The government has indicated that it will raise the financial threshold for creditors petitioning for an individual's bankruptcy through an amendment to the Insolvency Act 1986. From 1 October 2015 a creditor will need to be owed at least £5,000, rather than £750 as at present. This change, coming very shortly after the recent abolition of the remedy of distress, will inevitably serve to further limit landlords' armouries when attempting to recover arrears from tenants.
A useful method for recovery of arrears totalling £750 or more is to serve a statutory demand on the tenant particularly where there is no dispute as to the debt claimed and the tenant has assets available. The demand provides a debtor with a period of 21 days in which to settle the debt, before a creditor can bring insolvency proceedings. In the landlord and tenant scenario, this is a significant threat to a tenant and is often a very effective method of persuading a non-paying tenant to settle its debts relatively swiftly, and at very little expense to the landlord compared to other available remedies.
The rationale for the increase is to prevent the very serious consequence of insolvency for what can be relatively minor debts and also to ensure creditors do not use statutory demands as a scare tactic, with no intention of ever bringing insolvency proceedings. However, following the proposed change, where arrears do not exceed the limit of £5,000, landlords will likely suffer as a result of this often effective remedy no longer being available.
Unfortunately this comes very shortly after the remedy of distress was abolished and the Commercial Rent Arrears Recovery procedure ("CRAR") was implemented in its place for commercial tenancies. Distress was not only a relatively immediate and low-cost method of recovering arrears, but it was also a very useful tool for a landlord, potentially having very serious adverse consequences for a tenant. The CRAR procedure is much more convoluted and, as a result, is more expensive for landlords.
Following the changes, where there are arrears which total less than the proposed statutory limit of £5,000, there will still be methods of recovery available to a landlord, including forfeiture, a small money claim through the County Court, CRAR, and in some instances recovery from the guarantor or indeed by drawing down on the rent deposit. However, many of these methods are complicated to pursue and require careful thought before being embarked upon. Each must be carefully considered against the facts of the individual case to ensure it is available to the landlord and is worthwhile pursuing from a costs perspective.