Rent arrears and recovery

In a recent conversation, a private landlord explained that, in reality, he only managed to collect about 90% of the rents from his rental properties (especially those occupied by his housing benefit claimants).  The remaining 10% was left unpaid at the end of the tenancies for a variety of reasons.  Occasionally, tenants left without paying the last few months' rent, or the amount of repairs, cleaning and dilapidations exceeded the amount of the damage deposit held.

Negotiation

The simplest method to assist rent recovery is also the most important; it relies on avoiding legal action entirely.  Negotiating with the tenant in a non-threatening way can help the landlord discover why the rent arrears has occurred, and explore possible solutions.

If, for example, the tenant has lost his employment or had difficulty in paying the rent, then the landlord might help the tenant apply for housing benefit, with the rent being paid directly to the landlord.
Alternatively, the landlord might agree to waive some of the arrears in return for the tenant agreeing to leave.  Where this approach is adopted, it is important to remember that there is no guarantee that the tenant will give up possession; only the court has to power him to force the tenant to leave in the final event.  Ensure that the tenant has vacated, returned the keys (ideally in front of a witness) before signing any waiver.

Background information is also very useful at this stage.  Note the bank account details if any rent payments are made by cheque.  This information, and any employment details are useful if the landlord needs to undertake garnishee proceedings or an attachment of earnings order (discussed below) at a later stage.

Accepting rent and mesne profits

Once the landlord has decided to bring possession proceedings on the defaulting tenant, the issue remains as to whether s/he should continue to accept any rent that might be forthcoming.
A landlord who has terminated a tenancy needs to take care that any further rent is accepted as 'mesne profits', otherwise the act of accepting further rent after this point may lead to an inference that a new tenancy is being created. 
The exception, here, is in the case of an assured or assured shorthold tenancy (AST).  Here, there is no need to accept rent as mesne profits until after the date the tenancy is brought to an end by the court (using a possession order) - before this date, a statutory tenancy exists anyway (Housing Act 1988 s.5(2)).

In Burrows v Brent London Borough Council (1995), the local authority obtained a possession order against a couple who had run into serious rent arrears.  The tenants then entered into an agreement with the landlord to start trying to pay off their arrears whilst they continued to occupy the property.  The tenants then failed to make the agreed rent repayments.  Although the decision was later reversed in the House of Lords, the tenants managed to defend the original eviction action on the basis that a new tenancy had been created upon the acceptance of further rent payments.
Equally, care needs to be taken where tenants have absconded, leaving an unlawful occupier or partner in occupation.  Again, any rent accepted, should only be taken as mesne profits unless there is an intention to grant a new tenancy to the remaining occupier.

Sureties and Guarantors

If a guarantor has agreed to guarantee the tenancy, then the guarantor may also be approached for the rent arrears.  It may even be necessary to take proceedings against the guarantor to obtain a judgment and thus recover the debt.

Money judgment

Landlords often include a claim for rent arrears when bringing possession proceedings against a defaulting tenant (unless the landlord claimant is using the Accelerated Possession Procedure).  The judge will normally then grant a money judgment for the rent arrears which are outstanding plus any further rent due up until the date on the possession order.
Where the APP has been used, the landlord will need to lodge a separate claim for the rent arrears - normally as a Small Claims action, to obtain judgment.

Costs and interest
The court can award costs to the claimant at the end of any possession or rent arrears action but, because they are awarded on a discretional basis, they need to be included on the landlord's possession claim when the application or particulars of claim is drafted. 
Where the tenancy agreement provides for this, the landlord may be able to recover all reasonable administrative and attendance costs (sometimes referred to as 'indemnity costs') incurred in bringing the possession action - otherwise they will be awarded on a very limited basis (summary costs).
Under section 69 of the County Courts Act 1984, the landlord is also entitled to include a claim for interest on the rent outstanding.  The rate is set at a standard rate and the current rate may be obtained by contacting the Court. 

Tracing the debtor
A common difficulty here, of course, is that the tenant has often left the property leaving no forwarding address.  Stronger data protection rules mean that this information has become increasingly more difficult to obtain whereas, previously, utility companies could often be persuaded to share this information, where a tenant had given a redirection address for the final bill.

Before the landlord, as creditor, can take enforcement action to recover the debt, he will need to be able to trace the tenant, or at least any assets he owns, so that the court can distrain against them.  This is where any pre-tenancy information obtained about the tenant, his place of employment, or next of kin etc. can be useful in tracing defaulting tenants. 
Employment details are particularly valuable as they allow the landlord to apply for an attachment of earnings order on the current employer.

Equally, landlords can employ a tracing agent (see list at end of article), many of whom operate on a success-only fee basis, to help them track down the defaulter and recover the debt.
Of course, the ex-tenant or debtor may have no assets of significant value so the process would be uneconomic.  So, in many cases, the enforcement process may stop at this point with the landlord writing off the debt.

County Court Judgments (CCJ)
Tenants may, hopefully, decide to settle the terms of the judgement voluntarily, if only because of the danger of being included on the list of County Court Judgements (CCJ).  If a money judgement is not settled within 14 days, then the name and address of the defaulting party will be entered onto the CCJ lists which is in the public domain and used by banks, building societies and credit referencing agencies.

