Rent arrears, possession claims and a way through the mess…

2020 has thrown challenge after challenge at landlords and letting agents, not least of which has been the impact of lockdown on tenants, the ‘domino’ effect on rent arrears – and an increasingly difficult landscape in which to do anything about it.

 

Here, Mike Morgan, Hamilton Fraser’s Legal Division Manager, sets out the latest position and highlights a way through the mess left behind by COVID-19.

 

What are grounds for seeking possession based on rent arrears?

COVID-19 has brought many changes to the private rented sector. One piece of good news is that the three grounds for possession due to rent arrears, set out in the Housing Act 1988, have not changed (although we’ll come on to see that the length of notice you need to give has…)

 

Section 8 is a mandatory ground. This means that if you prove your case, the court must make an order for possession in the landlord’s favour. To use Section 8, rent must be unpaid at the time of the service of the Section 8 notice and at the date of the hearing:

 

• If rent is paid weekly or fortnightly, at least eight weeks' rent is unpaid
• If rent is payable monthly, at least two months' rent is unpaid
• If rent is payable quarterly, at least one quarter's rent is more than three months in arrears
• If rent is payable yearly, at least three months' rent is more than three months in arrears

 

Section 10 is a discretionary ground. This means that the court is not obliged to make a possession order if it does not consider the rent arrears to be sufficiently serious. To use Section 10, rent must be unpaid by the tenant when the Section 8 notice was served and unpaid by the time possession proceedings start.

 

Section 11 is also a discretionary ground. Section 11 can be used where the tenant has persistently delayed paying rent, regardless of whether the rent was in arrears on the date that possession proceedings began.

 

How much notice must be given to the tenant?

Whether serving Notice on your tenant under Ground 8, 10 or 11, the notice periods are the same. The notice periods were updated from 29 August 2020 and are as follows:

 

• Six months’ notice if less than six months’ arrears
• Four weeks’ notice if six months’ arrears or more

 

Perversely, this is starting to have unintended consequences. We’re seeing landlords waiting to get at least six months’ rent arrears in order to shorten their notice period. As we’ll come on to see, the courts are looking for even more rent arrears than this, before prioritising a possession claim.

 

What happens next?

The courts were suspended from dealing with possession proceedings until 21 September 2020. As you might expect, the courts have a backlog of existing possession claims to deal with as well as new claims raised since that date. To use court time effectively and proportionately, judges will consider which cases are a priority. By way of guidance, cases with extreme alleged rent arrears will be considered a priority – this means arrears equal to at least:

 

• 12 months’ rent, or
• (ii) nine months’ rent where that amounts to more than 25 per cent of a private landlord’s total annual income from any source

 

There are other grounds for treating possession claims which do not relate to rent arrears. Priority will generally be given to claims issued before the suspension started in March 2020. When the court reaches a decision over the priority or urgency of a case, it will consider the impact not only on the claimant and defendant in a particular case, but also on other claimants and defendants in other cases.

 

This is bad news for landlords. In practice it means landlords are likely to face a wait of at least six months when issuing proceedings. Even worse, they face a dilemma of having to gamble increased financial hardship against a shorter timescale for proceedings.

 

So what is the alternative?

Innovation through mediation

Mediation is more important now than ever. Now that the previous COVID-19 related delay on issuing eviction proceedings has ended, landlords will be required to reach out to tenants to understand their financial position before taking possession action through the courts.

 

The Property Redress Scheme mediation service helps landlords and tenants to work together to agree on an affordable rent repayment plan when tenants fall into arrears. This of course brings many benefits: money saved by not needing to go to court, control over rent arrears and lost rent, as well as - in some cases – early possession of a property for re-letting.

 

That said, mediation is much more than just agreeing a repayment plan for arrears. We launched our mediation service quickly in response to lockdown and have unrivalled experience of tenancy mediation during such unprecedented times. We have seen both tenants and their landlords in difficult financial circumstances, and these have often meant that we’ve needed to be creative in the solutions we suggest.

 

All roads may lead to Rome – but which is the right road?

In our first case, the tenant had incurred four months’ rent arrears during lockdown. She was back at work, able to pay her normal monthly rent again, but needed time to pay the arrears. The landlord agreed that the tenant had previously been a model tenant but was adamant that rent arrears must be paid before the end of the fixed term. This meant a monthly contribution towards rent arrears that was beyond the tenant’s reach.

