evicting the tenant), without following the proper notice period [note 2]. See paragraphs 31.12.156 to 31.12.157.
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 31.12.184). 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 9]. This is also the case if they give notice to the tenant not to pay rent to the mortgagors [note 10]. The mortgagee must either take possession or leave the mortgagors in possession [note 11].
A mortgagee cannot be said to be in possession when they merely receive a sum equal to the rent from the mortgagors’ agent, when the agent has not served on the tenant any notice on the mortgagee’s behalf [note 12]. The mortgagee must act in such a manner to substitute themselves for the mortgagors 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 13].
When a mortgagee is in possession of a tenanted property, the bankrupt and joint owner are no longer actively in control of that property, and are no longer entitled to collect rent. The mortgagee will assume the role of manager of that property [note 14], 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 15].
When a mortgagee enters possession, they are entitled to collect any rent arrears that exist at the date of possession [note 16]. The mortgagee is entitled to arrears of rent whether falling due before or after the mortgage was granted. The mortgagees are also entitled to receive rents held by a letting agent (see paragraph 31.12.46). Any rent collected by the mortgagee in possession should be used firstly in paying the current outgoings such as insurance and repairs. The balance will then be applied by the mortgagee in payment of the interest on the mortgage loan, followed by the capital [note 17]. The consequence of this on the official receiver, as trustee, is that if he/she does not collect the bankrupt’s share of any rent arrears in a timely fashion, the rent arrears may be lost to the estate (see paragraph 31.12.102).
When a mortgagee in possession exercises its right to sell the property, and a tenancy was granted by the mortgagors 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 18]. 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 31.12.188 and 31.12.189 below on the repossession process. The mortgagee may choose to sell a property with a sitting tenant.
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.
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.
(amended August 2013)
A mortgagee in possession may relieve itself of its position and responsibility by appointing a receiver of rents under its statutory power [note 19] and the court may appoint a receiver of rents 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 31.12.192).
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 borrowers (mortgagors) breach the terms of their mortgage loan, see paragraph 31.12.180. This right is enshrined in the Law of Property Act 1925 [note 20] and it is also normally contained in the terms of the mortgage deed. Failing to make mortgage payments will make the mortgagors in breach of the terms of their mortgage loan. Where the mortgagors have not obtained permission from the mortgagee to grant a tenancy over that property, the mortgagee will not normally appoint a receiver of rents as to do so will be acknowledging and giving validity to that tenancy.
It is worth noting that when a receiver of rents is appointed either by the mortgagee (under the terms of the mortgage loan) or by the court (under the Law of Property Act 1925), they act for the mortgagors (the borrowers) and not the mortgagee [note 21]. The receiver is therefore unable to bring possession proceedings against the mortgagors 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.
Where a receiver of rents is appointed by the mortgagee, he/she is responsible for paying the running costs of that property from the rents received as follows [note 22];
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/her 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.
A property is exempt from council tax where the liable person is a mortgagee in possession (see paragraph 31.3.33) [note 33]. Generally speaking, when a receiver of rents has been appointed, he/she is an agent of the mortgagor, however, when the mortgagors are bankrupt, it is likely this agency has been brought to an end, and the mortgagee can be considered in possession. Where the local authority is seeking payment of council tax from the bankrupt(s), the official receiver should suggest that the local authority seek guidance from the receiver as to whether they are now acting on behalf of the mortgagee in possession under the powers of the mortgage deed, see Chapter 69, paragraph 69.12.
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 23]. 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.
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 24]. 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 will no longer attempt to collect the bankrupt’s share of the rental profits after allowable deductions.
See Chapter 69 for further details on Law of Property Act receivers.
Where a receiver of rents is appointed and the property is the only outstanding asset matter, the case may be transferred to the LTADT if the property is unlikely to be disposed of within 12 months (probable where rent is being received). However, 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 individually.
A Form A and Form J restriction should be registered against all jointly owned property in which the bankrupt has a beneficial interest (see Chapter 50, Part 7). The official receiver should check that these restrictions are registered prior to any transfer of the case to LTADT (see Chapter 50, paragraph 50.36 - 37).
The legal title to a jointly owned property and a related AST agreement do not vest in the official receiver, as trustee, and it is not possible, consequently, for those items to be subject to disclaimer. In jointly owned properties, it is the beneficial interest (the right to receive a financial benefit) in the property or the AST agreement that vest in the official receiver, as trustee. It is rarely necessary to disclaim a beneficial interest as there are not normally any onerous obligations attached to such an interest.
The position might, though, be different if both (all) the joint owners are bankrupt (see paragraph 31.12.197).
Where both joint owners of a tenanted property are bankrupt it is possible that any obligations relating to the property (and related tenancy agreement) might fall to the official receiver as sole beneficiary. In this case, where there are onerous obligations in excess of any value to the estate of the property (and/or benefit from the tenancy agreement) (see paragraph 31.12.198), then it would be appropriate to issue a disclaimer of the interest of the bankrupts in the property and the tenancy.