This is a powerful weapon against any defaulter, and there is no harm in reminding defaulters of the consequences of a CCJ entry in the hope that it may bring early payment either before or after court proceedings.  Defaulters with a CCJ will remain on the list for six years (unless they can prove that the debt has been satisfied) and the individual will find it increasingly difficult to obtain any form of credit, bank loan or goods on hire purchase during this time.

Financial Enforcement

Once the money judgment has been obtained from the court, it may be enforced in a variety of ways.  The main one are:

• Attachment of Earnings orders
• Warrant of Execution
• Garnishee
• Charging Order

Attachment of earnings
One the most powerful methods to collect a debt is using an attachment of earnings order.  This is an order to a debtor's employer to deduct a sum of money on each payday from the debtor's wages.  This option is only available if the person is employed; attachment of earnings orders cannot be used against self-employed persons.  Clearly, people who change their jobs frequently will prove harder targets.

Warrant of execution
This is an order allowing the bailiff to seize and sell sufficient of the debtor's goods to recover the money due under the judgement.  This process is also known as 'distress'.
There are limits placed on the type of goods a bailiff may take.  The bailiff must allow the defendant to keep items which are necessary for the basic domestic needs of the defendant and his family such as clothing or bedding or any items he requires to do his job or carry on his trade such as tools or vehicles (up to a pre-determined value).  Even a debtor's car in some cases is considered as 'a tool of trade' as the individual may not be able to carry out his trade without it.

Also, all property seized must belong to the defendant which means that the bailiff cannot take goods which the defendant has on hire purchase, lease or which are rented, or which belong to someone else such as the defendant's spouse.
Where a possession order includes a money judgement for the arrears, the landlord should also apply for execution against the defendant's goods when applying to the bailiff for the warrant of possession (see previous article in LUJ Jan 2004).

Whereas distress is an important weapon to the landlord of commercial premises, there is less likely to be anything of significant (resaleable) value amongst the average tenant's belongings that would justify levying distress to recover a debt.  Exceptions might be where it was known that the tenant owned say, an expensive painting, or a second car with significant value.  Therefore, the powers of distress may be more use as a threat than in action.  The Government also considers that these powers may now contravene human rights.

Care must also be taken with any of the tenant's possessions left behind at the property after the tenant has vacated.  If the landlord seizes them, and prevents the tenant from obtaining them by locking them away, then the landlord may become liable under the Torts (Interference with Goods) Act 1977.  Equally, if the tenant suffers loss because the goods are sold at substantially less than their market value, then a liability may arise.  These issues and procedures for sale of such goods have been dealt with previously in more detail in Letting Update, October 2002, p15.

Garnishee
This is an order directed to anyone who owes the debtor money.  The order requires them to pay the money they owe to the debtor directly to the court.  This method is commonly used against a debtor's bank account and may be useful where previous payments passing between the parties or information obtained from an oral examination show that a bank account exists.  It is also useful where the debtor is a business or a self-employed person.

Charging Order
This is an order preventing the debtor from selling his land or securities (bonds, stocks and shares) without paying what he owes you.  Such an order will be most useful in the case of a debtor with no earnings or assets apart from property.  If the court agrees, the charging order can be further enforced by ordering the debtor to sell the land or securities to pay off the debt.  This is a matter for the court's discretion.

Receiver by Way of Equitable Execution
If the debtor is in receipt of money, for example as a landlord who receives rent on property he owns, the Court can appoint a receiver to collect the money on your behalf.  The Court is not bound to appoint a receiver if it does not consider that the fairly substantial costs of receivership would be justified having regard to the amount of the debt.  For this reason you should seek the advice of a solicitor if you wish to use this method. 

Oral Examination
An oral examination can be used to obtain further information about the defendant's financial circumstances such as any bank accounts held by the person against whom a judgement has been obtained.
The court has the power to order the debtor to attend at court so that he can be asked questions, on oath, as to his ability to pay the debt.  Oral examination is not in itself a method of enforcement, but can be a very important feature of the enforcement process.  It can enable the litigant to decide which enforcement action would be the best according to the defendant's circumstances.

In order to obtain an oral examination, you should apply to the court for the district in which the debtor resides or carries on business - usually this will be the court in which you obtained judgement.  The court can provide you with the application form (N316) and a leaflet giving more details on the procedure and suggestions for questions that might be asked. 
The litigant might, for example, ask the debtor to supply information on:

• name and address of employer, works number, PAYE number
• the person's earnings
• details of any other earnings (including those of spouse)
• details of his bank account(s), name and branch, current balance
• details of any other accounts, premium bonds or investments
• whether the person owns a car (including hire purchase details)
• details of other property (including hire purchase details)

If the debtor fails to attend or refuses to be examined, he can be committed to prison by the judge for contempt of court.

Summary

Recovering debt can be like a chess game;  it is important to keep one step ahead of the opposition.  Persuade the tenant (or ex-tenant) to resolve the problem before it gets worse.  Use your superior knowledge to persuade the debtor that further legal action will simply add further costs, increase the debt and could severely damage the person's credit rating and ability, and his future ability to obtain loans and credit cards.

Collecting rent arrears and enforcing a court judgment can be costly and time-consuming.  Start by having as much information about your tenant as possible including date of birth, employer, national insurance number, next of kin; this will help you or any tracing agent to track down the debtor.
If all else fails, and the debt is economic to collect, be prepared to take legal action, or consider putting the debt in the hands of a debt collection service.