OFFICIAL RECEIVER AS TRUSTEE AND LANDLORD
31.11.63 IntroductionThe official receiver (or an insolvency practitioner) will become landlord of a property automatically upon his/her appointment as trustee of the bankrupt’s estate, as a solely owned property vests in a trustee from the date of appointment (see paragraph 31.11.66 for further details). There are exceptions to this if, for example the property were to be held on trust. This part deals with the trustee’s role as the landlord, and covers both the rights and obligations that the official receiver will assume whilst acting as landlord of a property let under an assured shorthold tenancy (AST).
Following the initial enquiries into the tenanted property (see Part 1), the official receiver should have sufficient information to decide how to deal with the tenanted property. If an insolvency practitioner is to be appointed, or the reversionary interest and tenancy agreement are to be disclaimed, or the tenancy agreement is to be ended in some other way, see Part 3.
To assist in locating information in Part 2 a breakdown of the part is provided as follows:
As the renting out of property by a bankrupt is not classed as a trade, sanction to continue trading is not required from the Secretary of State [note 1].
The following terms are used in the remainder of this chapter and should be interpreted as follows:
(a) A beneficial interest is an interest in the proceeds of sale of a property and in the rents and profits which are or could be earned from the property until the sale. It amounts to an equitable, as opposed to a legal, interest in the property. Beneficial interests often arise as a result of contributions to the purchase of, or payments for improvements made to, the property and can arise whether or not the person is the legal owner of the property (see Chapter 31.3, paragraph 31.3.14).
(b) The legal estate is the title to the property itself which vests in its owner (see paragraph 31.3.13).
(c) The reversion of a property is the landlord’s interest in a property whilst a tenancy agreement is in place. Whilst a tenancy agreement has been granted over a property owned by someone, the tenant holds an interest or property right. The landlord has a reversionary interest - the right to regain possession of that property when it reverts to him/her at the end of the tenancy agreement.
(d) A covenant is a type of legal promise or term of contract to either do or not do something, which is often contained within the terms of a lease or tenancy agreement.
If the tenanted property is solely owned by the bankrupt, then the official receiver, as trustee, has two interests in the property:
The obligations of landlord vest in the official receiver automatically upon his/her appointment as trustee [note 2] whether or not the rent is collected (see paragraphs 31.11.98 to 31.11.104). Action can be taken by the tenant where the landlord refuses to accept rent tendered or to perform the duties of landlord under the terms of the tenancy agreement, as this would be a breach of the covenants under the AST agreement. Refusal to receive the rent would not have the effect of terminating the tenancy agreement.
When the official receiver becomes trustee and landlord of a solely owned tenanted property, the official receiver should establish the whereabouts of all sets of keys to the property as a matter of urgency. The official receiver should make a list of all persons who hold a set of keys on the file for future reference and require the bankrupt to deliver up all sets of keys in his/her control. The official receiver should place all keys that he/she secures into the office safe for safe keeping. Any keys placed in the safe should be clearly and securely labelled with details of the name of the case and the property concerned and the details should be entered into the office safe register. The keys should be retained until the property is disposed of (see Part 3).
If the interest of a landlord under a residential tenancy agreement is assigned (which includes the automatic vesting of the tenancy in the trustee under the Insolvency Act 1986), then the new landlord must give notice in writing of the assignment [note 3]. The notice must provide the new landlord’s name and address and be sent to the tenant not later than the next day on which rent is payable under the tenancy or, if that is within two months of the assignment, the end of that period of two months.
The official receiver should ensure that where a solely owned tenanted property vests in him/her as trustee, a letter is sent to the tenant providing information that the official receiver is the new landlord and relevant contact details (Annex K or L).
If the new landlord under that tenancy (the trustee), fails without reasonable excuse to notify the tenant of the assignment and of his/her name and address, he/she commits a summary offence and is liable on conviction to a fine currently up to £2,500 [note 4].
The official receiver has a duty of care to visitors and trespassers and also in relation to defective premises, see Part 1, paragraphs 31.11.23 and 31.11.24. In addition when acting as landlord, the official receiver has certain duty of care obligations regarding waste, see paragraph 31.11.72 below.
Where the bankrupt is the landlord of a solely owned residential property, the official receiver is under a duty of care regarding any waste if it can be said that the official receiver is "keeping" household waste [note 5]. The term "keeping" is believed to include having the temporary possession or being in the presence of something, so the official receiver may be "keeping" waste when the property where it is situated forms part of the insolvent’s estate. An offence may be committed even if the waste is "kept" for only a short time. See Chapter 82, Part 1, particularly paragraph 82.3, for guidance on what that duty of care is and how to act to meet that duty of care.
