Defaulting Tenants

These are grim days indeed. The recent spate of unprecedented institutional failures caused by toxic debt levels means that landlords, as individual small businesses, must face up to growing concerns over the effects of tenant default as never before.
This article outlines the range of options for landlords who want to know what they can do to recover money from defaulting tenants.
"The contents of this article are not intended to be nor should they be relied upon as legal advice. Readers should seek independent advice when taking enforcement or other proceedings."

Debt judgment

The latest statistical figures (2nd quarter 2008) from Ministry of Justice states that “37,609 landlord possession claims were issued using the standard and accelerated possession procedures on a seasonally adjusted basis, 2% higher than in the second quarter of 2007 and the same as the first quarter of 2008”.
The volatility in lettings coupled with the likely recession in the ‘real’ economy give rise to the strong possibility that these statistics may increase.
So, if it all goes wrong, what can landlords and letting agents do to stand the best chance of recovering unpaid money?

Defaulting tenants
Broadly speaking there are two types of defaulting tenants; – the ‘can’t pays’ and the ‘won’t pays’.
Where a tenant loses his or her job, their position is understandably genuinely compromised. The chances of recovering your losses (at least to any meaningful degree) can be better than first anticipated because, often, this profile of tenant will recover their position fairly quickly. By contrast the ‘won’t pays’ can be much trickier to deal with, and often highly tactical.

The insurance option

For years, niche brokers have, for a relatively small premium, covered landlords against tenant default on rent. The insurance also covers the associated legal costs of eviction on arrears grounds. Given the latter can easily reach £500 for a straightforward undefended case, the premium (usually much less) can turn out to be a wise investment.

Main features
Upon acceptance of the claim, the insurer will typically pay out to the landlord a sum equivalent to the rental default, for as long as the tenant remains in default, up to the policy limit. All payments will be subject to policy terms and conditions and key things to check include the level of excess as well as precisely when payments start. For example, a policy stipulating an ‘excess’ of one month’s rent, and that rental payments will be aid out two months in arrears effectively means that if a tenant fails to pay rent contractually due on January 1, this first payment will not be paid by the insurance company until 1 April – about 3 months later.
Commonly, the cost of this type of policy is bundled within full management charges; the managing agent having secured a ‘block rate’ with the insurer. For landlords acting without a letting agent, policies like this can be purchased directly over the web. Typically, cover will be subject to satisfactory references and documentation. By its nature, this sort of policy can only be taken out before landlords enter into a tenancy agreement.

Like any insurance, claims will not be accepted if they fall outside policy terms and conditions. For example, a claim may have to be submitted within a certain number of days from the first default, contractual documentation will need to be in order, as will statutory obligations, e.g. proven compliance with the tenancy deposit scheme etc.
Precise statistics on the number of claims resulting are difficult to gauge, largely because only the underwriters of such policies really know the true figures, but approximately 2-4% of policies sold result in a claim.

It is important to note that this type of policy typically has a cap on payments. For example, a landlord ‘loosing’ £5,000 by way of rent arrears, does not automatically gain full recovery of that loss under the policy, which might limit payments to, say, half of that.
Also, any shortfall in payment not covered by the policy becomes an uninsured loss which the landlord will then have to cover the cost of recovering himself. Check with the insurer about the amount actually covered before you purchase your policy.

Other options

For those who do not take out insurance, getting money back can be less straightforward but is by no means necessarily always rocket science.
A county court judgment (CCJ) is but a piece of paper so landlords need to know how to convert that into real money.

Attachment of Earnings Orders
Under the Attachment of Earnings Act 1971, anyone looking to enforce a CCJ against an individual in employment can obtain an attachment of earnings order by completing a court application form and filing a fee. The court form is to be found on www.hmcs.gov.uk under ‘Forms and Guidance’. Form N337, a largely self-explanatory form, needs to be completed, and filed at court with the requisite fee, currently of £65 (payable to HMCS).

If the debtor has moved to a different area after leaving the property, you will have asked the court to transfer the case to his or her local court for attachment purposes – court staff can be helpful in explaining this procedure. The court will require the debtor to complete details of their employer. Upon the return of these details, if the judge is satisfied that an order is justified, he or she will make an attachment order without the need for a formal hearing.

The effect of an attachment order is that each month, a cheque for a specific amount assessed by the court will be sent to you until (a) the debt is extinguished; or (b) the debtor leaves that employment.
For certain debtors, the embarrassment factor of this order (which must be notified to their employer) is high enough to result in payment. They may contact you to make you an offer without the need for an order. Under these circumstances, you can notify the court of an agreement and request a ‘suspended attachment’ of earnings order. If the offer turns out to be merely a play for time, notify the court again of collapse. A full order can then be made.

Change of employment
If your debtor has left his or her job, the attachment of earnings order will be adjourned by the court. You will have to re-confirm your debtor’s income source and if they have started a new job, you can request the court to simply re-issue the order on Form N446 – you need not start the whole process again.
Attachment of earnings orders cannot be made where debtors are self-employed.

Statutory demands
For debts over £500 a statutory demand can be served. A precursor to bankruptcy proceedings, this formal demand for payment should be personally served on the debtor. Once served, the debtor has 18 days to set aside (ask the court to overturn) the demand so that it is no longer effective.
If the debtor does not apply to set aside, bankruptcy proceedings can be commenced. Though increasingly common, bankruptcy is no soft option – the consequences being grave. Usually a statutory demand will be enough to provoke payment or at least dialogue.

Bankruptcy
The effect of this order needs little explanation. Whilst perhaps ultimately self-defeating, the value to a landlord comes essentially from the punishment factor which is so high with these proceedings that it should provide leverage for at least some payment from all but the most vanquished of debtors.

Here, more complex rules of court apply. A DIY approach is not generally recommended but in the broad analysis a bankruptcy petition form is completed once the 18 day window for setting aside the statutory demand has expired. The completed form is taken for issue to the local District Registry division of the debtor’s local court or the High Court in London, depending on where the debtor has resided for the last six months. Accompanying documentation includes a copy of the statutory demand and a statement of service from (typically) a process server. Currently the total court fee is £610.

Direct attachment to a bank account
Third Party Debt Orders, as they are known, require some knowledge of account details and the level of balance, most likely from an oral assessment of means. If these facts are known, a creditor can apply on a simple court form (Form N349) for an order securing payment directly out of the debtor’s specified bank account, the result being that payment of the whole or part of the debt will be extracted from that balance.

Charging orders
Should the debtor have moved on to purchase a freehold or leasehold interest in a property, a charge against that property can be placed at HM Land Registry. Once obtained, the charging order can be enforced by an application for an order for sale of the property. Once obtained, it is advisable to apply for a ‘restriction’ – which prevents the property being sold without your consent (as creditor), thereby safeguarding the debt. The charge sits on the ‘title deeds’, attracting interest, until the property is sold. Since it is an ongoing encumbrance on the debtor’s property, the charging order counts, in accounting terms, as an asset, which is something business creditors might find more attractive than bankrupting the debtor.

Conclusion

Some of these options are more straightforward than others but all provide potential solutions for landlords seeking to enforce the easily obtainable CCJ. Quite what works in any individual case depends entirely on circumstances, not least of the debtor themselves. Communication is key – an aggressive approach can be tempting but is often counter-productive and debtors often require coaxing. What is clear is that lost rent needn’t necessarily be lost forever.