Tenants of Mortgaged Properties: What Protection is Available?

The amount of protection currently available to a tenant of a mortgaged property largely depends on whether or not the tenancy is authorised. Broadly speaking, a tenant whose landlord has a buy-to-let mortgage and / or who notified his mortgage company of the tenancy will probably be authorised.

The years leading up to 2008 saw a boom in the number of buy-to-let mortgages and borrowers who were new to the rental market. Many of these first-time landlords have struggled to maintain mortgage payments on their investment property, especially at a time when an increasing supply of rental properties has forced down rents. In addition, a proportion of landlords use conventional mortgages, aimed at resident homeowners, to fund their buy-to-let investment properties. A tenant whose landlord has this kind of mortgage is likely to have almost no protection available if the landlord gets into arrears with his mortgage.

An exception would be where the tenancy agreement pre-dates the mortgage - a topic not covered by this article. A tenant in this situation should take legal advice as soon as they are aware of any difficulties with the mortgage – it is possible that their tenancy could take precedence to the mortgage lender’s right to repossess.

The Notice to Occupiers

For most tenants the first indication they may have that the landlord is in difficulty with the mortgage will be the “Notice to Occupiers”. A mortgage lender seeking a possession order is required, by law, to send a letter to the property addressed to “The Occupier”. This letter must inform the occupier that a possession case has been started in respect of the property and give the names and addresses of the lender / claimant and the borrower / defendant. The letter must also give the address of the court were the case will be heard and the date set for the hearing.

Until recently, the occupiers of a mortgaged property only had to be given 14 clear days’ notice of the hearing – although in practice many lenders sent the Notice to Occupiers much sooner than this. However, in April 2009 the law governing the Notice to Occupier changed. Now a lender is required to send the Notice within five days of receiving the hearing date from the court. This should ensure that tenants get at least about four weeks’ notice that a possession claim has been started before the possession hearing takes place.

Anyone occupying a property as a tenant should never ignore mail that is addressed to “The Occupier”. That letter could be the first, and only, warning a tenant may have that their home is at risk.

Authorised Tenants of Mortgaged Properties

Authorised tenants should be in a slightly better position than unauthorised tenants. However, even if tenants are authorised the mortgage company may be unaware of their existence and issue a mortgage possession case in the normal way. If this were to happen the Notice to Occupier would, again, alert the tenant to the threat they faced. An authorised tenant in this situation should immediately contact the mortgage lender.

In a case where a borrower falls into mortgage arrears, and the lender knows that the property is occupied by an authorised tenant, the correct procedure is for a receiver to be appointed to collect the rent. However, this does not mean that the tenant will necessarily be entitled, or allowed, to remain in the property indefinitely. If the mortgage lender does want to repossess and sell the property they need only give any authorised tenants two months’ notice that they wish to repossess and sell the property before they may start a possession case. If the mortgage lender follows the proper procedure, and the tenant has rented the property under an assured shorthold tenancy, the court must grant a possession order in this type of claim.

Proposed Changes to the Law

Although private tenants living in mortgaged properties should now get considerably more notice of a pending mortgage possession case they are still in a precarious position. The current law means that a tenant, who has paid his rent regularly in accordance with a legal agreement entered into in good faith, has virtually no security if the contractual relationship between the landlord and their lender breaks down. The only recourse a tenant in this situation may have is to sue his erstwhile landlord for damages.

In May 2009, after lobbying by leading housing charities, the government announced that it intended to change the law on tenants in this position by making it obligatory for mortgage lenders to give tenants two months’ notice that their home is at risk because of the landlord’s default. Many tenants may feel that even this offers far too little protection from eviction.