The landlord should ensure that tenants have suitable and sufficient facilities to cope with their waste. It is advisable that the tenant is encouraged to deal with their own waste whilst in occupancy of the property as if the property becomes vacant, and the landlord is left with unwanted items, then this waste is no longer considered as household but becomes commercial waste and is now the responsibility of the landlord. As the Household Waste Recycling Centres are provided and licensed only for household waste, this avenue of disposal is not available for use by a landlord. A skip, direct delivery to a private disposal point or professional removal services would be required in this case. If the official receiver has to deal with waste left behind by a tenant, any deposit held could be used to defray the costs incurred (see Part 3, paragraph 31.11.141).
The official receiver’s obligations as trustee in relation to solely owned property cases are the same as that of the landlord [note 6], as prescribed by the tenancy agreement and legislation. 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 31.11.76).
(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 paragraphs 31.11.77 to 31.11.78). This should already be in place so a copy of the policy should be obtained, held, and renewed if it expires (see Part 1, paragraph 31.11.28).
(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 8] (see paragraphs 31.11.79 to 31.11.87).
(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 8] [note 10] (see paragraph 31.11.89 and 31.11.90).
As the official receiver becomes landlord of a property upon appointment as trustee, he/she needs to ensure that the property is reasonably safe. The official receiver should rely on the bankrupt’s account of the property unless there is reason to doubt the bankrupt. If the bankrupt cannot provide copies of the required gas and electrical safety certificates (see paragraph 31.11.73) and assurances that the property is in good order, then the official receiver may consider arranging for a general inspection of the property by local agents (or previous agents retained) to determine its general condition and any risks. There is no Service Level Agreement with an agent for this service.
Under a standard AST the tenant has a right to peaceful enjoyment of a property. Where this clause is not specified in the terms of the tenancy agreement, it is an implied covenant [note 7]. This should be taken to mean that the tenant has a right to remain undisturbed by the landlord, who should not gain entry without the tenant’s consent or make unannounced visits on a regular basis.
The official receiver, as trustee, must ensure that where the bankrupt has taken a deposit prior to 6 April 2007, and it has been retained, that it is preserved in one of the government schemes for rental deposits (see Part 1, paragraphs 31.11.44 to 31.11.47). If the bankrupt has retained a deposit in a bank account rather than a proper scheme, then when the official receiver becomes trustee, he/she should transfer the funds into the custodial scheme provided by The Deposit Protection Service (paragraph 31.11.45).
The official receiver, as landlord, will be responsible for ensuring there is sufficient landlord insurance (including public liability) in place and should have the official receiver’s interest noted on the policy. The official receiver should not wait to be appointed as trustee before obtaining insurance but should obtain it as soon as he/she becomes aware of the need for insurance (see paragraphs 31.11.27 to 31.11.28).
If the official receiver obtains insurance under the Willis Insolvency Open Cover Insurance Facility, this should be continued for as long as the official receiver remains in control of the property. Reference should be made to Chapter 49, Part 3 for advice on how to obtain cover. This is done by ensuring the case is added to the premium bordereau for smaller non-trading cases on a monthly basis (see Chapter 49, paragraph 49.27 and paragraphs 31.11.27 to 31.11.28).
The official receiver should ensure any necessary repairs and maintenance of the property are carried out where funds permit (see paragraphs 31.11.94 to 31.11.97). Reference should be made to the terms of any tenancy agreement in place to see what the landlord is responsible for. For example, this may include arranging for a ‘Gas Safe Register’ registered gas engineer to repair a broken boiler.
The cost of making a repair should be met from the rental income. If the costs of the repair are likely to be expensive in relation to the rental income being received, it is possible that the tenancy agreement may have become onerous and the official receiver may need to give consideration to disclaiming the reversion of the property and the tenancy agreement (see Part 3).
The official receiver, as trustee and landlord, is responsible for arranging any repairs on the property specified in the AST. Firstly, the official receiver should establish the likely costs of any repairs by obtaining quotes to carry out the required work. If there are letting agents in place, the official receiver may consider requesting that the agents arrange for the appropriate repairs to be made and account to him/her for the expenditure, provided that the costs of obtaining the agent’s services in this regard are reasonable.
