Q&A: What the Debt Respite (Breathing Space) Scheme could mean for letting agents

The Debt Respite Scheme, or "Breathing Space" law, will come into effect on 4 May 2021 in England and Wales, to "give someone in problem debt the right to legal protections from their creditors". Landlord Action's Legal Director, Tim Frome, answers questions from Goodlord's Oli Sherlock about what the new scheme could mean for letting agents, landlords, and their tenants.

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Tim, can you start by taking us through what the Debt Respite Scheme is?

These regulations have not actually come into force yet, they're due to come into force on 4th of May, and it's going to be all new, so we are going to have to be an element of "suck it and see" with exactly how tenants use these regulations, but what I'll try to do now is give an overview of how we see it, of how the guidance is set out, what the aims and the objectives of the regulations are and what we know to be behaviour in terms of both tenants and landlords and agents. In summary, this scheme comes under the Debt Respite Scheme Breathing Space Moratorium and Mental Health Crisis Moratorium, England and Wales Regulations 2020. It was actually passed last year.  It's not just about the property industry, believe it or not, this is actually regulations that are in place to help people with all kinds of qualifying debts. It just so happens that it's going to be very relevant for the industry generally, because it does cover where a tenant will have a debt that can be a trigger for a tenant being able to try to use these regulations.

So, this isn't a result of the pandemic, is it? This has something that's been in the pipeline for what about four or five years, through campaigning initiatives from different parties. The timing of this is interesting, because of course, you could argue it's more relevant now in the rental space than it would have been 13 months ago, but it isn't a direct answer to the pandemic itself, right?

No, this is not. This is not based purely on Covid-19 and actually it was delayed while the government were looking at the impact. They were planned by the government and a lot of work has gone into putting this together. It just so happens that now is the time that we need to start really thinking about it and looking at the impact, because it is coming into play on the 4th of May. There are three different types of Breathing Space that are going to be provided to tenants. There's something called the Standard Breathing Space, where the person has one of these qualifying debts, of which rent arrears will be one - other types of qualifying debts, just to give a bit of context, are credit cards, store cards, personal loans, payday loans, overdrafts and utility bills, so it does cover quite a lot of different types of debts that a person may have. What they are able to do is go and visit a Debt Advice Provider. It has to be a Debt Advice Provider who is authorised by the Financial Conduct Authority to offer Debt Counselling, or it could be someone within a local authority, where they formally provide debt advice to residents. They're the two debt advice providers that are able to confirm that there is a person that is suitable for one of these breathing spaces.

With that in mind Tim, do we expect functions of our existing advisors for example, to be front and centre of this kind of initiative, or would they not quite qualify?

I would be looking specifically at how they can get themselves authorised. I haven't seen any publicity released by Shelter or Crisis or any of these other organisations yet. So again, this is a little bit of a "Watch this space," to see what happens here. 

We don't really know how this will be utilised yet, do we?

What's interesting is obviously the process for entering into one of these arrangements is not yet clear. However, the impact of once someone does enter into one of these things, is quite serious. The mental health crisis process is actually where someone is also in the same situation or they've got qualifying debt, but they're also under observation by a mental health professional. That mental health professional is going to have to provide information to the FCA Authorised Debt Advice Counsellor, to say that the trigger's there for them to be eligible on the mental health side of things. The difference is that if someone enters into a standard breathing space, this will be for a period of 60 days, but the person can only enter those once a year. With the mental health breathing space, they last 30 days, but as long as the issues that the person is facing are ongoing, they can keep entering into a new breathing space every 30 days, so this is where there's going to be a little bit of a difference between the two types of Breathing Space that a person can enter into. 

On that basis, this initiative is time sensitive, because ultimately this doesn't say that your liability goes away in the future. In fact the wording actually, compels the individual to still be liable for any future payments. So can we just talk through how that would work in the context of rent, maybe?

Again, it's not fully clear exactly how a debt advisor is going to interpret some of these requirements, but from what we can see, the Breathing Space is what it says on the tin, so to speak, to give the person some breathing space to rearrange their finances so that they are able to meet the liabilities that they have and are owing. There aren't any elements to say that, an amount owing is written off or anything like that. It really should just be a situation whereby the person is given some professional advice by the debt advisor on how to rearrange their finances to be able to pay the amounts owing ongoing, or in the future. If there are ongoing liabilities that are owing, for example the rent, the tenant is still liable to pay that and they should be paying it as they're going along really. But again, we're going to have to wait and see what happens in practice, because once the Breathing Spaces has ended, say all of the money that was owing is still there, the landlord or the agent, is still going to have the capability to recover that money in the future, using legal means - it just means that the tenant would've had that breathing space for those 60 days to try and rearrange their finances to actually help them to cover the amounts that they are owing.

