Possession proceedings for tenants of mortgagors
Borrowers' powers to grant tenancies, whether a tenancy is binding on the lender, and how tenants of borrowers can become involved in possession proceedings against their landlord.
- Mortgage limitations
- Buy-to-let mortgages
- Effects of breach of mortgage terms
- Is the tenancy binding on the lender?
- Tenancy granted before the mortgage
- Lender consents to tenancy
- Lender accepts the tenancy as its own
- Establishing facts
- Pre-action protocol for possession claims
- Notice of proceedings
- Application to join the proceedings
- Offers of payment
- Possession orders
- Notice of execution of possession order
- Application to suspend or set aside execution
- Appointment of receiver under LPA 1925
- Compensation for breach of implied covenants
A borrower has a general power to grant tenancies.
However, mortgage agreements may contain terms that prohibit the borrower from granting tenancies, either absolutely or without the lender's prior permission.
Buy-to-let mortgages are granted to enable the borrower to buy a property to let.
Generally, buy-to-let mortgage agreements will include consent to grant tenancies, but the borrower may be required to inform the lender about details of lettings.
Effects of breach of mortgage terms
Where a borrower has let a property in breach of the mortgage agreement, the tenancy is still binding on both landlord/borrower and tenants, and the tenants will continue to enjoy their rights under the tenancy until it is terminated.
If a landlord/borrower wants to evict the tenants, they must give notice requiring possession to the tenants and follow the eviction procedure appropriate to the type of tenancy granted.
A lender can bring possession proceedings against the borrower if they breach the terms of the mortgage agreement.
Is the tenancy 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, this will not create a new tenancy and the borrower will remain the landlord.
There are three situations when the tenancy is 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. This means 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. 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.
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 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'.
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.
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 have the consent of the lender and will be binding.
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 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, but only where the property was the landlord's own home at some time before the tenancy began.
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.
Knowledge by the lender of the existence of a tenancy will not be sufficient. It is 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. 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.
A tenant is not liable to pay rent to the lender once the possession order against the borrower/landlord has been made, although if they remain 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 under Section 21.
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
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. 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.
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. The borrower remains the tenants' landlord. The receiver can bring possession proceedings against the tenants if the rent is not paid.
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 (CML) 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. 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.
Pre-action protocol for possession claims
Before repossessing a borrower who has mortgage or purchase plan (also known as 'Islamic mortgage') arrears over a residential property, lenders must comply with the Pre-action Protocol for Possession Claims based on Mortgage or Home Purchase Plan Arrears. The protocol requires lenders to check who is in occupation of the property before issuing possession proceedings and, in certain circumstances, postpone legal action against the borrower.
Lenders will have to demonstrate compliance with the protocol by presenting two copies of Form N123 – Mortgage pre-action protocol checklist at the court hearing.
Notice of proceedings
Lenders who have issued a claim for possession against a borrower must serve a notice on the property addressed to the occupiers. They must do this within five days of receiving notification of the hearing date from the court.
Lenders will have to demonstrate compliance with this requirements by producing copy of the notice and evidence of its service at the court hearing.
Application to join the proceedings
If a tenant becomes aware of the lender's possession proceedings against their landlord, they can make an application to the court to join the proceedings as a party on form N244.
Some courts may give a tenant permission to be joined to proceedings at the hearing itself. This is within the discretion of the court. The tenant will need to prove the existence of a tenancy and may wish to ask for an adjournment of the possession hearing so that they can obtain legal advice.
Unauthorised tenants wishing to apply to the court for postponement of a possession order do not need to apply to be joined in proceedings.
Offers of payment
Claims for possession of residential property following a default on mortgage payments will usually fall under the provisions of the Administration of Justice Acts 1970 and 1973. Under these Acts only the borrower can make an offer to pay the mortgage instalments and an amount off the arrears. The tenant cannot make such an offer in an attempt to resist the making of a possession order.
If the borrower/landlord offers to pay the instalments and an amount off the arrears funded by the rent from a tenancy that was created in breach of the mortgage agreement, this is likely to be rejected by the court. This is because the offer of payment could only be met by continuing the breach of the mortgage agreement.
The type and effect of a possession order against the borrower/landlord will vary depending on whether the tenancy is binding on the lender or not.
Binding on lender
If a possession order is made and the tenancy is binding on the lender, the tenant will have the right to remain in the property and the court will order that the lender will recover possession against the borrower/landlord, but not against the tenant.
Not binding on lender
If the tenancy is not binding on the lender, any possession order the lender obtains will be enforceable against the borrower/landlord and the tenant.