Consideration may also be given to allowing the tenant to arrange the repairs and account to the official receiver for the cost, providing receipts as evidence. As the tenant is not responsible for arranging these repairs, he/she may refuse. Any such request should be made over the telephone initially to see if the tenant would be prepared to find a suitable person to carry out the repairs and attend at the property at the tenant’s convenience. If the tenant does not wish to assist the official receiver in this way, then he/she should not be pushed on the matter.
Repairs of a cosmetic nature, such as redecorating, should not be considered as being essential. The landlord’s responsibility is provided for in legislation [note 8] 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 13].
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 14].
(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 31.11.65.
In order to carry out necessary repairs the tenant is required to give access to the property to the official receiver, as landlord, or any person authorised by him/her in writing, at reasonable times of the day on receipt of 24 hours notice in writing for the purpose of carrying out the repair [note 16].The right of entry is limited to that which is strictly necessary to do the work and the repair and does not oblige the tenant to give the landlord exclusive occupation or access to all parts of the house at the same time unless this is essential for the execution of the repairs [note 17].
The repair of the structure and exterior includes the reinstatement of decorations damaged by the work of repair [note 17] but not damage to decorations and furnishings caused by condensation which was not due to structural damage [note 18]. Saturation of the plaster is considered to be damage to the structure [note 19].
'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 20]. 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 21].
In addition, repairs to slabs in a back yard were found to not be covered [note 22].
The landlord’s obligation to repair extends only to instances where the landlord has knowledge of the defect but it is sufficient if he/she has information about the existence of a defect which would put a reasonable person on inquiry as to whether repairs are needed [note 23].
The official receiver, as landlord, should ensure that where it is considered that the repairs should be carried out the repairs should be undertaken within a reasonable time of receiving notice of the defect [note 24].
The official receiver, as trustee and landlord, is 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. As landlord, the official receiver is required to ensure that an annual safety check is carried out by a ‘Gas Safe Register’ registered tradesman [note 25] (see ). A copy of the issued safety certificate should be issued to the tenant within 28 days of the check.
If the bankrupt cannot produce a current gas safety certificate, the official receiver should arrange for one to be obtained as a matter of urgency. Where a current certificate does not exist, the official receiver should make an appointment for a gas safe engineer to attend on the property within five working days, with the aim of obtaining the certificate within ten working days of the official receiver becoming trustee (or within ten working days of first becoming aware of the property). 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 official receiver, as trustee and landlord, is required to ensure that any electrical system and appliances supplied by the landlord should be safe when a tenancy begins, and remain safe throughout the tenancy [note 8] [note 26]. 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 27].
On appointment as trustee, the official receiver should seek to ascertain that the electrical safety certificates are current and, where they are not, should make arrangements to obtain the certificates in respect of the property at the earliest opportunity in order to comply with the legislation. Where a current certificate does not exist, the official receiver should make an appointment for an appropriate tradesman to attend on the property within five working days, with the aim of obtaining the certificate within ten working days of the official receiver becoming trustee(or within ten working days of first becoming aware of the property). The cost of obtaining these certificates should be paid from the estate and covered by the rental income. The cost of the assessment and certificate should not cost more than £200 in an average home.
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.
The official receiver is therefore advised to check with the bankrupt/any letting agent that a smoke alarm is fitted on each floor of the property, preferably in the hall and landing areas. Where no smoke alarms are fitted in the property, the official receiver should ensure that they are fitted. Where the alarms are battery operated, and thus must be regularly checked and replaced, the onus for doing this should be placed on the tenant. Where the tenancy agreement does not specifically refer to this, a letter should be sent to the tenant (Annex K or Annex L) informing him/her that he/she has the obligation to check that any smoke alarm fitted in the property is working and to replace the batteries regularly in accordance with the manufacturer’s instructions.
Where the property is rented out as furnished or part furnished, the official receiver should check that the furniture complies with current fire safety regulations [note 12]. Where a letting agent has been employed by the bankrupt, the letting agent should be able to confirm that any furnishings supplied comply with the legislation.
Where the bankrupt has maintained a service agreement on something such as the heating system, the official receiver should obtain all documents relating to that agreement and consider continuing the agreement if the cost of doing so is not prohibitive.
The Housing Act 2004 provided for a new system of assessing the condition of residential premises. A local authority must review the housing conditions in their area and if they consider a property should be inspected with a view to determining whether a hazard exists, they must arrange for such an inspection to take place [note 28].
