Bankruptcy is not Rent Arrears

A recent decision of the Court of Appeal will cause increased concern to large numbers of tenants facing bankruptcy but will come as a relief to their landlords.

In the recent Court of Appeal case of Christina Sharples v Places for People Homes Ltd [2011] EWCA Civ 813 the Court considered two consolidated cases dealing with the interaction between the Insolvency Act 1986 and the Housing Act 1988. Both tenants were Assured tenants of social housing providers, were in arrears of rent and possession proceedings had been taken against them. The first tenant declared bankruptcy prior to the reinstated hearing of the possession action while the second obtained a Debt Relief Order. Both then sought to defend the claims for possession on the basis that the Insolvency Act precluded the Court awarding any ‘remedy’ in respect of debts which formed part of their bankruptcy and further that as the rent arrears formed part of the bankruptcy they could not be lawfully due and could not therefore form a ground for possession. These arguments failed before the lower courts and an outright order for possession was made against the first tenant and an order made against the second tenant suspended on condition that he paid the rent in future and that he paid a monthly sum towards the arrears. Both tenants appealed.

The Court of Appeal drew a distinction between the monetary debt which formed the rent arrears and the right to land created by the tenancy which was an incumbrance granted by the landlord over his own property. The debtor is protected from action designed to compel him to pay the debt but the landlord seeking to remove the incumbrance over his property by seeking possession is not an effort to seek payment of the debt due but rather an effort to recover something that was his all along. Therefore both appeals failed. The second tenant succeeded in part as the suspension of his order on condition he paid arrears of rent which fell inside the bankruptcy clearly offended against the restriction on forcing him to make payments towards a debt that was protected by the Insolvency Act but all this led to was a variation of the suspended order rather than it being set aside.

The Court came up with its own summary of its findings which is reproduced here:

(1) an order for possession of property subject to a tenancy, including an assured tenancy, on the ground of arrears of rent, which are provable in the bankruptcy of the tenant, is not a “remedy … in respect of that debt” within IA s. 285(3)(a);

(2) that is so, whether the order is an outright order for possession or is a conditional suspended possession order;

(3) IA s.285(3)(b) is implicitly limited to legal proceedings against the bankrupt “in respect of that debt”; that is to say, it is qualified in the same way as IA s.285(3)(a);

(4) accordingly, proceedings for an order for possession of property subject to a tenancy, including an assured tenancy, on the ground of rent arrears, in which no claim is made for arrears provable in the tenant’s bankruptcy, are not subject to the automatic stay in IA s.285(3)(b);

(5) an order for possession of property subject to a tenancy, including an assured tenancy, on the ground of arrears of rent, which are the subject of the tenant’s DRO, is not a “remedy in respect of the debt” within IA s. 251G(2)(a), whether the order is an outright order for possession or is a conditional suspended possession order;

(6) proceedings for possession of property subject to an assured tenancy on the ground of rent arrears, which are provable in the tenant’s bankruptcy or are the subject of the tenant’s DRO, should not normally be stayed under IA s. 285(1) or (2) or IA s. 251G(3);

(7) on the hearing of such proceedings, no order can be made for payment of such arrears; nor should a suspended order for possession be made conditional on payment of such arrears, but it should be made conditional on payment of any other arrears (i.e. those not provable in the bankruptcy or subject to the DRO) and current rent.

Many tenants will find this to be a tough decision and it may well leave those who thought they were protected by declaring bankruptcy in a difficult position. While landlords will be pleased that bankruptcy cannot be used as a bar to possession it will cause problems where a suspended possession order is made as there will be little prospect of recovering arrears of rent as a condition of the tenant remaining in the property where those arrears form part of a bankruptcy or DRO.

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