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Tenancies binding on the lender

This content applies to England

Information needed to establish whether a tenancy is binding on the lender.

When the tenancy is binding on the lender, the lender cannot enforce possession against the tenants even if it has recovered possession of the property from the borrower/landlord. The tenants will pay rent to the lender which will become their new landlord, and will retain the security of tenure that is appropriate to the tenancy.

If the lender appoints a receiver under the Law of Property Act 1925 to collect rent directly from the tenants (see 'Receivership' below), this will not create a new tenancy and the borrower will remain the landlord.

There are three situations when the tenancy will be binding on the lender.

Tenancy granted before the mortgage

If the tenancy was created before the grant of the mortgage to the borrower/landlord, the tenants will have an 'overriding interest' binding on the lender, ie the tenants' interest will take precedence over that of the lender. This scenario is unusual where the lender seeking possession is the lender of a first mortgage. It is more likely to occur where the borrower/landlord:

  • remortgaged the property with a different lender after the grant of the tenancy
  • took out a second loan secured on the property, and the lender of this loan recovered possession from the borrower
  • changed during the course of the tenancy, and the new landlord took out a mortgage to purchase the property.

Date of mortgage registration

Most property is subject to compulsory land registration whereby certain interests must be registered with the Land Registry.[1] Transfers of ownership of properties, both freehold or long leasehold, must be registered, unless the transfer is the result of a gift or legacy. In addition, lenders will register a mortgage as a charge on the property (although it is not compulsory for them to do so).

An online Land Registry search can be carried out for a small fee in order to establish the date that the:

  • borrower/landlord was registered as the owner of the property
  • mortgage was registered as the lender's charge over the property.

It is not possible to create an overriding interest between the date of the transfer of ownership of a property and the date of registration of an interest at the Land Registry, so where a tenancy is created after the date of the transfer of ownership but before the mortgage registration, it does not create an overriding interest over the lender's interest.[2]

Lender consents to tenancy

A tenancy is binding on a lender if the lender has consented to the creation of the tenancy. Council of Mortgage Lenders (CML) guidance states that 'if the tenancy was created after the loan was entered into but was consented to by the lender, on possession the lender will take the property subject to the terms of the tenancy'.[3]

Regardless of the type of mortgage agreement, it is important to consider the borrower's rights to grant tenancies under the terms of the mortgage agreement to ascertain whether or not the lender consented to the creation of the tenancy.

Explicit or implied consent

It is arguable that the lender's consent must be explicit, rather than implied.

In one case, where a lender granted a standard mortgage to a borrower on a property that consisted of several bedsits already let to tenants, which contained a terms prohibiting the granting of tenancies without the prior written consent of the lender, it was held that the lender was not bound by the tenancies, even if, as it was argued by the tenants, the bank must have known that the bedsits in the property would be let out.[4]

Buy-to-let mortgages

Buy-to-let mortgages are granted to enable the borrower to buy a property to rent out. CML guidance states that: 'Generally the terms and conditions of a buy-to-let loan will include consent to tenancies. Provided those terms and conditions are complied with, the tenancy will be treated as having consent to tenancies'.

This means that the majority of tenancies in buy-to-let mortgages will have the consent of the lender and will be binding.[5]

Ground 2

If the lender has consented to a tenancy, it may be able to apply for possession against the tenants using ground 2 of Schedule 2 of the Housing Act 1988 (see the page Mandatory grounds: Assured tenancies for more information about ground 2). For ground 2 to apply, the borrower/landlord must have given the tenants notice in writing prior to the start of the tenancy stating that this ground might later be relied upon. However, the court can dispense with this requirement if it is considered just and equitable to do so.

A similar ground applies to tenancies protected under the Rent Act 1977 (see the section Regulated (protected) tenancies for more information), but only where the property was the landlord's own home at some time before the tenancy began.[6]

Lender accepts the tenancy as its own

If the tenancy did not predate the mortgage or the lender did not consent to the tenancy, the tenants will only continue to have a right to remain in occupation after a possession order against the borrower/landlord takes effect if the lender accepts the tenancy as its own.