If a Local Authority inspects a property and finds it to be dangerous, it can take enforcement action by serving improvement notices, prohibition orders, or hazard awareness notices. There are also emergency measures that may be taken, or in worse case scenarios, slum clearance declarations or demolition orders may be obtained. Generally, a notice will firstly require the landlord to put the hazard right [note 29]. If the official receiver is notified of or served with one of the above notices, the reversionary interest in the property is likely to be onerous and the most likely course of action for the official receiver will be to disclaim the reversionary interest and tenancy agreement (see Part 3, paragraphs 31.11.153 to 31.11.169). Only where the costs of rectifying the hazard are less than the combined equity and rent, should the official receiver consider effecting the repairs required (see paragraphs 31.11.79 to 31.11.87 and 31.11.94 for guidance on balancing the costs against benefit).
The official receiver will need to decide on a property by property basis whether or not the cost of any repairs or other expenses on the property are necessary. See guidance in paragraphs 31.11.82 and 31.11.85 on what is considered necessary. If an essential cost or repair is considered necessary, the official receiver will then need to decide whether it should be paid/the work undertaken and paid for, or whether the property has now become onerous, with a disclaimer being more appropriate (see Part 3, paragraphs 31.11.153 to 31.11.169). Deciding factors will include:
(a) How much rent has already been collected.
(b) Whether the tenant is a reliable, good payer.
(c) Whether the rent is significant in relation to the cost of the repairs.
(d) Whether the tenant has given notice to quit or the tenancy has ended.
(e) If the mortgagee is about to appoint a receiver or take possession.
(f) Whether or not there is equity in the property. If there is no equity, it may be more appropriate to disclaim the reversion and tenancy (see Part 3).
The official receiver is dealing with a case in the early stages after being appointed trustee, and he/she has collected 2 months rent (£2,000, from £1,000 a month). The boiler breaks down, and the official receiver instructs a gas safe engineer to inspect and quote for the repairs (see paragraph 31.11.88). The gas engineer advises that repairs will cost £1,000. The tenant is left without heating and it is winter, so the decision is urgent. The official receiver inspects the case file and the mortgagee has said they are not going to appoint a receiver or take possession proceedings. The tenant has paid the rent on time and does not have any rent arrears. His tenancy is due to run for another three months and he has spoken to the official receiver saying he doesn’t want to lose his home.
In this case it would be reasonable to go ahead with the repairs as the next 3 months rent will total £3,000. £2,000 has already been collected, so after paying the £1,000 for the repairs to the boiler the estate should benefit by £2,000.
The official receiver has an obligation as landlord to carry out necessary repairs and so not to do so, means he/she is in breach of the relevant legislation [note 8] and terms of the tenancy agreement. When the official receiver decides that although the repair is necessary, the obligation to pay for the repair has meant that the property has become onerous, the official receiver will need to consider disclaiming the reversionary interest in the property and the tenancy agreement (see Part 3).
Where the official receiver, as trustee, concludes that payment for repairs is going to be made, the repairs should usually be funded from income already collected. Occasionally an expense may need to be paid prior to the collection of rental income, for example insurance (see paragraph 31.11.77). Where an essential payment is needed immediately on notification of the case, it will need to be paid for from the main estate account. See Chapter 49, paragraph 49.4 for guidance on the payment of insurance premiums.
The official receiver may also need to pay for essential expenses from the rental income collected. Where such a payment is needed, this should be paid from the estate account set up for rental income balance (see paragraph 31.11.108). If there is no such balance from rent already collected, then the official receiver needs to decide whether or not it is likely that sufficient rent will be collected in the future to cover the expense. If there is a risk that sufficient monies will not be collected to cover the cost, then consideration needs to be given to disclaiming the reversionary interest in the property and the tenancy agreement instead (see Part 3).
The official receiver should collect the rent as soon as he/she is appointed as trustee. The rent should be collected in full from the date of the bankruptcy order, including any arrears arising prior to the order. The official receiver should ensure that any rent that was held by the tenant or letting agent pending his/her appointment as trustee is also collected.
The rental income should be collected where there is a current tenancy agreement in place, which includes a statutory periodic tenancy (see Part 1 for more details on determining if the tenancy is current). See paragraph 31.11.104 for circumstances when rent should not be collected.
A tenancy is still current if an assured shorthold tenancy (see paragraph 31.11.17) has ended but the landlord has allowed it to continue verbally, as by default, the tenancy continues as a statutory periodic assured shorthold tenancy with the same terms and conditions as the former tenancy. In this situation rent should continue to be collected.
