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Security of tenure

This content applies to England & Wales

Security of tenure of rental purchasers.

Protection from eviction

Genuine rental purchasers have very little security of tenure, as occupation is by way of a licence and is therefore outside Rent Act 1977 and Housing Act 1988 protection. Rental purchasers are covered by the Protection from Eviction Act 1977 and so it is necessary to get a court order before evicting the occupier.[1] An additional prohibition against eviction without court order is contained in the Consumer Credit Act 1974, in respect of regulated conditional sale agreements in the following circumstances:

  • agreements before 1 May 1998 where credit of less than £15,000 is afforded to the occupier
  • agreements 1 May 1998 onwards where credit of less than £25,000 is afforded to the occupier
  • agreements after April 2008, without financial limit.[2]

Some rental purchase agreements may contravene the Consumer Credit Act in the format of the agreement, and high interest rates and over-valued houses may constitute extortionate credit bargains or, for agreements after 5 April 2008, unfair relationships.[3]

Rental purchase companies generally take action for possession far more quickly than building societies where there has been default on payment.

A rental purchaser in arrears does not have the right to sell because they do not own the property until the final payment is made.

Statutory and equitable protection

Rental purchase agreement means an agreement for the purchase of a dwelling house (whether freehold or leasehold property) under which the whole or part of the purchase price is to be paid in three or more instalments and the completion of the purchase is deferred until the whole or a specified part of the purchase price has been paid.'[4] The definition requires the purchase price to be paid in at least three instalments, so as not to protect purchasers who are allowed into possession in the more usual transaction after exchange of contracts, when normally a deposit is paid followed by the balance on completion.

For true rental purchase agreements, the court has a statutory discretion to protect the occupier from eviction under the Housing Act 1980.[5] The court may adjourn the proceedings, suspend the execution of an order, or postpone the date of possession. The court can grant relief on condition that the occupier makes payments towards the arrears and has the power to revoke or vary any condition that it has imposed.[6]

Rental purchase and Rent Act evasion

Historically, many ostensible rental purchase agreements were prepared not with the intention of selling the property, but to avoid the Rent Act 1977 by seeking not to create a tenancy. It was thought that where there was a bona fide rental purchase intended by the parties, no landlord/tenant relationship would be established.

However, the Court of Appeal[7] then held that entering into possession with the intention of purchasing the property does not bar the application of the principle established by the House of Lords for determining whether a tenancy exists[8] .

Therefore, there may be rental purchase agreements where a tenancy, rather than a licence, is created. In these cases, the tenancy will be protected under the Rent Act 1977 or will be an assured/assured shorthold tenancy under the Housing Act 1988, depending on when the agreement began, except where the tenancy is outside protection for another reason. To establish whether a particular arrangement is a bona fide rental purchase, the following points should be considered. If any of the elements below are present, the agreement is probably not a true rental purchase agreement:

  • where there was no expectation that the occupier would purchase the property (it will be necessary to check the dealings between the parties before the document was signed, for example how the property was advertised, what conversation took place, whether the owner really wanted to sell the property)
  • where the sale price was inflated above market value or the interest rate specified in the agreement inflated as compared to the then current mortgage rate
  • where the term of repayment is unduly long, either in itself or when compared with the length of any leasehold interest granted
  • where there are any clauses in the agreement inconsistent with a bona fide contract for sale, for example a prohibition against assigning, subletting or parting with possession
  • whether the usual investigation of title and property before a purchase/sale was not completed
  • where the parties' actions since the date of the agreement have been more consistent with a tenancy than a bona fide sale
  • whether the occupier instructed solicitors before entering into the agreement.

Occupiers who wish to dispute their status can apply for a declaration in the county court that they are either protected[9] or assured[10] tenants, but agreements entered into after the coming into force of the Housing Act 1996 are more likely to be assured shorthold tenancies. If they are facing eviction, occupiers can use the argument as a defence to possession proceedings.

It is important to bear in mind that it may be to the occupier's advantage to accept the apparent status of rental purchaser if, for example, the specified sale price is at or below the true market value, or if the periodic payments are below a fair or market rent level.

[1] para 61 Sch.25 Housing Act 1980.

[2] s. 92(2) Consumer Credit Act 1974; s.2 Consumer Credit Act 2006.

[3] ss.19-22 Consumer Credit Act 2006.

[4] s.88(4) Housing Act 1980.

[5] s.88 Housing Act 1980.

[6] s.88(3) Housing Act 1980.

[7] Bretherton v Paton (1986) The Times, 14 March 1986.

[8] Street v Mountford [1985] 2 All ER 289.

[9] s.141 Rent Act 1977.

[10] s.40 Housing Act 1988.

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