Bankruptcy does not restrict landlord's right to repossess leasehold property
In Christina Sharples v Places for People Homes Ltd [2011] EWCA Civ 813, the Court of Appeal considered whether a landlord's application to repossess property let by way of an assured tenancy was a "remedy in respect of a debt" under section 285(3)(a) (bankruptcy) or section 251G (debt relief order) of the Insolvency Act 1986. The court also considered whether the leave of the court was required where a landlord sought repossession of leasehold property occupied by an undischarged bankrupt.
The Court of Appeal has held that the landlord of an undischarged bankrupt does not need the permission of the court, under section 285(3)(b) of the Insolvency Act 1986 (IA 1986), to take possession of leasehold premises should the tenant default under the terms of the lease. The court's decision applies to repossession either by peaceable re-entry or court order.
In addition the court confirmed that an application for an order for possession of premises subject to an assured tenancy does not amount to a "remedy in respect of a debt". Consequently, these applications do not fall within the prohibition on creditor enforcement action against a bankrupt's property (section 285(3)(a), IA 1986) or the moratorium on creditor action against a debtor subject to a debt relief order (section 251G, IA 1986). (Christina Sharples v Places for People Homes Ltd [2011] EWCA Civ 813).
Background
Terminating assured tenancies
An assured tenancy is a type of tenancy of residential property that provides the tenant with a degree of security of tenure.The Housing Act 1988 (HA 1988) introduced a new statutory regime for tenancies of residential properties. Between 15 January 1989 and 28 February 1997, such tenancies were most commonly assured tenancies. At the end of a fixed term assured tenancy, the tenant has the right to remain in the property unless the landlord can establish one of the grounds for possession in Schedule 2 to the HA 1988 (section 5(2), HA 1988). This gives the tenant a degree of security of tenure.
A key feature of an assured tenancy is that the manner in which a landlord can bring the tenancy to an end, as well as the grounds on which it can do so, are limited.
A landlord can end an assured tenancy by obtaining a court order allowing the landlord to repossess the property (section 7, HA 1988) if one or more of the following prescribed grounds apply:
• The tenant has failed to pay rent for a period of eight weeks or more (ground 8, Schedule 2, HA 1988).
• The tenant has fallen behind with payment of the rent (ground 10, Schedule 2, HA 1988).
• The tenant is consistently late in paying the rent (ground 11, Schedule 2, HA 1988).
An assured tenancy subsists until the landlord actually retakes possession of the property (section 5(1), HA 1988). The court may, if it thinks fit, make a suspended order for possession in favour of the landlord. A tenant that is subject to a suspended possession order does not have to give up possession of the premises, provided that he complies with the conditions set out in the order.
Bankruptcy, debt relief orders and obstacles to creditor enforcement action
Restrictions on creditor action in bankruptcy
One of the core principles of bankruptcy is that all unsecured creditors (of the bankrupt) receive a share of the proceeds from the realisation of the bankrupt's insolvent estate. Their share is proportionate to the amount of the debt that the bankrupt owes them (the pari passu principle).To ensure that the pari passu principle is applied, the Insolvency Act 1986 (IA 1986) prevents creditors from enforcing their claims against the bankrupt during the course of the bankruptcy. The restrictions on creditor action include:
• Denying a creditor any remedy against the bankrupt in respect of the debt due to that creditor, following the making of the bankruptcy order (section 285(3)(a), IA 1986).
• Requiring a creditor to obtain court's permission before taking any action against an undischarged bankrupt (section 285(3)(b), IA 1986).
Restrictions on creditor action against a debtor subject to a DRO
A debtor who is subject to a DRO gains the benefit of a moratorium that prevents creditors taking action against the debtor. From the date of the DRO, no creditor whose debt falls within the scope of the DRO has any remedy against the debtor in respect of that debt (section 251G, IA 1986).Taking possession of leasehold property
The courts have provided the following guidance on the question of whether the repossession of leasehold property by a landlord is caught by the restrictions on creditor action:• Where a landlord forfeits a lease (that is not an assured tenancy), the termination of the lease ends the tenant's interest in the property. Accordingly, steps taken by the landlord to repossess the leasehold property are not taken against the tenant's property and so are not caught by the restrictions on pursuing remedies against a bankrupt's property (Ezekiel v Orakpo [1977] 1 QB 260). This principle applies where a landlord seeks to take possession of property let by means of a secured tenancy (under Part IV of the Housing Act 1985), following termination of the tenancy by court order (Harlow District Council v Hall [2006] EWCA Civ 156).
• A landlord's right of re-entry is not a remedy for use by the landlord to remedy a default by a tenant. It is a means by which a landlord prevents detriment from occurring to it from a continuing default by ending the tenant's occupation of the property (Razzaq v Pala [1997] 1 WLR 1336).
Facts
This appeal concerned two separate cases, that of S, who was bankrupt, and G, who was the subject of a DRO.S and G fell into arrears of rent under the assured tenancies of their homes. Their landlords applied for orders for possession but, before the hearing of those applications, S became bankrupt and G became the subject of a DRO.
At the hearing of the applications for orders for possession, S and G argued that the landlord's right to apply for an order for possession was a remedy caught by the restrictions on creditor action. In both cases, the court made the order sought.
