Questions have been asked in the House of Commons regarding tenants who have been paying their rent and fulfilling all their other obligations but who nonetheless find they are at risk of losing their home. What protection do they have?
We sympathise with tenants who find themselves in this position. So, what can lenders with the charge on the property do in cases where the tenant is paying their rent, but the landlord is not using this money to meet their mortgage commitments?
It seems it all depends upon what type of mortgage the landlord has and the protection for tenants falls into two distinct groups, and are affected in quite different ways.
The first are those whose landlord has a buy-to-let mortgage, and these tenants are generally in a much stronger position.
The second group comprises those whose landlord has a residential mortgage. A borrower with this type of loan should seek the permission of the lender before renting out the property. Where the lender agrees, it will be bound by the tenancy agreement. That provides protection for the tenant, should the mortgage lender need to take possession of the property or appoint a receiver because the borrower stops paying the mortgage.
In some cases, however, a borrower with a residential mortgage decides to rent out the property without telling the mortgage lender, in contravention of the mortgage agreement and perhaps even fraudulently. These tenants have been disadvantaged and their tenancies put at risk through no fault of their own.
Likewise the mortgage lender. It is quite likely that neither the lender nor the tenant will even be aware of each other’s interest in the property. Both have been put in a difficult position because of the irresponsible behaviour of the borrower.
But while mortgage lenders may sympathise with tenants in this position, it is important to understand that their legal responsibility – reinforced by regulatory requirements – is to the landlord, and not to the tenant.
The lender has an obligation to minimise arrears and get the best price possible for the property. This is likely to lead the lender to seek possession of the property quickly. In this situation, the tenant has few rights.
So how common is this problem? Recent television coverage of the issue reported it against the backdrop of 75,000 mortgage possessions this year.
The reality is, however, that only a much smaller proportion of total possessions – perhaps 4,000 this year, or around 5% of the total, according to the Department for Communities and Local Government (DCLG) – will involve residential mortgages where the lender discovers the property is occupied by tenants.
If tenants are renting from a borrower with a buy-to-let mortgage, they are in a better position. Here, the tenancy is normally binding on the lender if it needs to take enforcement action against the borrower/landlord. The tenant will have the statutory right to notice under their assured shorthold tenancy.
Instead of seeking possession, the lender may choose to appoint a receiver, who will, as far as the tenant is concerned fulfill the role of the landlord, maintaining the property and collecting the rent.
Under an assured shorthold tenancy, a tenant is entitled to the remainder of their contractual period – which is typically six months but can be longer – as notice and to a minimum of two months at the end of that period. In practice, a lender or receiver will often allow the tenant to remain beyond the notice period until rent arrears are paid off or the tenant chooses to leave.
Sometimes, a property may be sold with a sitting tenant. This is rare, however, because the lender has a responsibility to the borrower to obtain the best price for the property, which usually implies sale with vacant possession.
New Advice agency campaign
A number of organisations, including Crisis, Citizens Advice, Shelter and the Chartered Institute of Housing have launched a campaign to help tenants when the mortgage lender takes enforcement action. The campaign calls for courts to be able to delay possession to allow tenants to find an alternative home.
But if there is a residential mortgage on the property, giving the tenant more time to find a new home could put the lender in conflict with the borrower, particularly if it means mortgage arrears build up and the property is eventually sold for less than would have been the case if it was marketed straight away. If the landlord had had adequate mortgage protection insurance for commercial premises the situation would not have arisen in the first place
The campaign also calls for notices to occupiers to be made more obvious and perhaps to carry a risk warning. Landlords Insurance is available to compare online.