The official receiver will need to balance the value of the beneficial interest to the estate (including any equity in the reversion and the rental profits from the tenancy agreement) against any expenses or liabilities the official receiver, as trustee, may have in relation to the property to establish if the beneficial interest is onerous. Where these expenses/liabilities are greater than the bankrupts’ beneficial interests then the property is likely to be onerous.
The official receiver should initially seek to establish if the mortgagee intends to take possession proceedings or appoint a receiver of rent when dealing with jointly owned onerous property. A disclaimer should not initially 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 informed that if they have not dealt with the property by a certain date, a disclaimer will be issued.
The notice of disclaimer should contain a description of the jointly owned property sufficiently detailed to ensure that there can be no doubt as to the property being disclaimed [note 25]. As it is only likely that a disclaimer will be issued where both joint owners are bankrupt, a disclaimer should be issued by the official receiver, as trustee, disclaiming the bankrupt’s beneficial interest in each bankruptcy case. For this purpose, there is no such thing as a joint disclaimer. In relation to the interest in a jointly owned tenanted property, a suitable wording would be:
“…..the beneficial interest in the [freehold/leasehold] premises known as and situated at [address of property] comprising [e.g., a two-storey terraced house] and a tenancy agreement granted to [name of tenant] on [date of tenancy agreement] of the aforementioned premises from [date of commencement of tenancy] at an [annual/monthly] rent of [£].”
The collection of the bankrupts’ share of the rental profits does not preclude the official receiver, as trustee, from disclaiming the bankrupts’ beneficial interest in both the property and tenancy agreement at a later date. Irrespective of an intention to disclaim the bankrupts’ beneficial interests in tenanted property, the official receiver, as trustee, should arrange initially for the collection of the rental profits for the benefit of the insolvent estates. Once the disclaimer has become effective, the right to collect the bankrupts’ share of the rental profits, including any rent arrears, comes to an end.
Disclaimer brings to an end the official receiver’s interest in the bankrupt’s beneficial interest in the property including the tenancy agreement from the date of the disclaimer, and discharges the trustee from all personal liability in respect of the property as from the commencement of his/her trusteeship [note 26]. A disclaimer will not end an AST agreement, or end the bankrupts’ duties as landlord, although the bankrupts will no longer be entitled to any of the rental profit which forms part of the beneficial interest in the property.
Effectively, the bankrupts will remain as legal owners of the property, holding the full beneficial interest on trust for the Crown (see paragraph 31.12.205).
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.
After a disclaimer has been served, it remains the bankrupts’ responsibility to collect the rental income, but they are not entitled to any surplus rental profits which forms part of the beneficial interest. The tenant will probably still wish to pay the rent to preserve his/her rights under the tenancy agreement. It is possible that the mortgagee, who still retains security on the property post disclaimer, will either apply for a vesting order in relation to the beneficial interest, or more likely take immediate action to appoint a receiver of rents or to obtain possession of the property.
Disclaimer of both the bankrupts’ beneficial 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 28].
The effect of a disclaimer is to determine (end) the insolvent’s interest in the property (being the beneficial interest) thereby, effectively leaving the beneficial interest without an owner (see paragraph 34.69). Assuming no vesting order is made (see Chapter 34 Part 5), the interest would become bona vacantia (see paragraph 38.29), and would vest in the Crown. Property that is bona vacantia is dealt with by the Treasury Solicitor (www.bonavacantia.gov.uk). The Treasury Solicitor is not required, as a matter of law, to assert a claim to the property, which is, or may be, bona vacantia.
Both bona vacantia property and property under escheat (see paragraph 34.80) in the Duchies of Cornwall (which covers the modern county of Cornwall) and Lancaster (which covers the modern county of Lancashire and parts of Merseyside, Greater Manchester, Cheshire and Cumbria) falls to the respective Duchy. The solicitor to these Duchies is Farrer & Co (www.farrer.co.uk/.../SPAN>).
By accepting rental profits, the Crown Estate may take on some duty of care in relation to the property. Instead, the most likely course of action is that the mortgagee will exercise control to protect their interest.
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 29].
Where the official receiver, as trustee, disclaims both joint owner bankrupts’ beneficial interests in a freehold or leasehold reversion, then any person with an interest in the beneficial interest may apply for a vesting order vesting in them the bankrupts’ beneficial interest [note 30], (see Chapter 34, Part 5). This will include the tenant, any other occupiers, and the mortgagee. The court may also consider the bankrupts to have an ongoing interest in the disclaimed beneficial interest, as the bankrupts will retain the legal title to the property and also the landlords responsibilities following disclaimer of the beneficial interest.
Following disclaimer, the official receiver, as trustee, will no longer have any rights or liabilities in respect of the property. Any insurance taken out by the official receiver on the tenanted property should therefore be cancelled.
Along with serving notice of the disclaimer on the tenant, the official receiver should also write to the tenant informing him/her that although the legal title remains vested in the bankrupts, the official receiver no longer has a beneficial interest in the property. The official receiver should provide the tenant with the mortgagee’s contact details and suggest that the tenant contacts the mortgagee 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.