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Trust Deeds and Sequestration in the Social Housing Sector

Trust Deeds and Sequestration in the Social Housing Sector

It is a frustrating situation for Registered Social Landlords (RSLs) when tenants become insolvent and any outstanding debt becomes irrecoverable. Below we answer some common questions around tenants signing trust deeds and sequestration.

Are we obliged to write off any debt? At what stage do we do so?

When a tenant enters into a trust deed, any tenancy debt is affected only if that trust deed proceeds to become protected. You should initially receive communication from a trustee advising that the debtor/tenant has entered into a trust deed and providing you with an opportunity to object to it becoming protected. If enough creditors object, the trust deed will remain unprotected, and that means creditors have a choice about whether they want their debt repaid through the trust deed or from the debtor directly.

If, however, the trust deed proceeds to become protected, the landlord can recover any debts outstanding as at the date of protection only from the trustee. This means the debtor themselves cannot be pursued for the debt which is outstanding at the date of protection, which is sometimes why landlords think that the debt has to be written off. The position is the same if the tenant is sequestrated - the debtor cannot be pursued for debts as at the date of sequestration.

In effect, the debt due is 'removed' from the account as the tenant can no longer be pursued for it and the balance starts from 0 again at the date of protection/sequestration. What can (and should) happen, however, is that the debt is instead claimed from the debtor's estate which is being administered by the trustee. Creditors should receive a claim form from the trustee, which allows the landlord, and other creditors, to set out the details of the debt due. All creditors should then receive a dividend from the debtor's estate in proportion to the debt due (for example, 10p is paid back to creditors for every £1 due). In reality, very little sums are usually recovered from the trustee as the debtor normally has such little assets or so many debts. So, practically speaking, the debt is normally not recovered in full and the remaining debt is 'written off'.

You should bear in mind that the tenant is still directly responsible and liable for any ongoing rental charges or debts which accrue after the date of protection/sequestration.

Do trust deeds or sequestration affect the tenancy at all?

Technically speaking, an RSL still has the Ground for decree for eviction if rent arrears have accrued, regardless of whether the tenant has entered into a trust deed (protected or not) or has been sequestrated. What the landlord cannot do is also seek a decree for payment for the sums outstanding as at the date of protection or sequestration. In reality, however, sheriffs normally take insolvency into account when assessing 'reasonableness' which is necessary before awarding decree for eviction. Previous case law suggests that a sheriff will not consider it reasonable to grant decree where the tenant has been sequestrated or entered into a trust deed and debts have had to be written off.

Do we have any recourse if debt is written off?

Unfortunately, all of the above does not leave the landlord with much recourse in terms of recovering debt which has vanished in the insolvency process.

The Accountant in Bankruptcy website has some useful guidance on the process around bankruptcy and trust deeds.

There is also a public insolvency register which you can use to ascertain whether a tenant has entered into a trust deed, whether the trust deed is protected, has been sequestrated, and details of the trustee involved.

If you would like any advice in relation to trust deeds and sequestration, please contact our experienced social housing team.

Trust deeds and sequestration

Written by : TC Young

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