In two recent cases the Court of Appeal has considered the effect of a Debt Relief Order on repossession proceedings: Sharples v Places for People Homes Ltd: Godfrey v A2 Dominion Homes Ltd [2012] 1 All ER 582 and Irwell Valley HA v Docherty [2012] EWCA 704, in which Sharples was applied.

In Sharples the Court of Appeal was asked to consider the effect of bankruptcy (Sharples) and a DRO (Godfrey) on the court’s power to make a possession order. In both instances it was decided that an order for possession was a remedy which restored the landlord’s full proprietary rights, as arising from the contract, and was not a remedy “in respect of” the debt to which IA s285(3)(a) (bankruptcy) or IA s.251G(2)(a) (DRO) applied. Accordingly, it followed that neither a bankruptcy order nor a DRO precluded the court from making a possession order. It made no difference whether possession was ordered before or after bankruptcy had occurred or a DRO was made.

The Court of Appeal also went on to consider what effect a DRO ought to have on the court’s discretion to make a possession order on the discretionary Ground 10 of the Housing Act 1988, that is some arrears of rent. The Court of Appeal accepted that arrears of rent could be included in the qualifying debts to which the DRO applied and that the possession proceedings could not therefore include a money claim for rent arrears nor a suspended order conditional upon the tenant making a contribution towards the arrears. The court could however, indeed should, make a suspended order conditional upon the tenant paying the current rent and any arrears which were not provable in the bankruptcy or were qualifying debts under the DRO.

The Court of Appeal then went on to consider what was described as the difficult issue as to whether the permission of the court was required to bring or continue possession proceedings where a bankruptcy order or a DRO had been made. It was held that the stay provisions of IA s.285(3)(b) or IA s.251G(2)(b) applied only to proceedings relating to the provable debt and did not apply to possession proceedings, such that the permission of the court was not required.

In the case of Docherty the single judge of the Court of Appeal, in an application for permission to Appeal, was asked to consider a slightly different point, which was whether a DRO made after a possession order, and in which the rent arrears formed part of the qualifying debt, had the effect of extinguishing all the rent arrears at the end of the moratorium period, including those that had accrued after the DRO was made. The possession order included a money order for the arrears for £1,316 and a suspension of possession on condition that the tenant paid current rent and a contribution towards arrears. Lord Justice Lewison held that the making of the DRO could not affect the wording of a possession order, which pre-dated the DRO. He also found that the qualifying debt (in respect of the arrears) was limited to the judgment debt included within the DRO and that it was only this amount that was discharged by reason of the expiry of the moratorium. Accordingly, the possession order was not unenforceable by reason of the DRO and the arrears on the running rent account which exceeded the judgment debt of £1,316 were not only recoverable but also entitled the landlord to apply for a date for possession, by reason of the tenant’s default in complying with the Possession Order.

It was argued that there could be circumstances where the tenant had paid all the current rent but not the arrears but could still remain vulnerable to possession where the DRO was made after a possession order and which included a provision for payment towards the arrears. It was said that this would be contrary to the principle set out in Sharples. The court declined to make any finding on this hypothetical but potentially common scenario, whereby further such cases may well yet find their way to the courts.

Neither bankruptcy nor the making of a DRO affects the right of a secured creditor to enforce his security and accordingly the above cases should have no effect on a mortgagee’s right to possession. Furthermore, a secured debt cannot be a qualifying debt for a DRO (see s.251A(3)) and accordingly, provided the loan agreement contains a provision that any arrears can be added to the capital balance and thus become the subject of the security, a DRO cannot include mortgage arrears.

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