How does the new Pre-Action Protocol for Debt Claims apply to property litigation claims? - Boodle Hatfield

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13 Nov 2017

How does the new Pre-Action Protocol for Debt Claims apply to property litigation claims?

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The general principle behind the new Pre-Action Protocol for debt claims ("the Protocol" which came into force on 1 October 2017) is to provide the debtor with all the information, in order to make an informed decision and respond regarding payment or set out any issues they disagree with and to try and avoid involving the court where possible.

For more information on the procedure to follow under the Protocol, see Pre-Action Protocol for Debt Claims in force from 1 October 2017.

In a situation with a large company against a consumer individual, this level of consumer protection is to be welcomed, but how does it affect the landlord and tenant relationship?

Who does it affect?

The Protocol applies to any debt claimed by a business (including sole traders and public bodies) from an individual (including a sole trader). It is therefore wide-reaching and on the face of it, applies to landlords recovering a debt from a tenant, who is an individual. This is on the basis that most landlords will likely be considered to operate as a business, even if they are individuals.

When does it not apply?

There are limited circumstances where the Protocol does not apply. It does not apply where the debt is covered by another Pre-Action Protocol (such as mortgage arrears) or to claims issued by HMRC governed by Practice Direction 7D.

It also states that it is intended to complement any regulatory regime, to which the creditor is subject. Where compliance with the Protocol is inconsistent with a specific regulatory obligation (such as a principle, rule, or guidance contained in the Financial Conduct Authority’s Handbook), that regulatory obligation will take precedence. The Protocol should also be read in conjunction with industry and governmental guidance relating to good practice in the recovery of debt.

What about a claim for possession including rent arrears?

There is no specific protocol for rent arrears or possession claims; therefore subject to what I say below, the Protocol will apply. It may seem rather unfair that the Protocol applies to a landlord seeking rent arrears. These sums are rightly due under a lease or tenancy agreement and fall due regularly. The Protocol may be used by a well-informed tenant to play the system. However, as a debt claim is included, rent arrears will come under the Protocol even though it seems unlikely that this was an intended consequence, given that it will complicate and delay the procedure.

The Protocol timescales will serve to delay the landlord receiving payment or being able to commence proceedings against the tenant and will increase costs.

The extent to which the courts will refer to the Protocol in respect of possession claims which include rent arrears is, as yet, uncertain. On the face of it, the Protocol does apply, but if brought up in proceedings, it might be argued by a landlord that as the fundamental purpose of those claims is to gain possession rather than to recover the debt, the Protocol should not apply. Having said this, landlords need to be aware that there is the risk of sanctions being applied (in respect of any order made and with regard to costs) if the court considers the Protocol does apply and it has not been complied with.

What about a claim for commercial property arrears?

Where a commercial lease is let to an individual, the Protocol will also bite. To avoid possible sanctions the Protocol should therefore be complied with.

What about a claim against an individual guarantor?

The Protocol also affects a business landlord’s debt claim against an individual guarantor so again, should be complied with to avoid possible sanctions.

Other remedies available to a business landlord

The Protocol only affects debt claims; therefore it will not have any impact on the other avenues available to landlords where there are arrears such as forfeiture by peaceable re-entry and Commercial Rent Arrears Recovery (CRAR) (where applicable). With regard to residential property, the S21 possession procedure will also not be affected (as the claim is just for possession and no debt).

There is also the option of serving a statutory demand against the individual subject, to the debt being £5,000 or more and where there is no genuine dispute. Although the Protocol applies to a business claiming payment of a debt from an individual, it also sets out the conduct the court will normally expect from parties “prior to the start of proceedings“. Serving a statutory demand is a different process to starting court proceedings and therefore the Protocol does not apply. The threat of bankruptcy may work, as an incentive for the tenant to pay, and if the case, will be a significantly quicker process for the landlord to recover the sums owed.

The future

It remains to be seen how courts will interpret the Protocol, with respect to landlord’s pursuing arrears. It may be that it will serve as a deterrent to landlords, that fewer claims are issued and that there is more use of alternative remedies available, at least in the near future, but we shall have to wait for clarification from the court and see how things develop. In the meantime, to avoid possible sanctions, a landlord should consider the Protocol carefully, before issuing a claim against an individual.

This article first appeared on the PLC Property Blog.

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