Tenant's rights when a landlord is made bankrupt

Individuals can become bankrupt on their own application or as a result of a creditor's petition. People with assets are sometimes made bankrupt by their creditors following a failure to pay their debts.

How the tenants are informed

If someone who rents out property is made bankrupt, the trustee in bankruptcy sends a letter to the tenants to tell them about the bankruptcy. The letter asks for more information from the tenants, including the amount of the rent and details of any rent arrears.

Role of the bankruptcy trustee

The trustee could be the official receiver or a licensed insolvency practitioner. They both follow the same rules set down in the Insolvency Act 1986 and the Insolvency Rules 2016. The main difference is the official receiver works for the government Insolvency Service. The official receiver often deals with the bankruptcy at first, then passes the case to a private insolvency practitioner.

Tenants can check if their landlord has been made bankrupt and who the trustee is on the insolvency register.

Search the insolvency register at gov.uk.

What happens if a tenant is bankrupt

For information about rent arrears and possession proceedings for a bankrupt tenant, see possession proceedings against bankrupt tenants on Shelter Legal.

When someone becomes bankrupt, their property vests in the bankruptcy trustee.[1] Vesting means the rights to the property automatically pass to the trustee. A property the landlord owns and rents out vests in the trustee if they are made bankrupt. The trustee will take steps to release money from all the landlord's property to pay their creditors and cover the costs of the bankruptcy.

A bankrupt's family home is treated differently to a property they rent out. A property the bankrupt lives in can revert to them after three years. A property with tenants in it does not.[2]

Bankruptcy of a sole landlord

The tenancy continues as normal with the trustee stepping into the shoes of the landlord. The trustee can appoint a receiver to deal with the property or deal with it themselves.

The legal title to the property vests in the trustee. That means they take over the responsibilities of the landlord.[3]

Bankruptcy of a joint landlord

If the property is jointly owned, the beneficial interest vests in the trustee. The beneficial interest is the bankrupt's financial stake in the property.

The legal title to the property does not vest in the trustee. That means the trustee does not become the landlord of the property.[4]

Read more about beneficial interest in property on Shelter Legal.

The trustee has a legal duty to release money from the bankrupt's rental property to pay their creditors. They can do this by collecting rent or selling the property.

The trustee is more likely to sell the property if there is equity in it.

Paying rent to the trustee

The trustee or receiver receives rent from the tenant. The income is usually paid into the estate to be distributed to the landlord's creditors. The trustee contacts the tenant to make arrangements to receive the rent payments.

The rent payments are not normally used to pay any mortgage on the rental property.[5] This could mean the mortgage falls into arrears, and the lender could take steps to repossess it.

Trustee sells to a different landlord

The bankruptcy trustee could sell the property to another landlord with the tenant still living in it.

If the landlord is a joint owner, the other owner or a third party could buy out the landlord's share of the equity.

If the trustee sells with the tenant in the property, the new owner becomes the landlord. The tenant pays rent to the new landlord.

Trustee sells with vacant possession

Before the trustee can sell an empty property they must get vacant possession of it. That means they must evict the tenants first.

Trustee disclaims the tenancy

The trustee can decide it is not in the interests of the estate to continue as landlord. If this happens, the trustee will write to the landlord and the tenant to inform them that the tenancy is disclaimed. The tenant will be a tenant of the original landlord again.

The trustee is more likely to disclaim the tenancy if it is likely to be a burden. This could happen if the property is in a poor state of repair, or the tenant has a particularly long fixed term, or a rent that cannot be raised. It is more likely to happen if the tenancy agreement is fully assured, or regulated by the Rent Act 1977.

The trustee could still take steps to sell the rental property if they disclaim the tenancy, but they cannot evict the tenant to do so.

The bankruptcy trustee can evict tenants so the property can be sold with vacant possession. How the tenants are evicted depends on the type of tenancy they have. Most private tenants are assured shorthold tenants.

Use the tenancy status checker on Shelter Legal for help checking a tenancy type.

Ending the tenancy using section 21 for assured shorthold tenants

Most private tenants have an assured shorthold tenancy. That means it can be ended by giving the tenant a valid section 21 notice.

The trustee cannot issue a valid section 21 notice if the original landlord would have been unable to give valid notice. For example, if the landlord did not protect the tenancy deposit, the trustee cannot serve a valid section 21.

Read more about when a section 21 notice is not valid on Shelter Legal.

Ending the tenancy on grounds

The trustee might issue a possession claim on grounds. This means it must set out a reason for evicting the tenant in the notice and the possession claim. Common reasons include rent arrears and antisocial behaviour.

Read more about grounds for possession against assured and assured shorthold tenants on Shelter Legal.

People who live with their landlord or landlord's spouse, ex-spouse, civil partner or ex-civil partner are classed as living in the family home of the bankrupt. A family home is treated differently from tenanted property.

One year delay in taking action

The bankruptcy trustee does not normally take steps to sell a family home for the first 12 months after the landlord's bankruptcy. This is because for the first 12 months, the courts must consider the rights of the family members who live in the property. After the 12 months is over, the rights of the creditors outweigh the rights of the family members.[6]

What happens after one year

After the initial 12 months is up, the trustee will take steps to sell the property. If the value of the property means a sale would not be worthwhile, the trustee might accept a charging order. Only the bankrupt owner can negotiate this with the trustee.

The trustee has three years from the date of the bankruptcy order to deal with it. After this, any property that is classed as a family home reverts to the bankrupt. This is sometimes called the 'use it or lose it' rule.[7] It only applies to family homes, not to property the bankrupt rents out to someone else.