Posted by Caroline Preist, Partner
Landlords – does the Pre-Action Protocol for Debt Claims apply to your dealings with tenants?
The Pre-Action Protocol for Debt Claims has been in force since 1 October 2017 and sets out rules to follow when any business is claiming payment of a debt from an individual. This covers a debt payable from a tenant to a landlord, whether in respect of rent or other sums due under the lease.
With regard to the meaning of “business” and “individual”, the Protocol will clearly apply to corporate landlords of residential properties. However, as the definition of “individual” includes a sole trader, it will also apply to some commercial premises depending on the identity of the tenant. Landlords, especially those with larger portfolios, are also likely to be considered as acting as a “business” for the purposes of the Protocol.
What are the changes?
Before the new Protocol came into force, a landlord would have been required to follow the much more straightforward general Practice Direction on Pre-Action Conduct. They could simply write to the tenant with basic details of the claim, ensuring any key documents were disclosed and considering alternative dispute resolution.
The tenant would then be required to respond within a reasonable time, which could be as little as 14 days in a simple claim. After this, generally the landlord could issue proceedings without risking penalties for non-compliance.
The new rules are far more onerous and have the potential to significantly delay recovery of debts. The Protocol requires more in-depth information to be included in the initial letter to the tenant, as well as enclosing a standard form of Information Sheet, Reply Form and a Financial Statement form. It must be sent by post unless the tenant has specifically requested otherwise.
If the tenant requests a document, the landlord is now required to produce it or say why it is not available within 30 days. This could take up further management and admin time where a document proves difficult to locate, several are requested or copies of lengthy documents need to be made.
As well as these additional obstacles for the landlord to slip up on, more concerning are the potential timescales involved for recovering outstanding debts under this process. For example:
- The landlord is now required to wait a longer period of 30 days without any response from the tenant before issuing proceedings, even in a simple case.
- If the tenant requests a document, the landlord cannot issue proceedings until 30 days after the document has been provided.
- If the tenant requests additional time to seek debt advice in the Reply Form, the landlord must allow at least a further 30 days for that advice to be obtained and even longer if reasonable.
- Where negotiations have not resulted in a resolution, the parties are required to take stock, review their positions and attempt to narrow the issues in dispute. Where the landlord still wishes to issue proceedings, they must give 14 days’ notice of their intention to do so.
There is therefore scope for an impecunious but clued-up tenant to evade payment for several months before the landlord is able to issue proceedings. This is a significant shift from the previous position.
What if I decide not to follow the Protocol?
If a landlord issues proceedings without having complied with the Protocol, they do so at their own risk. The Court will expect compliance as standard and will take any infringements into account when deciding on case management and costs.
Whilst the Court is unlikely to penalise minor or technical infringements, it could impose costs sanctions even where the landlord is ultimately successful in its claim. It could also order that the claim be stayed until steps are taken to comply, thereby defeating any benefit to issuing at an earlier stage.
However, where there is a genuine urgency to bring the claim, such as if a limitation period is about to expire, the Court may overlook non-compliance.
How should I change my practices for recovering debts from tenants? Are there any other ways I can get paid quicker?
The upshot of the above is that processes need to be reviewed to minimise any delays in recovering debts. It is advisable to engage with tenants early where they fall into arrears and send a formal Letter of Claim to trigger the above timescales as soon as possible. Document management should be well organised to ensure that information can be provided to the tenant quickly.
In light of the potential pitfalls, delays and additional cost involved in pursuing debts via this route, other options should be considered since they may now be more attractive. These could include:
- Evicting the tenant using a self-contained statutory procedure (i.e. under Section 8 or 21 of the Housing Act 1988) or by issuing forfeiture proceedings, particularly where the property can be easily re-let at the same or higher rent.
- Commercial Rent Arrears Recovery (otherwise known as CRAR) where the tenant is a sole trader and may have assets of value which could be seized by an enforcement agent.
- Insolvency procedures such as serving a statutory demand, since the threat of bankruptcy can often prompt payment, especially from those who hold directorships.
In the context of recent tightening up of the rental market generally, the Protocol is yet another change to which landlords need to adapt.
For more information, or if you have any questions on the Pre-Action Protocol for Debt Claims please contact us on:
0800 302 9933 Email us