Many people bought property before and during the boom expecting that by increasing equity over a period of years they would get a better return than they would otherwise. The plan was to buy a property at a reasonable price, let it out for a few years, sell it on and pocket the profits. Hence the boom extended to what became known as the ‘Buy to Let’ sector.
The idea was simplicity itself. An individual or a couple with a reasonable disposable income purchase a property and let it out to tenants. Mortgages of up to 100% were easy to come by and rents were buoyant. In principle and generally in practice the rental income more than covered the monthly mortgage payments. The property increased in value year on year and in due course the sale of the property would yield a nice little profit, even allowing for capital gains tax. For many the temptation was repeated and rather than limit their ambitions to one or two properties, they bought multiple properties, sometimes hundreds.
And then the bubble burst. The continuous increase in property values slowed down and eventually began to go the other way as property sales volumes and prices tumbled. The demand for rental properties began to reduce and rental income began to fall. Suddenly those who entered the ‘Buy to Let’ sector found that they were unable to reverse the process easily. As demand for property fell so did prices. And so did rental incomes. The mortgage payments on some properties began to exceed the rental income. Letting sometimes became impossible.
The term negative equity re-entered the vocabulary – in truth, it had never gone away. Because selling properties at a loss was an unattractive option, people held on to their ‘Buy to Let’ properties for too long. Instead of the hoped for recovery in the housing market, things got worse. As a result many such investors found that they were insolvent. Their disposable income was insufficient to bridge the gap between their (multiple) mortgage payments and their rental income. Mortgage payments fell into arrears and they began to seek solutions for their financial difficulties.
Having considered all of their options including entering into Individual Voluntary Arrangements (IVAs) and given that selling the properties would lead to shortfalls, many debtors petitioned for their own Bankruptcy (BCY) or one of their creditors so petitioned. They found that a crucial factor in their BCY would be the approach of the Official Receiver and/or of the Trustee in BCY.
Buy to Let in Bankruptcy
The bankrupt’s estate vests in the trustee immediately on his appointment taking effect or in the case of the official receiver, on his becoming trustee. The trustee can disclaim any onerous property and any property in significant negative equity would be regarded as onerous property.
Property with equity of up to £1,000 – deemed ‘de minimis’ – can usually be bought back from the trustee for a nominal sum. It is not entirely uncommon for the family of a bankrupt to buy back such a property on payment of £1 plus the official receiver’s costs of £211.
If the equity in the property is in the range of £1,000 to £5,000 then the trustee may seek to register a charge on the property rather than trying to realize this equity by having the property sold thus avoiding the risk that the sales price might not reach market value and that the net equity realized (after discharging the mortgage) might not cover the cost of sales.
If the equity in the property exceeds £5,000, the trustee may seek to sell the property and to realize the equity for the benefit of creditors and to discharge the costs of the bankruptcy. The bankruptcy laws deal in great detail with the rights and duties of the trustee and the bankrupt and the rights of other parties such as the bankrupt’s family and of creditors.
Where a bankrupt owns one or more ‘Buy to Let’ properties it appears that there has been a relatively recent change in the attitude of some trustees to the treatment of such properties. Historically where there was little or no equity in such a property, trustees allowed the bankrupt’s family to ‘buy back’ the property and allowed the bankrupt to manage the letting of the property and the servicing of the mortgage. Any surplus income thus generated would constitute part of the bankrupt’s disposable income and be subject to an income payments order. Thus the trustee could receive payments from the bankrupt for up to three years.
More recently, it appears that some trustees seek to seize control of such ‘Buy to Let’ properties and to assume all responsibility for them: receive all rental income; pay the mortgage and all associated insurance & maintenance costs; deal with all letting and tenant issues and take all the day to day decisions relating to the properties. Should the properties go into significant positive equity in the first three years of the bankruptcy, the trustee would also be in a position to realize the equity before the term expires in which the property re-vests in the bankrupt.
The motivation for this apparent change in approach by trustees is unclear unless they expect to improve the returns for creditors by taking such action. Should you become bankrupt and the trustee is intending to seize control of your ‘Buy to Let’ properties, you should seek to obtain legal advice on this matter.