Every now and again, a new law or scheme is introduced that has big implications for the property market. The government’s Debt Respite Scheme, which comes into force on 4th May this year, is just the latest example.
Designed to ease the financial pressure on those hit hard by the Covid-19 pandemic, the scheme prevents banks and other parties from chasing unpaid debts. This gives the debtor time to find a solution to their financial woes.
Does this sound fair and compassionate? Absolutely. With over 800,000 tenants currently behind on their rent, it’s good that the government is helping those in a financial pickle. The problem is that many landlords are in a pickle too. And if tenants can’t pay their rent, then landlords can’t make their buy-to-let mortgage repayments. Basically, it’s one big jar of Branston all round.
So here’s what you need to know about the Debt Respite Scheme…
What is it?
The Debt Respite Scheme will give tenants in arrears some ‘breathing space’ to get their finances in order. It gives debtors some legal protections and prevents landlords from banging down their door to recover the money.
During this period of respite, landlords cannot serve a Section 8 notice, apply for a warrant, start bankruptcy proceedings, or try to take possession of their property. What’s more, they can’t charge interest on money owed, seize any of the tenant’s possessions, and they’re not even allowed to contact the tenant about the debt.
The two types
There are two types of ‘breathing space’: a standard one and a ‘mental health crisis’ one.
The former, which any tenant with a problem debt can apply for, protects debtors for a period of up to 60 days. The mental health one, which is only available for people undergoing treatment for a mental health crisis, is more open-ended. It lasts for as long as the debtor is undergoing treatment (no matter how long that is) plus an additional 30 days.
Although the latter sounds particularly bad for landlords – they might not see their money for months in theory – mental health breathing spaces are reserved for tenants who have been hospitalised or are receiving treatment on an outpatient basis. It’s unlikely this would last for longer than 60 days in practice.
How does it start?
Any tenant can apply for breathing space if they’re unable to meet their debts. A specialist debt advice provider, who is authorised by the FCA to offer debt counselling, will then decide whether to award this breathing space – although, when it comes to mental health applications, an Approved Mental Health Professional (AMHP) will also need to confirm that the applicant is in treatment.
The decision to award debt relief will normally depend on whether the applicant has an income (and therefore might be able to do some budget juggling), or has assets that could be sold to cover the debt.
If there’s no realistic prospect of the tenant raising the money, the debt adviser will probably award relief. However, applications will be rejected if the tenant has already organised a debt relief order (DRO) or an individual voluntary arrangement (IVO).
What happens next?
Landlords will automatically receive an electronic or postal notification if one of their tenants has been granted breathing space. This notification will confirm when the period of grace officially began; therefore landlords can start ticking off the days, Robinson Crusoe-style, until they’re able to take action again.
The debt advisor will be the single point of contact for all parties throughout the process; so if the landlord has any questions then this is the person to ask. Landlords can’t, of course, contact the tenant during this period unless it’s about another matter like maintenance or safety checks.
The bad news
Sadly, landlords are pretty much helpless during this period. All they can do is twiddle their thumbs throughout the moratorium – no matter how desperate they are to get their hands on their money.
It’s particularly galling that secured debts aren’t covered by the breathing space scheme; therefore landlords’ lenders will still be knocking on their door for mortgage repayments.
What’s worse, landlords won’t even be able to claw back money for damage (to either the property or fixtures and fittings) during the breathing space. The up-against-it tenant remains as untouchable as the Crown Jewels.
The good news …
It’s not all doom and gloom, however. It’s important to note that these breathing spaces are not payment holidays. The tenant will still have to pay the full amount with knobs on once the period of grace ends.
What’s more, stricken tenants will still be expected to pay rent during the breathing space. The Debt Respite Scheme only applies to arrears that have built up in the past. Current rental payments count as ‘on-going liabilities’ and must be forthcoming. In fact, breathing spaces are usually granted on the specific condition that tenants keep paying their rent on time. And if a tenant defaults, the debt adviser could pull the plug.
Finally, when it comes to mental health breathing spaces, landlords should be reassured that tenants (or their carers) will usually seek to end the tenancy if treatments last longer than 60 days. This would allow the landlord to find a new tenant.
The bottom line
With record levels of debt in society, something like the Debt Respite Scheme was bound to come along sooner rather than later. Although many landlords won’t like having their ability to take action curtailed – even if it’s just for a couple of months - it’s often better to give tenants breathing space rather than evict them straight away. After all, if an evicted tenant disappears then landlords are unlikely to see their money ever again.
Furthermore, there’s always the chance that the scheme could work for everyone. Many tenants will use the time wisely, balance their books, and then come up with a sustainable plan to repay their debts – especially if the economy recovers more quickly than expected thanks to the vaccine rollout. In the meantime, struggling tenants will be kept off the streets (thus helping Britain’s homelessness problem) and landlords won’t lose an otherwise reliable tenant who’s just had some rotten luck.
But rather than thinking about debt, why not consider investing in Rent Guarantee Insurance?