If certain criteria are met, a rent deferral letter has the potential to be a regulated credit agreement under the Financial Conduct Authority's consumer credit regime. With more tenants seeking side letters to defer rent payments, it is important that landlords understand what amounts to a regulated credit agreement and what the consequences are if they enter into these types of agreement without authorisation from the UK's Financial Conduct Authority (the FCA).
What is a regulated credit agreement?
A lender enters into a regulated credit agreement if they:
- provide credit: 'credit' has a very wide definition and includes any form of financial accommodation - Rent deferral is likely to be considered a form of credit;
- the credit is provided to a 'protected individual' which includes an individual, a partnership which consists of two or three persons (provided not all of them are corporate bodies), an unincorporated body of persons which does not consist entirely of corporate bodies and is not a partnership (such as a trust) and a sole trader;
- the credit is provided by the lender 'by way of business' (i.e. in the course of a business run by the lender); and
- none of the available exclusions apply.
How could this apply to a rent deferral letter?
If landlords enter into rent payment plans with tenants which are corporate entities (not 'protected individuals'), then these arrangements will fall outside of the FCA's regulatory regime.
Rent payment plans may also avoid being classified as regulated credit agreements if an exclusion applies. Exclusions are listed in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Each exclusion has conditions which must be satisfied for the exclusion to apply. There is no specific exclusion which deals with deferral of rent payments, however some of the exclusions could apply if the relevant conditions are met. The two most useful exclusions are summarised as follows:
1. A credit agreement will be exempt if the tenant is required to repay the credit in not more than 12 instalments and within a period of 12 months or less (beginning on the date of the agreement), provided the credit is either secured on land or is provided without interest or other charges.
2. Another exclusion is where the credit exceeds £25,000 and the credit agreement is entered into by the tenant wholly or predominantly for the purpose of a business carried on by the tenant. Therefore, if the tenant is using the property for business purposes and the rent deferred amounts to £25,000+ credit, this exclusion can be relied on.
What are the consequences?
As explained, there are some exclusions available which may apply to rent deferral agreements to ensure that they do not amount to regulated credit agreements. If no exclusion applies, the rent deferral agreement could be a regulated credit agreement and entering into the agreement would, in principal, be a criminal offence if the landlord is not regulated by the FCA (which is likely). Note that the FCA has a number of enforcement powers available to it, including uncapped fines and senior members within the organisation could be held personally liable (they could also be fined and/or face up to two years imprisonment).
As the government has encouraged landlords to enter into these types of arrangements, we would be surprised if the FCA brought enforcement action in the circumstances, even where none of the exclusions apply and the rent deferral arrangement amounts to a regulated credit agreement. To do so would seem to go against the government's intentions. Unfortunately, neither the government nor the FCA have clarified the position – hopefully they will do so in due course. For now, landlords should exercise caution in entering into these types of agreements and landlords should seek to ensure that an exclusion applies in any event.