The provisions of the Mortgage Repossessions (Protection of Tenants etc) Act 2010 came into effect on 1 October 2010 and apply to any assured, assured shorthold, protected or statutory tenancy that is not binding on the lender and that was in existence, or commenced on or after, that date. A tenant who has succeeded to such a tenancy will also be covered.
The key points are:
when making a possession order the court may, on the application of an unauthorised tenant, postpone the date for delivery of possession for up to two months
when considering whether to stay, suspend or postpone possession, the court must have regard to the circumstances of the tenant and whether there have been any breaches of the tenancy agreement
the court may make any stay or postponement conditional on the tenant making payments to the lender although this will not create any tenancy or any other right to occupy the property`
If the possession order has already been made and the tenant did not ask for a postponement, or was not the tenant when the order was made, they may ask the court to stay or suspend execution of the order for up to two months. In these circumstances, the tenant will only get extra time from the court if they have asked the lender to give a written undertaking not to enforce the order for two months and the lender has not given such an undertaking.
DGLC Guidance to the Mortgage Repossessions (Protection of Tenants etc) Act 2010 informs lenders, landlords and tenants of their rights and responsibilities.
Notice of execution of possession order
In order to enforce the possession order, the lender needs to apply to the court for a warrant of possession to be enforced by a court bailiff (in the County Court) or for a writ of possession to be enforced by a High Court enforcement officer (in the High Court).
From 1 October 2010, the lender must serve a 'Notice of execution of possession order' at the property when the warrant or writ of execution is applied for. No warrant or writ may be executed until 14 days after the notice is given.
The notice must be in the prescribed form and must be either personally served on any person who appears to be resident at the property or addressed to 'The Tenant or Occupier' (or by name, if known) and sent by first class or registered post or affixed to the property in a prominent place.
Lenders must demonstrate compliance with this requirement at the court hearing.
Application to suspend or set aside execution
At this stage if a tenant wants to apply to the court to suspend the execution of the warrant or writ for a period, or to set them aside where the tenants argue that they have a tenancy that is binding on the lender, they must make an application to the court on form N244.
Appointment of receiver under LPA 1925
It should be noted that instead of seeking a court order for possession, the lender may, in certain circumstances, appoint a receiver under the Law of Property Act 1925 to receive rent and/or to exercise a power of sale without a possession order.
The appointment of a receiver is most likely to occur with buy-to-let mortgages, but all mortgage agreements can contain an express power to enable the lender to do this, and the law imply this power for every lender.
Compensation for breach of implied covenants
A tenant can make a claim against the landlord for damages for breach of the covenant for quiet enjoyment and/or the covenant that the landlord shall not derogate from the grant of the tenancy, both of which are implied into every tenancy agreement.
A tenant has up to six years from the date that the tenancy agreement was breached in which to issue such a claim against the landlord.
Last updated: 22 March 2021
s.99 Law of Property Act 1925.
See Land Registration Act 2002 for details of when such interests have to be registered.
Abbey National Building Society v Cann  UKHL 3; Lloyds Bank plc v Rosset  UKHL 14; Scott v (1) Southern Pacific Mortgages Ltd (2) Mortgage Express : Southern Pacific Mortgages Ltd v Wilkinson & Mortgage Business Plc (Intervener)  UKSC 52.
para 3.3 Industry guidance on buy-to-let arrears and possessions, CML, June 2009.
Lloyds Bank plc v Doyle, CA, Legal Action 17, April 1996.
para 3.3 Industry guidance on buy-to-let arrears and possessions, CML, June 2009.
case 11, Sch.15, Rent Act 1977.
Mann v Nijar (2000) 32 HLR 223, CA.
Chatsworth Properties v Effiom  1 WLR 144, CA.
Paratus AMC Ltd v Fosuhene  EWCA Civ 827.
s.101(1)(iii) Law of Property Act 1925.
s.103 Law of Property Act 1925.
s.109(2) Law of Property Act 1925.
s.109(3) Law of Property Act 1925.
Civil Procedure Rules, r.55.10(2).
Civil Procedure Rules, r.55.10(4).
Civil Procedure Rules, rr.19.2 and 19.4.
Britannia Building Society v Earl (1990) 22 HLR 98, CA.
Mortgage Repossessions (Protection of Tenants etc) Act 2010.
s.1 Mortgage Repossessions (Protection of Tenants etc) Act 2010 and Civil Procedure Rules, rule 55.10(4A).
s.2 Mortgage Repossessions (Protection of Tenants etc) Act 2010; The Dwelling Houses (Execution of Possession Orders by Mortgagees) Regulations 2010 (SI 2010/1809).
s.5 Limitation Act 1980.