 

The tenant was fearful that this unsustainable situation meant having to move, which could cause a problem for her son who attended a special needs school and needed to remain there until the summer of 2021. We encouraged the tenant to think about whether there was an alternative source of funding, and this led to her finding a loan at an acceptable rate of interest.

 

With the funds available to pay rent arrears immediately and in full, the landlord was encouraged to agree to a new fixed term tenancy until the summer of 2021. The tenant was then happy to pay the loan at a rate that was manageable for her and continue living in a place that her family really regarded as ‘home’.

 

You scratch my back…

In this case, a tenant had to stop working during lockdown and fell into one month’s arrears. Although difficult, he was managing to pay his ongoing rent with savings and benefit payments. He was also ready to re-open his business (as a barber) when lockdown ended. He could not, however, stretch to catching up on the month’s arrears until then.

 

The landlord had a six-week deposit and knew the tenant, who had never been in arrears previously, well. The tenant wanted to remain at the property when the current fixed term ended in early 2021. The landlord was encouraged to take a pragmatic view that gave the tenant a deadline to clear his one (and only) month’s arrears three months before the end of the fixed term; if he did the landlord would be willing to let him remain at the property. Of course, if he didn’t, the landlord would be able to serve notice to terminate the tenancy at the end of the fixed term.

 

This solution worked well for both parties, helped preserve the goodwill in what had been a long term landlord-tenant relationship, and gave the tenant time and flexibility to get back on his feet.

 

It’s time to call it a day…

Our last case concerns a rather luxurious period property and arrears approaching £20,000. The tenant had been in less than two months’ arrears before lockdown, after which arrears escalated quickly due to the high monthly rent. The landlord was, understandably, concerned that the longer the tenant remained at the property, the worse this situation would become. The tenant was convinced in their own mind that their business would improve and that they would get back to normal in a few months. They suggested that they could pay approximately 80 per cent of the arrears immediately, but questioned why they should have to, pointing to the suspension on possession proceedings, meaning that it would take many months to evict them. In effect, the tenant felt that this left them in control of determining what they paid and when.

 

We helped the parties see their respective positions with a little more clarity – for the landlord, possession was likely to be a long and expensive process, with an escalating debt owed by the tenant. For the tenant, the reality was that it was not clear when they would get back to being able to pay the full monthly rent and arrears, and that remaining at the property was only making things worse. ‘Cutting their losses’ the landlord was happy to make the tenant an offer to accept 80 per cent of the arrears, provided they left the property on an agreed date before the next month’s rent fell due. 

 

A repayment plan was documented to this effect, also making it clear that if the funds were not paid or the property not surrendered, the offer was ‘off the table’ and the tenant would remain liable for the full arrears owed. Given the nature of the property, the landlord had taken a deposit equivalent to three months’ rent at the start of the tenancy (before the tenant fee ban!).  Both parties acknowledged that the return of the deposit would be dealt with in the usual way when the tenancy was surrendered, giving the tenant the assurance of a substantial sum also being returned to them, provided the property was returned in a good and clean condition as per the terms of the tenancy agreement.

 

Getting more help

Need further advice or information? HF Assist is a new helpline for letting agents and property managers, available from just £10 per month (plus 20% VAT). To find out more about HF Assist, please visit www.hfassist.co.uk.

 

Need help with possession claims and eviction? Landlord Action is one the UK’s best known eviction and housing law specialists dealing with problem tenants, squatters, rental debts and other housing law matters in England and Wales. Costs for preparing and serving a notice seeking possession start at just £144 inc VAT. To find out more please visit www.landlordaction.co.uk.

 

Need a mediator?  Landlord Action is delighted to have partnered with the Property Redress Scheme mediation service to offer a package to assist landlords and tenants to come to an arrangement with regards to the property. For £220 Landlord Action will undertake a Step 1 review and, once a notice is served, we’ll instruct the Property Redress Scheme mediation service to start a mediation case for you and try to contact your tenant to see if they are willing to undertake the mediation. The usual cost for these two services would be £244 and you’d have to instruct the Property Redress Scheme mediation service separately. There are further fees if your tenant agrees to use the mediation Property Redress Scheme mediation service. More information is available here.