All income receivable on an investment property forms part of the legal and beneficial interest that will vest in the official receiver if he/she becomes trustee of the bankrupt’s estate. Investment income which forms part of the estate cannot be treated as the bankrupt’s income for IPA/IPO purposes as it will vest in the trustee and should therefore be collected directly by the official receiver upon appointment as trustee. All rent and other income from an investment property should be collected in full by the official receiver and should not effect any IPA/IPO calculation. See Chapter 31.7 for guidance on IPA/O’s.
The official receiver should only cease to collect rent if the mortgagee appoints a receiver, takes possession of the property, or his/her reversionary interest in the property and interest in the tenancy agreement is disclaimed (see Part 3) or the property is sold. The official receiver, as trustee, continues to be responsible as landlord for the collection of rent and other landlord duties even after the bankrupt receives his/her discharge.
Rental income should be collected by the official receiver, as trustee, directly from the tenant or letting agent in the circumstances detailed in paragraph 31.11.98 whilst waiting for the mortgagee to reply or to take other action. The mortgagee does not have any right to the rent until it either a) enters into possession of the property or b) appoints a receiver. In the meantime, the rent should be collected for the benefit of the bankruptcy estate.
By collecting the rent from the tenant, the official receiver will generally ensure that no further payments are made in respect of any mortgage on the property. Where the mortgage payments cease, this is likely to have the effect of ensuring that the mortgagee takes early action to protect any interest held in the property, thereby relieving the official receiver of his/her responsibility.
The official receiver should not allow rent to build up for long with an agent. If the mortgagee appoints a receiver of rents or enters possession, the receiver will be entitled to collect any rents that have yet to be collected by the official receiver, including any arrears and consequently this rental income would be lost to the bankruptcy estate [note 30]. See paragraph 31.11.116.
The official receiver as trustee should not collect rent when there is;
To collect rent in these circumstances may validate an otherwise invalid tenancy to the detriment of the value of the property and thereafter to the bankruptcy estate. The basic rule is that if one party permits another into possession of his/her land on payment of rent, without more the inference sensibly and reasonably to be drawn is that the parties intended there to be a periodic tenancy [note 31].
Although under normal circumstances rent arrears should not be collected (see paragraph 31.11.104 above), it will sometimes be acceptable to do so and to be beneficial to the estate. Where rent arrears exist, the official receiver needs to decide on a case by case basis whether or not to attempt to collect them from the tenant. Generally where rent arrears are ongoing and significant (e.g. over 3 months is owing at the date of the bankruptcy order), or where the bankrupt has already commenced action to evict the tenant prior to the bankruptcy order, then rent should not be collected.
Where rent is offered up by the tenant, the official receiver as trustee and landlord cannot refuse to accept it, and the tenant may even come to the office and leave money in order to preserve their rights of occupation. If a tenant pays rent arrears, a record should be kept of how much and when payment is made in case future action is taken to evict the tenant for breaching the terms of the tenancy agreement.
The official receiver, as trustee, should actively attempt to collect rent arrears from a tenant where the arrears have only built up since the date of the bankruptcy order or within a short period prior to the bankruptcy order. Consideration should be given as to why the tenant has fallen into arrears and the official receiver should exercise his/her discretion on a property by property basis in deciding whether or not to collect the arrears. On this, professional assistance maybe required.
The official receiver may consider:
(a) Asking the tenant to send in a cheque for the rental amount every month/week (as per the terms of the tenancy agreement).
(b) Asking any current letting agent to continue to act and send in the balance on the account every month (see paragraphs 31.11.117 to 31.11.120).
(c) Asking the official receiver’s local agent to act in the collection of rent (see paragraph 31.11.120A).
(d) Using a letting agent in their locality who is prepared to act for the official receiver (see paragraph 31.11.120A).
All rent collected by the official receiver, as trustee and landlord, in respect of a tenanted property should be banked in the usual manner.
This applies even where the bankrupt is the sole owner of more than one tenanted property. To ensure that the necessary decisions can be made in relation to a particular property the official receiver will need to know all the receipts and payments of monies which relate to that property. The official receiver should therefore maintain a schedule of receipts and payments in relation to each tenanted property.
All receipts are banked centrally by Estate Account Services in Birmingham. To ensure that rent due in relation to a particular tenanted property has been received it is the responsibility of the local office to monitor its receipt.
Where there is a tenant in occupation, and the official receiver as trustee is the landlord, the bankrupt no longer has any rights to deal with the tenancy. This means he/she does not have the right to evict the tenant; only the official receiver as landlord has that right. From the date the official receiver becomes landlord (upon appointment as trustee), the bankrupt no longer has any reason to be in contact with the tenant.