Mere knowledge by the lender of the existence of a tenancy will not be sufficient.[7] It will be necessary for the facts to support a conclusion that the lender's actions are such that they amount to the creation of a new tenancy. For example, in a case where the lender's solicitors wrote to the tenants informing them not to pay rent to their former landlord but to make a new arrangement for the payment of rent to the lender, this was held to have created a new tenancy.[8] However, acceptance of rent payments from an occupier who did not identify herself as a tenant did not constitute acceptance by the lender to treat the occupier as its own tenant.[9]

A tenant is not liable to pay rent to the lender once the possession order against the borrower/landlord has been made, although if s/he remains in the property the lender can seek payment for use and occupation.

Status of the new tenancy

If a new tenancy is created by the lender, it is likely to be an assured shorthold tenancy because this is the default tenancy for tenancies created by private sector landlords after 27 February 1997. As such it will be relatively simple for the lender and new landlord to recover possession against the tenants (see the page Notices: Assured shorthold tenancies for more information).

Establishing facts

To find out whether the lender is bound by the tenancy or not, tenants can:

  • carry out a Land Registry search
  • contact the landlord and ask when the mortgage was granted
  • ask the court to confirm the date the mortgage was granted (this information will be on the particulars of claim submitted to the court by the lender)
  • contact the lender or lender's solicitor and ask when the mortgage was granted.

Receivership

Most mortgage agreements contain an express power to enable the lender to appoint a receiver to collect rent from the tenants, although this power is also implied into any mortgage agreement by law.[10] The lender does not require a court order to exercise this power. The appointment of a receiver by a lender is most likely to occur with buy-to-let mortgages.

A receiver can demand rent from a borrower's tenant when a power of sale has become exercisable. A power of sale is exercisable when interest under the mortgage is in arrears of at least two months or another term of the mortgage has been breached.[11]

The payment of rent to a receiver does not create a new tenancy because the receiver is deemed to be the agent of the borrower, not of the lender.[12] The borrower remains the tenants' landlord. The receiver can bring possession proceedings against the tenants if the rent is not paid.[13]

Power of sale

The lender (or the appointed receiver) can also exercise the power of sale without obtaining a possession order against the borrower.

Council of Mortgage Lenders members have agreed not to exercise the power of sale without a court order against owner occupiers. However, the agreement does not apply to buy-to-let mortgages (or non-CML members) and the receiver could sell the property with the tenants still in occupation.

Where the power of sale is exercised, the buyer of the property becomes the new landlord and is bound by the tenancy. However, this is not likely to be a common situation as most buyers (and any mortgage lender who may be funding the purchase) normally require vacant possession on completion of the sale.

[1] See Land Registration Act 2002 for details of when such interests have to be registered.

[2] Abbey National Building Society v Cann [1990] UKHL 3; Lloyds Bank plc v Rosset [1990] UKHL 14; Scott v (1) Southern Pacific Mortgages Ltd (2) Mortgage Express : Southern Pacific Mortgages Ltd v Wilkinson & Mortgage Business Plc (Intervener) [2014] UKSC 52.

[3] para 3.3 Industry guidance on buy-to-let arrears and possessions, CML, June 2009.

[4] Lloyds Bank plc v Doyle, CA, Legal Action 17, April 1996.

[5] para 3.3 Industry guidance on buy-to-let arrears and possessions, CML, June 2009.

[6] case 11, Sch.15, Rent Act 1977.

[7] Mann v Nijar (2000) 32 HLR 223, CA.

[8] Chatsworth Properties v Effiom [1971] 1 WLR 144, CA.

[9] Paratus AMC Ltd v Fosuhene [2013] EWCA Civ 827.

[10] s.101(1)(iii) Law of Property Act 1925.

[11] s.103 Law of Property Act 1925.

[12] s.109(2) Law of Property Act 1925.

[13] s.109(3) Law of Property Act 1925.

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