That's an important point, isn't it? Because the advisor should recognise - again we're dealing with hypotheticals here - that these actions are only applicable where the tenant actually has a chance of making up the debt, right? These aren't designed to go, "Okay, you've got 10 months worth of arrears, you don't have a job, you have no source of income, no savings, you are further down on your credit card", et cetera, et cetera. If there is no possible, well obvious way forward, then actually this shouldn't come into play, should it?

It shouldn't. The debt advisor would be not be acting in accordance with the regulations if they just sign someone off for a Breathing Space in that situation.

Does this mean that a notice couldn't be served during this time?

In that period, you can't take any action. Not even a phone call. We don't know exactly how tenants are going to enter into these in the first place, but if the do enter into one of these, the impact is quite serious in that you basically, for those 60 days, from when you're informed that the tenant has entered into one of these, you literally cannot do anything, in terms of chasing the money from them, you can't contact them, you can't serve a notice.

Can anybody with debt apply for the Standard Breathing Space? Is there a figure that the debt must be before they can do it?

The guidance doesn't make any reference to a specific figure. So it has to be a debt which is a qualifying debt, then it should really should be the job of the debt advisor, to be able to look and see whether there's any way that that person can cover that debt in the short or immediate term really, before entering into one of these Breathing Spaces. Because if it is only a small amount of money, then really they should be able to try and find a way to get that covered straight away. It's only when it's going to be a slightly large amount of money and they're going to need to use their other skills that they should have in that role to be able to help the party to rearrange their finances and cover the amount.

And if I remember the wording correctly,  it said that it's a 12-month window on this Breathing Space initiative, i.e. you can action this, but you can't then go again within the next 12 months, is that right?

You can only enter into one every 12 months, for a Standard Breathing Space.

One of the key points here  is that this wasn't devised for arrears. Arrears have been encapsulated in this, but this actually comes on the backdrop of payday loans, store cards, credit cards, etc. So what we're probably yet to see, I think we said a few times now, is the actual knock on effect on arrears.  But from an agent's perspective, how is this scheme going to work for them? Do they have  a role to play here or actually, is this very much on the tenants, and if they choose to go down that route ultimately, that will be their choice?

What we do know is that from dealing with possession claims at the moment, there is an onus on landlords to be explaining what the effect the Covid-19  pandemic has had on the tenant and make reference on the claim form as to whether the tenant is claiming any form of benefits as well. So there is an argument that if the person is in quite severe rent arrears or has quite a severe financial situation, that some questions should be being asked of the tenant as to whether they are entering into that kind of arrangement, whether they've thought about applying for universal credit or any other benefits they're entitled to, whether that also includes taking advice on entering into a Breathing Space as well, we haven't seen that yet.

There's a lot of information that's provided to tenants as part of the claim process now, particularly at the review hearing stage and the tenants are given the opportunity to obtain free legal advice or they're given information on the notices about different areas in which they can obtain advice and at that point, it's likely the other third parties may be pointing tenants in this direction. Whether they would have then the time, I guess, to make the appointment, get it all signed up and what have you, again, we're not too sure yet, because again, we're not too sure exactly how long it's going to take for someone to actually get signed up for one of these Breathing Spaces. But it's something that we have to be mindful of in the future.

Let's just drill down on who can apply for this scheme. This is any adult in the UK, or England?

It will have to be an individual, they have to owe a qualifying debt, they have to  live or usually reside in England or Wales. It also says they shouldn't " have a debt relief order or an individual voluntary arrangement with IBA or an interim order". So basically someone that's already gone down a formal step in terms of an arrangement with their creditors can't get one in that situation. Then also, If you already have had one in the previous 12 months, then you can't enter into a new one. There are a couple of interesting points in the guidance that says the debt advisor must be satisfied that their client meets both of the following conditions - that if their client cannot or is unlikely to be able to repay or all or some of their debt, and the that the Breathing Space is appropriate for their client, so this makes it clear that at that point in time, they need the 60 days to really be able to look at their finances and reschedule the way that they're dealing with their money. And that period of time will be suitable to enable the person to actually be able to cover the amounts in the future.