When becoming trustee, the official receiver should write again to the bankrupt (Annex J) informing him/her that the official receiver is now trustee and landlord of the property. This letter informs the bankrupt that he/she should no longer attempt to contact the tenant or deal with the property, including not attempting to evict the tenant, propose a new tenancy agreement, collect the rent or to move back into property.
The letter also informs the bankrupt that the official receiver will not be making payment of the mortgage loan and that consequently the mortgagee may take action in relation to the property, although this will not necessarily result in the tenant being evicted, and that any shortfall on the mortgage loan will be a debt in the bankruptcy.
The bankrupt should not be permitted to move back in to the property should any tenant subsequently vacate the property. As from the date of the bankruptcy order, the property, and any tenancy agreement vests in the official receiver as trustee and the bankrupt no longer has any right to enter the property. If the bankrupt enters the property without the official receiver’s permission, he/she would be a trespasser on the property. The official receiver would then have to consider taking steps to evict the tenant or to disclaiming the property (see paragraphs 31.11.153 to 31.11.169).
If the official receiver were to accept rent from the bankrupt in such circumstances this may result in the creation of a tenancy agreement between the bankrupt and the official receiver, as trustee, and the bankrupt would become a tenant of the official receiver [note 31].
If the official receiver were to let the bankrupt move back in to the property, it would compromise the position of the mortgagee, as when there is an unauthorised tenancy or a vacant property, the mortgagee can seek repossession and sell the property with vacant possession. Allowing the bankrupt to move back in would make selling the property in the event of repossession more difficult.
As the mortgage payments are not an allowable expense, see paragraph 31.11.115, repossession is a possibility. For these reasons the bankrupt should not be offered the option to buy back the interest in the property from the official receiver [note 32], see paragraphs 31.11.188 to 31.11.202 for more details.
As a tenanted property is not normally a family home under the Insolvency Act 1986 (see paragraph 31.11.10), then the notice to the bankrupt and other interested parties informing them that the property falls under section 283A [note 33] should not be sent. This notice informs the bankrupt that the property vests in the trustee but will re-vest in him/her after 3 years and it would be incorrect to send the letter as the property will not re-vest in the bankrupt automatically (unless it is a family home see paragraph 31.11.11) [note 34]. In addition, the notice offering to sell the interest back to the bankrupt [note 32] should not be sent. See Part 3 for exceptional circumstances where the official receiver may consider selling the bankrupt’s interest in a tenanted property
When appointed as trustee, the official receiver should write again to inform the tenant of his/her appointment as trustee and that he/she is now the landlord and will be collecting the rent from henceforth (Annex L). The rent to be collected includes the period for which the official receiver was receiver and manager. If a letting agent was acting for the bankrupt at the date of the bankruptcy order and the services of the agent have been retained by the official receiver, as trustee, the tenant should be told to keep making payments to the agent (Annex K), who will be requested to account to the official receiver as trustee (see paragraphs 31.11.117 to 31.11.120 for guidance on letting agents). Alternatively, Annex K may also be used where the official receiver appoints a new agent to act on his/her behalf (see paragraph 31.11.120A).
The letter to the tenant upon the official receiver’s appointment as trustee, provides information to the tenant in accordance with the wishes of the Department for Communities and Local Government, a government department responsible for housing policy (www.communities.gov.uk). The letter provides the tenant with information on the official receiver becoming landlord, any deposit paid, and the tenant’s right to remain in the property. There is also link to Shelter’s website which provides guidance on the repossession of tenanted properties by a mortgagee.
When he/she becomes trustee the official receiver should notify the mortgagee that he/she is now the landlord in respect of the tenancy agreement on the property and that he/she will be collecting the rent until a receiver is appointed or the property has been repossessed (Annex M). The letter makes it clear that the official receiver will not be using the rent to make mortgage payments.
The mortgagee is a creditor in the bankruptcy proceedings and so the bankrupt should not be allowed to pay the mortgage from the rental income from the date of the bankruptcy order. Mortgage payments on a rented property are not a valid expense of the bankrupt for IPA/O purposes.
As soon as a receiver of the property is appointed, or the mortgagee takes possession, it becomes the mortgagee’s responsibility to carry out the duties of the landlord and their right to collect the rental income, including arrears [note 35] [note 36]. See Part 3 for more information on a receiver’s powers.
Upon becoming trustee the official receiver should write further to the letting agent (Annex N) after a decision is made as to whether or not the agency agreement is to continue (see paragraph 31.11.118). If the official receiver wishes to retain their services, the letter should request that the agents account to him/her for rent collected and expenses paid on a monthly basis. Where the official receiver is to use a new letting agent, see paragraph 31.11.120A.
