This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Summary and implications
An important change in the way landlords can pursue recovery of rent arrears is about to come into effect.
From 1 October 2015 the minimum debt that can form the basis of bankruptcy proceedings will increase to £5,000.
This means that – in the case of tenants who are individuals (not companies – see below) the much used (and generally highly successful) 'statutory demand' process for collection of arrears will not be available unless/until the arrears are £5,000 or more.
The current lower limit for individuals and company debtors is just £750 – this will remain the limit (for the time being at least) in the case of company debtors.
What should you do?
From 1 October 2015 a different approach may be required in the case of individuals who want to take a lease in their own name(s).
- It will now be potentially more expensive (in terms of legal and court fees) and more time consuming to pursue recovery of small debts (i.e. debts of under £5,000) - if County Court proceedings are used as the alternative to the familiar statutory demand.
- Other options should therefore be considered.
- One option will be Commercial Rent Arrears Recovery (‘CRAR’, which replaced 'distress' for rent) but CRAR is only available for recovery of rent, VAT and interest – not service charge, or other charges under leases, and only in the case of purely commercial premises.
- When granting new leases to individual tenants, taking a rent deposit of £5,000 (or more) should be considered, so that debts under the new bankruptcy limit can be recovered by 'drawing down' on the deposit (but this will not necessarily resolve the problem that can occur if the deposit is not replenished following drawdown).
- On an application to assign to an individual tenant the new limit will strengthen landlords’ hand to insist on a rent deposit (or other security) as a condition for consent being given.
- The importance of getting (and keeping updated) an address for individual tenants (and assignees) other than the premises address under the lease is underlined. Individual tenants may become more prone to leaving 'small' arrears balances unpaid; without an address any form of legal action is made more difficult/expensive.