This is for any individual in England and Wales, with a qualifying debt. So, arguably you could see landlords in this position too, couldn't you?

Exactly. If the landlord has a qualifying debt, then there's no  reason they can't enter one of these as well. Mortgage arrears are actually a qualifying debt.

And arguably, after the last 12, 13 months, landlords are in a very difficult position. So this most definitely can affect both sides of your business to a certain degree. Another question is, how do we know for certain they've entered into these arrangements. This is a formalised process, right? 

It has to be signed off by the authorised debt advice provider. There's also a database kept by the Insolvency Service, of everyone.

Do we expect this to feature as part the individual's credit file or too early to know?

Yep, too early to know, but the facts are that it's going to be on the Insolvency Service database and they're using legislation to provide themselves with some form of break from having to pay creditors. There's a high possibility that there will be a knock on effect to their credit rating on the back of this.

The presumption is that any interest payable will be stopped, effectively they have 60 days to pay nothing, they can't be touched at all, can they, in that period of time?

No. They can't be chased, quite rightly. So as we touched on,  they can't email them, ring them up, ask them to pay the amount that are owing at that point in time, you can't serve Section 8 Notice on them, if they're in rent arrears, if there is a claim ongoing in the courts, so you've already actually issued a claim, that claim, look again, we're going to need formal clarification on this point, but it looks like you're going to contact the court to stay the matter for 60 days, so that will mean not having a hearing, and also if you have managed to obtain a possession order, but then you become aware that the tenant's entered into a Breathing Space, you're not going to be able to apply for the bailiff for a writ to enforce the possession either for that time period. So these are all quite serious steps that need to be taken into consideration.

This could all sound scary, but just to reassure letting agents, this comes down to the timing of the application of the Breathing Space, right? So that would suggest that in this, the application has come in, at the very, very last second, even potentially after the last second. But again, our expectation is that actually, if people are going to use it, that's probably when it will be used, because it just gives a further delay to essentially being removed from your home. But arguably if you've got to that point, you've passed the point of no return anyway from a debt perspective.

And this is the point. If you're at the stage, particularly towards the end of a possession claim, and what we know, with the amount of arrears that have been building up during this period, there would seem to be little hope that the tenant will be able to pay off those arrears. So the debt advisor shouldn't be looking at the fact they've got 10,000 pounds worth of rent arrears, having a 60 day period to try and refinance some bits here and there is not going to be sufficient to be able pay that off. So, you'd like to think that the Authorised Debt Advisors who, as I say, have to be FCA authorised, would be giving the correct advice in accordance with the law. They shouldn't be advising or applying for the person to enter into a Breathing Space in that kind of situation. If, for example, it's only one or two months rent arrears at the beginning of the process, and that some help could be provided to enable them to pay that amount off, then maybe it would be appropriate. So that's the kind of thing we're going to have to see.

I think the fear around this is that it could drive a significant process down to a very, very, very slow pace, maybe even slower than it is now. But again, a lot leans on that debt advisor. If they are not doing their role properly, then ultimately that is going to allow the scheme to fall down and not deliver the appropriate action that it's designed to do. If a tenant qualifies for the Respite Scheme, will a guarantor automatically be joined in this Respite and will they be notified by the FCA debt advisor?  Thinking about GDPR here.

From what we understand, and I've spoken to some other legal individuals within the industry about guarantors, we do not feel that guarantors will be affected, so if there is a guarantor, you can still speak to them to try and make sure that any amounts are paid, so if the tenant has the Breathing Space, it does not also encapsulate the guarantor. In terms of GDPR, it's always a touchy subject, I think what is likely to happen there is that the tenant themselves obviously give authorisation to the debt advisor to then provide information to all their creditors that they've entered into it, so that GDPR point is covered. But I think we're going to have to look at what happens.

But arguably on that point the guarantor is liable, whether in Breathing Space or not technically, or should be. It's simply there's been a breach on the contract and therefore it needs to be fulfilled. Another question that's come through Is whether this scheme is being backdated? So if a tenant's already in a large rent arrears, can they apply? 