The letter requests that any balance held on account should be forwarded to the official receiver whether or not the agreement is to continue.
The official receiver should have received a copy of the agency agreement from the agent in response to the initial letter sent to the letting agent (Annex G see paragraph 31.11.40). The agreement should be inspected and a decision made as to whether or not the official receiver wishes to continue with the services of the agent. If the letting agency is a well established and reputable business, and the terms of the agreement do not place excessive requirements or fees on the landlord, then the official receiver should consider continuing with the services provided. If the agency is a member of the National Association of Estate Agents (NAEA) www.naea.co.uk or the Association of Residential Letting Agents (ARLA) www.arla.co.uk, then it may reasonably be considered to be reputable. Both of these websites have the facility to check if a letting agent is registered with them.
If the official receiver decides to continue with the agency agreement, contact by telephone with the agent should be made prior to sending out the letter (Annex N) to discuss with the agent whether or not they would consider allowing the official receiver to continue with the agreement. If the agent is not prepared to act, see paragraph 31.11.120A.
If the letting agent will not consider allowing the official receiver to continue the agreement, consideration should be given to seeking the services of another agent (see paragraph 31.11.120A).
If the letting agent’s fees seem excessive for the services provided, and the official receiver believes that the services can be obtained elsewhere at a better rate, the assistance of another agent should be sought. Letting agents’ fees are usually around 10% to 15% of the rent collected.
If the letting agent is owed money by the bankrupt at the date of the bankruptcy order, then the agent is a creditor in the proceedings for that amount. The agent should not be allowed to deduct this debt from future rent collected. This needs to be made clear to the agent should the official receiver wish to continue the agent’s services. If the agent disagrees with this course of action, then their services should not be continued to prevent possible future disputes. In certain exceptional circumstances, if it may be better overall, this guidance may not be followed.
Where it is not possible to use an existing letting agent or there was no letting agent managing the property at the date of the bankruptcy order the official receiver can consider asking his/her local agent to act in the collection of rent and management of the property or consideration can be given to the use of a letting agent in the locality who is prepared to act. If a new letting agent is found, then the agents fees and services should initially be agreed by telephone, and then confirmed in writing by sending Annex N2 (letter instructing the agents).
Before instructing the letting agent the official receiver should ensure that after payment of the agent’s costs there will be a benefit to the estate. The letting agent’s fees should not seem excessive for the services provided. A letting agent’s fees are usually around 10% to 15% of the rent collected where management services are provided.
A further letter (Annex O) should be sent to the deposit scheme holder (see paragraphs 31.11.45 to 31.11.49) when the official receiver becomes trustee requesting that the deposit is transferred into the official receiver’s name as landlord.
When the official receiver becomes trustee and concludes his/her enquiries into the deposit, a further letter should be sent to the insurance based deposit scheme administrator (Annex P). The letter can be amended to indicate whether or not the deposit has been retained by the bankrupt. If the deposit has not been retained, it is likely that the tenant will want to make a claim on the insurance, possibly before the end of the tenancy. This should be done within 90 days of the cancellation notice being issued by the deposit scheme, as cover will lapse after that period [note 37].
If the deposit has been retained by the bankrupt, the official receiver should recover the deposit and place the monies into the Deposit Protection Service custodial scheme for safe keeping and allow the insurance to lapse.
When the official receiver encounters property owned by the bankrupt on a leasehold basis, which has subsequently been let out on an assured shorthold tenancy agreement, there are very few differences to dealing with freehold property. The official receiver should check that the lease does not contain a restriction on the granting of tenancies. If it does, then the tenancy will be invalid and the official receiver will need to consider whether or not to acknowledge the tenancy by collecting the rent or to disclaim the leasehold reversionary interest and tenancy agreement. See paragraphs 31.11.153 to 31.11.169 on disclaimers.
Where there is equity in the leasehold property, the official receiver should consider whether or not the leasehold property and the invalid tenancy agreement are onerous when considered together, see paragraph 31.11.143. Where there is equity in the property, the official receiver may consider it to be more appropriate to collect the rent rather than issuing a disclaimer, where there are no current onerous obligations attached to the tenancy agreement.