Against S, the court made an order requiring S to give up possession of her home to her landlord. Against G, the court made a suspended order for possession, with the suspension conditional upon G repaying the outstanding arrears of rent and continuing to pay the rent that fell due under the lease.
S and G appealed against the orders.
S argued that her case did not fall within the scope of the decisions in Ezekiel, Hall and Pala because, in those cases, the relevant tenancy had ended before the tenant's bankruptcy. In this case, the tenancy still existed when S became bankrupt. Consequently, the application for an order for possession was against the property of S and so fell within the scope of section 285(3)(a), IA 1986.
In addition, S and G put forward the following joint arguments:
• They argued that the previous authorities had taken too narrow a view of the meaning of the words "remedy in respect of a debt", by limiting that phrase to remedies that allow a creditor to recover the outstanding debt from the debtor. S and G argued that the phrase had a wider meaning, covering remedies that, while not being direct recovery actions, were effectively recovery remedies. In this case, they argued that seeking an order for possession had the direct coercive effect of compelling the debtor to pay the outstanding rent, or lose their home.
• S and G argued that this wider meaning of "in relation to a debt" applied in all cases, but that there were particularly strong policy reasons why it should apply in the context of assured tenancies. S and G pointed out that the policy behind an assured tenancy was to protect tenants of limited means from being made homeless. Given that one of the purposes of bankruptcy and DROs is to provide an insolvent individual with respite from unsustainable debts and to protect the bankrupt from creditor enforcement action during the course of those processes, S and G argued that it was against the policy of both the HA 1988 and the IA 1986 to allow landlords to repossess property in these circumstances.
Although the point did not arise under the facts of either case, the Court of Appeal also heard detailed argument on whether, if an undischarged bankrupt defaults under a lease, the landlord requires leave of the court to repossess that property. S and G argued that leave was required. They argued that the wording of section 285(3)(b) of the IA 1986 was wider than section 285(3)(a) of the IA 1986, and related to "any action" against the bankrupt, without any qualification that this action must relate to the debt due from the bankrupt.
Decision
The Court of Appeal dismissed the appeals, save in one respect in G's case.
The right of re-entry is not a remedy
The court held that the approach in Ezekiel, Hall and Pala was correct and applied in the context of assured tenancies.
A landlord's right to take possession of leasehold property in the event of a default by the tenant was a proprietary right, which existed to allow the landlord to protect itself from losses resulting from a continuing default. Exercising the right to repossess property did not give the landlord any better chance of recovering the outstanding rent, which was an unsecured claim in the bankruptcy estate.
Although the threat of repossession might well compel the tenant to pay future rent, the court held that this did not offend the pari passu principle. Any payment of future rent would come from the debtor's income and forms part of his reasonable domestic expenditure, which falls outside the assets available to satisfy creditor claims in any case.
Accordingly, the court held that the right to apply for an order for possession of property let by an assured tenancy was not, in principle, a remedy in respect of a debt.
However, in one respect, the suspended possession order made against G did amount to a remedy of that kind, because it required G to pay the rent arrears as a condition of suspension. A suspended order that directly linked the payment of rent arrears to the avoidance of repossession did enhance the landlord's position in comparison to other unsecured creditors and so fell within the DRO moratorium.
The court rejected the policy argument, on the basis that there was an equally strong public policy consideration that a landlord should have the ability to protect its commercial position by terminating leases of defaulting tenants.
No leave required to repossess leasehold property of an undischarged bankrupt
The court held that a landlord did not require the court's permission to repossess the leasehold property of an undischarged bankrupt who defaulted under the terms of a lease.
The court accepted that, interpreted literally, section 285(3)(b) of the IA 1986 was wide enough to encompass the repossession of leasehold property by a landlord. However, the court did not believe that it was Parliament's intention to create an automatic stay on actions against an undischarged bankrupt. The court noted that Parliament had given the court discretion to stay any action against a bankrupt (section 285(1), IA 1986). An automatic stay was inconsistent with that discretionary power.
Accordingly, the court held that the proper interpretation of section 285(3)(b) of the IA 1986 was to impose a stay on actions by creditors to enforce a provable debt against an undischarged bankrupt. Following its decision that repossession of leasehold property was not a remedy in respect of a debt, the court held that the section 285(3)(b) of the IA 1986 did not restrict the right of a landlord to repossess the leasehold premises of a defaulting tenant.
Comment
Landlords will no doubt welcome the decision that the leave of the court is not a pre-requisite to repossessing the leasehold property of a defaulting tenant. The decision that the restriction on creditor action in section 285(3)(b) of the IA 1986 is limited to creditor action in respect only of provable debts, is consistent with an earlier decision of the High Court in Re X [1996] BPIR 494, a case which was not, apparently, cited in argument in this case.
The court's decision that the approach in Ezekiel, Hall and Pala applies in the context of assured tenancies is unsurprising, given that the principle that the right to repossession is not a means of recovering unpaid rent is well established. Indeed, the somewhat favourable treatment of landlords is in keeping with other provisions of IA 1986, such as section 347 of IA 1986, which preserves a landlord's right to levy distress against a bankrupt's assets for six months of unpaid rent.
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