A little more breathing space for tenants? Debt relief moratoria and the Renters (Reform) Bill

Dr Lois Lane considers the impact of the Renters (Reform) Bill on the “Breathing Space Scheme".

What is ‘Breathing Space’?

The ‘Breathing Space Scheme’, as it is colloquially known, has been in operation for over two years now. Introduced via the Debt Respite Scheme (breathing space moratorium and mental health moratorium) (England and Wales) Regulations 2020 (“the Regulations”), which came into force in May 2021, the scheme is designed to assist people struggling with problem debt by providing temporary protection from enforcement action by creditors.

The Regulations introduced two temporary protections: the breathing space moratorium and the mental health moratorium. The former offers individuals a period of respite from their debts, during which they are protected from most forms of creditor enforcement action. While a breathing space moratorium is in effect, creditors cannot take legal action to recover the debt, make further demands for payment, or add interest and charges to the debts covered by the scheme. The moratorium lasts for a specified period, usually 60 days, but can be extended in certain circumstances.

To qualify for a breathing space moratorium, a debtor must seek advice from a debt advisor, who will assess their individual circumstances and determine whether they meet the eligibility criteria. Debtors must continue to work with their debt advisor during the moratorium to work on a sustainable solution to their debts. Landlords will receive a notification letter if a tenant has qualified for the scheme.

A mental health moratorium provides protection for individuals who are receiving mental health crisis treatment. It lasts for the duration of the mental health crisis treatment, plus 30 days after it ends. This treatment can be provided in a hospital setting or in the community by a specialist mental health service, but the mental health condition must be of a serious nature. Ongoing GP treatment for more routine mental health complaints will be unlikely to suffice.

What is the current position in relation to Breathing Space, rent arrears, and action for possession?

Rent arrears constitute a qualifying debt for the purpose of the Regulations. Consequently, landlords, both private and social, are prevented from taking legal action to recover possession of a property on grounds relating to rent arrears for as long as a moratorium lasts. However, a landlord can still serve notice on other grounds (for example relating to anti-social behaviour) or under Section 21 of the Housing Act 1988, while a moratorium is in effect.

Assured shorthold tenancies can therefore be terminated in the usual way under the current system, even where a moratorium is ongoing. This applies in the case of starter tenancies issued by some Registered Providers, although social landlords should be aware of the need to act proportionately and in line with any relevant policies in such circumstances, especially where a tenant has been granted a mental health crisis moratorium. Meanwhile, tenants with secure or assured non-shorthold tenancies will be protected from possession proceedings brought on the basis of rent arrears for as long as a moratorium lasts, though their landlords might still seek to evict them if they are also engaging in anti-social behaviour.

If a landlord has already served a notice of eviction under Section 8 of the Housing Act 1988 and it is due to expire during the Breathing Space period, the notice can be extended by an additional eight weeks, giving the landlord extra time to bring possession proceedings. Moreover, a tenant who fails to pay rent during a moratorium continues to accrue additional arrears, even though they cannot be enforced against of the duration of the moratorium.

Landlords who find themselves prohibited from taking action to recover possession under the current system can seek to rely on the provision in Regulation 17, which allows a creditor to request that a debt advice provider review its decision to grant a moratorium if they consider that their interests have been unfairly prejudiced by the decision, or there has been some kind of material irregularity in the decision making process.

Regulation 17(2) clarifies the matters in relation to which a creditor may request a review on the ground of material irregularity:

• “the debtor did not meet the relevant eligibility criteria when the application for the moratorium was made,
• a moratorium debt is not a qualifying debt, or
• the debtor has sufficient funds to discharge or liquidate their debt as it falls due.”

However, the Regulations do not clarify what is meant by unfair prejudice and there is limited guidance in the caselaw. In Axnoller Events Limited v Brake and Anor [2021] EWHC 2308 (Ch) the Court held that unfairness was to be assessed objectively and on a case-by-case basis. Since every moratorium would prejudice a creditor to some extent, they must demonstrate that the prejudice would be unfair. The Court declined on this occasion to lay down general principles on the meaning of “unfairly prejudicial”, noting that it was still early in the lifetime of the Regulations [27]–[36].

More general principles on the operation of the Regulations were laid down in the case of Kaye v Lees [2023] EWHC 152 (KB), the latest in a series of claims involving the same creditor and debtor. Ms Lees owed a large judgment debt to Mr Kaye, who secured a charging order over her property. An order for sale was made on 6 March 2020, pursuant to which Mr Kaye purported to sell Ms Lees’ leasehold interest to a third party. Ms Lees was evicted from her flat and the third party went into occupation, but Ms Lees had been subject to a breathing space moratorium. She had been granted a series of four mental health crisis moratoria made under the Regulations, as a result of which it was held, in a judgment handed down on 13 May 2022 (Lees v Kaye [2022] EWHC 1151 (QB)), that the sale and the eviction of Ms Lees from the flat was null and void.

However, in the most recent case, HHJ Dight CBE (sitting as a Judge of the High Court) held that Ms Lees did not satisfy the criteria for initiation of a further mental health crisis moratorium. He held that the necessary conditions are “(1) the debtor is suffering from a “mental disorder of a serious nature” and (2) in respect of that disorder the debtor is receiving “crisis, emergency or acute” care or treatment in hospital or in the community” [34]. He further laid down some general principles on the meaning of “unfair prejudice”, while concurring with the overall conclusion in Axnoller Events that what constitutes unfair prejudice to the creditor will need to be decided on a case-by-case basis. Of particular relevance, the Court in Kaye v Lees confirmed that “post-moratorium conduct can alter the balance of prejudice. Improvement in condition may enable a debtor to engage with the debt problem, and failing to do so having sufficiently improved might make the moratorium unfairly prejudicial” [40]. Finally, in order to prevent Ms Lees from seeking further Breathing Space or Mental Health Crisis Moratoria, the Judge granted an Injunction prohibiting her from applying for any further Moratoria for a period of 2 months.

To summarise the current position therefore:

• Possession proceedings cannot be brought against a tenant subject to a breathing space moratorium on grounds of rent arrears.
• Landlords can still serve notice in these circumstances under Section 21, provided the tenancy is an assured shorthold tenancy, or on grounds relating to issues other than rent arrears.
• Social landlords should be mindful of proportionality considerations if serving a Section 21 notice on a tenant subject to a moratorium, especially a mental health crisis moratorium.
• Landlords can apply to have the decision to grant a moratorium reconsidered under Regulation 17 if they consider it was wrongly granted or that they have been unfairly prejudiced by the grant.
• What constitutes unfair prejudice to the creditor will vary on a case-by-case basis. A grant can retroactively become unfairly prejudicial if the debtor’s financial position or mental health condition improves sufficiently for them to engage with the debt and they fail to do so.

How will the Renters (Reform) Bill change the current position?

The abolition of Section 21 will give tenants subject to debt relief and mental health crisis moratoria an extra layer of protection against eviction. Landlords will not be able to serve notice on a tenant for rent arrears alone for as long as a moratorium remains in place, though they will still be able to serve a Section 8 notice on other grounds.

With Section 21 taken off the table as an option for recovering possession and uptake on the Breathing Space Scheme continuing to grow, we should expect to see an increase in landlords seeking to challenge decisions to grant moratoria. In particular, landlords are likely to scrutinise extended or repeated mental health crisis moratoria carefully, to be sure that the tenant really is receiving crisis treatment for a serious condition. Whether the Courts will respond to the new legislative framework when considering the balance of prejudice between creditors and debtors in residential possession cases remains to be seen.

Dr Lois Lane is a second six pupil at Cornerstone Barristers.