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Insolvency and its effect on the landlord of residential property

What happens when the tenant of a long residential lease becomes insolvent? There are two possible insolvency procedures; an individual voluntary arrangement (IVA) and bankruptcy.

The purpose of an IVA is to allow a settlement between the insolvent and its creditors on agreed terms and this avoids the bankruptcy of the individual. The debtor applies for an interim order which lasts for 14 days unless extended. Once an application is made the court can stay an action, execution or other legal process and once the order is made the landlord needs court permission to take court action or peaceably re-enter. Court hearings and creditors’ meetings follow and in due course the IVA is entered into. There is an alternative process in which an IVA is proposed without an application for an interim order but the moratorium of creditors taking proceedings referred to above does not apply although an interim order can be applied for later on. The property of the insolvent remains vested in the insolvent.

The IVA will bind a landlord creditor even if it did not have notice of the relevant creditors’ meetings and there is no power for the lease to be disclaimed in connection with an IVA. An IVA can cover future payments, whether it does so depends on the terms of the IVA entered into. Whether it releases former tenants or guarantors of the tenant depends on the terms and in the case of a guarantor, on the terms of the guarantee. An IVA is contractual and third parties such as former tenants and guarantors would prima facie not be bound by it though.

There is at present conflicting authority as to whether if relief from forfeiture is sought by a tenant under an IVA it would be granted on payment of the reduced arrears liable under the IVA if the landlord is bound by it or the full amount that the tenant is liable to pay.

Bankruptcy orders can now be made by a court on hearing a petition or by an online application to an Adjudicator within the Insolvency Service. Once an order is made the individual is made bankrupt. A trustee in bankruptcy is appointed after the order is made and the property of the bankrupt vests in the trustee on the appointment taking effect save for certain personal effects,  property held on trust by the bankrupt and certain Rent Act and Housing Act tenancies.

Whilst a petition or online application is pending the court can stay any action, execution or other legal process against the property or person of the debtor. The landlord can sue for the rent and forfeit by court action without leave of the court but the action can be stayed. The landlord can forfeit by peaceable re-entry without leave of the court and it is thought that the process cannot be stayed, but this point is not wholly without doubt as there is no direct authority for it.

Once the order is made the landlord creditor has no remedy against the person or property of the bankrupt in respect of any debt provable in the bankruptcy and needs leave of the court to begin any action or other legal proceedings against the bankrupt however the landlord of an undischarged bankrupt does not need permission of the court to forfeit a lease either by peaceable re-entry or by way of court order.

The trustee in bankruptcy has power to disclaim a tenant’s liability under a lease and if so the effect is that the rights and liabilities of the bankrupt property are determined but those of third parties such as guarantors continue.

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