When dealing with leasehold property, the lease usually contains a requirement to pay ground rent, either annually or monthly. It is effectively a rent charge for the underlying freehold land where the leasehold is situated. The official receiver would not usually pay ground rent when dealing with a leasehold property in negative equity. The requirement to pay ground rent would normally cause a leasehold property with no or negative equity to be onerous and consequently the leasehold reversion and tenancy agreement should be disclaimed (see paragraphs 34.8 and 34.10 to 34.12). Where the leasehold property is tenanted, and there is sufficient surplus for the estate from the rent after allowing for the ground rent, then the ground rent should be paid by the official receiver as trustee.
Ground rent differs from mortgage payments in that it is a requirement for payment attached to the leasehold property; whereas a mortgage is a debt in the bankruptcy proceedings and is not attached to the underlying lease.
Service charges are a requirement to pay, for example, the upkeep of a communal area,and are often payable on leasehold flats. Where the service charges are not excessive in comparison to the rent being paid by the tenant, the charges should be paid by the official receiver, as trustee, as long as he/she wishes to preserve the benefit of the reversionary interest in the leasehold property and the tenancy agreement.
Any profits from renting out a property are taxable and are treated as income for income tax purposes, see Chapter 77, paragraph 77.37. Generally speaking, profits are considered to be all rental income received less all allowable expenses (as specified by HM Revenue and Customs on the Directgov website http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_10013435). The local RTLU or official receiver will need to account to HM Revenue and Customs prior to the case being closed by tax return.
As explained in paragraph 31.11.3, property letting is not considered to be a trade by HM Revenue and Customs, but is considered an investment, and the official receiver must account to HM Revenue and Customs for tax due on any investment income (see Chapter 77, paragraph 77.37). Rental income is not classed as 'earnings' and so is not subject to National Insurance Contributions. The owning official receiver or RTLU office as appropriate (whichever office has the case at the time the tax becomes due) should complete the tax return. Tax returns are due by 31 January in the year following the end of the tax year. All rental income is accounted for on a standard tax period of 6 April to 5 April. Therefore if the bankruptcy order was made on 2 May 2009, income tax is due from the official receiver on any income received in the tax year 6 April 2009 to 5 April 2010 and the tax return and payment would be due by 31 January 2011.
For further information see the HM Revenue and Customs website http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_10013435
Allowable deductions from rental income for taxation purposes are based on actual expenses incurred in that taxation period. Note it is the period the expense was incurred in or invoiced in and not the date it was actually paid that is relevant for tax purposes. Deductions from rental income are allowed for:
If the annual rental income received is less than £15,000 before deducting expenses, then only the total for the expenses needs to be entered onto the tax return and not a breakdown of each expense. See http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_10014027 for more information on allowable expenses.
When the bankrupt has more than one tenanted property, all the rental income should be added together for taxation purposes. Income tax is due on the rental income due in the relevant period minus allowable deductions (see paragraph 31.11.129). All of the rental income for that period is added together and then all of the allowable expenses are added together and deducted from the income figure, leaving the amount of net profit made in that period. Tax is payable on the net profit. A loss from one property can be offset against the profit from another property.
Where the bankrupt is renting out a room in his/her home (under a licence rather than tenancy agreement, see paragraph 31.11.19), then tax is not payable provided the total income generated is £4,250 or less a year. This includes rent and any other income paid by the lodger for meals, bills etc. Tax is only payable on anything received above the £4,250 allowance. See also paragraph 77.37.
Holiday lets and foreign letting taxation is generally calculated in the same way as for AST’s. Tax is payable on income from overseas property whether or not the money received in rent is brought into the UK. The main difference in holiday lets is in the allowances for replacement of furnishings with holiday lets. The landlord can claim a wear and tear allowance of 10% of net rent received on furnished holiday lets until April 2010 from which date it is proposed that the wear and tear allowance will be scrapped following the April 2010 budget. See http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_4017930 for more information. With foreign property, the income needs to be declared on the foreign pages of the tax return. Where more than one foreign property is held, it is classed as one business, and all foreign rental income and deductions are taken together. Where a UK rental property is also held, this is kept separate from overseas property, and they are treated as two separate businesses for tax purposes.
A property investment business does not need to register for VAT, as the letting of residential property is an exempt supply for VAT purposes. The letting of holiday accommodation is standard rated for VAT (currently payable at 17.5% of all taxable supplies), although it is unlikely to reach the threshold for compulsory registration. In the tax year 2009/2010, the threshold for compulsory registration was £68,000. See the Directgov website for further information on VAT. http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/DG_4015895
The official receiver needs to keep all records for the rental income and expenses for 6 years after the tax year they are for. This should include any invoices, receipts, rent books, letting agent papers and LOLA records.
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