My understanding is indeed yes. It's relevant to our individual circumstances at that point in time, once the initiative starts. But again, if they're in large arrears, then ultimately they're going to have to prove that's a manageable debt, first, it's a manageable debt and that again comes down to the debt advisor.

Say one tenant from a joint tenancy enters the Breathing Space initiative? Does that then automatically affect the other tenants?

This does raise an interesting point about joint tenants. So you might have one joint tenant enter into a Breathing Space and then what's the impact on the other joint tenants? So does that mean you can't obviously contact that one tenant, but then they're jointly and severally liable in most situations, so that just mean that the others are going to have pickup the slack in the meantime.  Remember, if you're going to serve Section 8 notice, it has to be on all the tenants in the property.You can't serve a Section 8 against just one. So in that situation, in terms of a claim, one tenant could potentially manage to delay matters when it's only one person that's actually involved. So again, this is something that we're going to have to see, when it occurs.

You mentioned Section 8 and when I first read through the guidelines on this, it occurred to me this was specifically around the debt itself. It is not there to protect tenants from eviction. So could you serve a Section 8 Notice per se anti social behaviour if it's a separate issue? And our understanding is, indeed you can take other relevant action, for any other breach of the agreement, and continue with that without any barrier due the Breathing Space initiative.

That's correct. As long as the Section 8 Notice is being served isn't on the rent arrears - so you can't use grounds 8, 11 and 12 - , you can use the other grounds. You can also go down Section 21 route as well, as long as you're not claiming any rent arrears.

Another question - if the registered debt advisor comes to us with a proposal for paying the debt within say 60 days, are we required to accept that, even if it's not what they would deem satisfactory? This isn't a directive, is it, it's a space for them to get sorted themselves more so than a directive back to the debtors?

Yes. If the debt advisor is doing their job properly, they should be proactively trying to come to arrangements with people to get the amounts paid. So it is possible the agents will start getting direct contact from these people to see if they can enter into arrangements and what we do know is that forms of mediation and discussions with parties to try and keep tenancies ongoing, particularly while the pandemic's been going on, has been heavily favoured by the government and the courts. But there's not actually any formal requirement to do so though. They are likely to try this, whether it's suitable or not, it will be taken on a case by case basis, I think.

What kind of notification would we expect, because we can't just take someone's word for it. We do expect there to be a formalised document that shows the tenant is in the scheme, you shouldn't just be taking the tenant's word for it, they do have to go through this process with a regulated advisor and I think it's fair to say, if that wasn't provided or forthcoming, then you can't assume that they are on Breathing Space. You would have to see that document first.

You'd have to see it, and as I say, I assume people will start seeing them quite quickly, so we'll be able to see exactly what it looks like, but yeah. Don't just take the tenant's word for it, it is the advisor that should be contacting the creditor, it shouldn't be the tenant that is handing them one of these.

Someone else has asked if  there's a chance that debt recovery companies will be chasing debts harder now before the scheme kicks in.  I think it's hard to say, right Tim?

Most debt recovery businesses don't take any prisoners, shall we say. They're usually already doing everything they possibly can to try and enforce the debt as soon as they are instructed, so I'm not sure whether knowing this is coming in will make too much difference, but yeah, from their point of view they're going to have to take these into consideration as well, because if they are trying to chase the debt, then it's possible that they're going to be informed by the advisors that they're going to have to hold off for 60 days.

Letting agents and landlords will want to do the right thing and make sure they know what their liability is. This is something they may have to be reactive to, but with the appropriate support or protection actually, this is something that could be quite easily handled.

You'd like to think so. I don't think a huge number of tenants are actually going to enter into these Breathing Spaces because they're not going to fulfil the requirements, but obviously you've got to be mindful if you are notified of one of these and what you're able to do and not do, and in some rare spaces, no communications with the tenant for 60 days, which is the most difficult thing for agents, particularly when you're so used to the main part of your job being actually communicating with your parties.

That no communication is just in relation to the debt, right? I take it they can still communicate with the tenant around anything else to do with the property, just not in regards to the debt itself.

One-hundred percent, and particularly as you know as there are ongoing responsibilities, as you say, just any repair issues as well as yeah, having to obtain relevant certificates and any other issues that may be occurring within the property is fine to discuss those and yeah, provide communication in those areas, just not about the qualifying debt.