Tenant's rights when a landlord is repossessed

Landlords who do not keep up with their mortgage payments are at risk of their mortgage lender taking action to repossess the property. A private tenant's landlord could change if their mortgage lender repossesses the property or appoints a receiver under the Law of Property Act 1925.

When a landlord changes the tenancy continues to exist. This includes when a lender repossesses a rented property. A tenant is not liable to pay rent to the lender after a possession order against the borrower, but arranging to pay rent directly could encourage a lender to allow the tenant to remain in the property.

Sometimes, a mortgage lender can evict the tenants without ending the tenancy or issuing separate court proceedings against them. Whether the lender needs to issue separate proceedings depends if the tenancy is authorised by the lender or not.

How a lender can take possession

A mortgage lender can take possession of rented property in three main ways. It could:

• start court proceedings against the borrower for mortgage arrears

• appoint a receiver under the Law of Property Act 1925 to manage the property

• exercise its rights under the mortgage to sell the property

The lender is only likely to use the option to exercise its rights to take over the property if it is a buy-to-let mortgage and the borrower has breached their agreement. To take over the property, the lender need only notify the borrower and the tenants of its intention. It does not need a possession order from the court.

The court deals with a mortgage lender's claim for possession in the same way as any other possession claim for mortgage arrears. The court has the same powers to suspend possession as it would if the borrower was in occupation of the property.[1]

The Pre-action protocol for possession claims based on mortgage arrears does not apply to buy-to-let mortgages.[2]

How the lender gets possession through the courts

The mortgage lender issues a claim in the County Court nearest to the property. The case is listed for a hearing, and the judge decides the outcome by making an order to do one of the following:

• adjourn the case to a fixed date

• adjourn the case on terms

• suspend possession on terms

• grant possession to the lender

The tenant is not a defendant in the possession proceedings.

Read more about the process for mortgage possession claims on Shelter Legal.

A tenancy is unauthorised when it is granted after the mortgage, and the lender has not given consent for it. An unauthorised tenancy is not binding on the landlord's mortgage lender.

A borrower has a general power to grant tenancies.[3] That means the tenancy between the landlord and the tenant still exists whether the lender grants permission for the tenancy or not.

How the lender can evict the tenants

The lender can bring possession proceedings against the landlord for a breach of the mortgage. It can enforce any court order against all the occupants of the property, including tenants. The lender does not need to take the tenants to court separately to evict them.

A tenant in this situation can ask the court to court to delay the date of possession for up to two months.[4] The court will consider the tenant's circumstances and whether they have complied with their tenancy agreement, for example by keeping up with rent payments.[5] The court can order the tenant to pay their rent to the mortgage lender for the period of the extension.

Read more about how an unauthorised tenant can request a delay to the date for eviction in Eviction of tenants of mortgage borrowers on Shelter Legal.

An authorised tenancy means it is binding on the mortgage lender.

If the tenancy is binding on the lender, the lender must manage the tenancy as the landlord. To end the tenancy, the lender must serve notice and bring a possession claim in the courts in the same way as a landlord.[6]

How a tenancy is authorised

There are three ways a tenancy can be authorised by the mortgage lender. For the tenancy to be authorised, one of the following must apply:

• the tenancy was granted before the mortgage agreement

• the lender consented to the tenancy

• the lender accepted the tenancy as its own

Tenancy granted before mortgage

Whether the tenancy is authorised depends on the date the tenancy started and the date the mortgage was taken out. If the tenancy began before the mortgage agreement, it is binding on the lender, whether the lender agreed to it or not. This is called an overriding interest.

Tenants can search HM Land Registry for details of when the mortgage lender registered its charge on the property.

A tenancy is more likely to pre-date the mortgage where the landlord:

• remortgaged the property with a different lender after the start of the tenancy

• took out a second mortgage, and the lender of this loan recovered possession from the borrower

• changed during the tenancy, and the new landlord took out a mortgage to purchase the property

A tenancy that starts after the date of the transfer of ownership but before the mortgage registration does not create an overriding interest.[7]

Lender consents to tenancy

If the lender consented to the tenancy, it is binding, whenever the tenancy and mortgage started. Buy-to-let mortgages often grant consent to a tenancy. Most other mortgages do not.

A lender who has not given express written consent is likely to argue that consent has not been granted, even if consent could be implied. In one case, a lender granted a standard mortgage to a borrower on a property that consisted of several bedsits already let to tenants. The mortgage contained terms banning the granting of tenancies without the prior written consent of the lender. The court held that the lender was not bound by the tenancies even if the bank must have known that the bedsits in the property would be let out.[8]

Lender accepts the tenancy

The lender could accept the tenancy if it behaves in a way that would create a landlord-tenant relationship. The facts must show that the lender's actions amount to the creation of a new tenancy. Knowledge by the lender of the existence of a tenancy is not enough to create a new tenancy.[9]

A lender that wrote to the tenants to pay rent directly to it instead of the landlord had created a new tenancy.[10] In a different case, acceptance of rent payments from an occupier who did not identify herself as a tenant did not create a new tenancy.[11]

How the tenant can find out if the tenancy is authorised

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 is included in 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

The lender becomes the landlord of the authorised tenancy. It can bring possession proceedings in the same way as the original landlord.

Ending the tenancy using section 21

Most private tenants have an assured shorthold tenancy. That means it can be ended by giving the tenant a valid section 21 notice.

The lender cannot issue a valid section 21 notice if the original landlord would have been unable to serve a valid notice. For example, if the landlord did not protect the tenancy deposit, the new lender cannot serve a valid section 21 notice.

It can be difficult for lenders to use section 21, as it requires the lender to supply documents such as gas safety certificates, which it might not have.

Read more about when a section 21 notice is not valid on Shelter Legal.

Ending the tenancy on grounds

The lender might issue a possession claim on grounds. This means it must set out a reason for evicting the tenant in the notice and the possession claim. Common reasons include rent arrears and antisocial behaviour.

There is an additional ground for possession that a mortgage lender can rely upon. To use it, the landlord normally must have given the tenant written notice before the tenancy started that it could be used.[12] The court can decide the pre-tenancy notice is not needed if it is just and equitable to do so.

Read more about ground 2 for possession in Assured tenancy mandatory grounds for possession on Shelter Legal.

The mortgage lender could appoint a receiver under the Law of Property Act 1925. The lender does not need to get a court order to appoint a receiver.[13]

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 in any mortgage agreement by law.[14]

The receiver is an agent of the mortgage lender.[15] They can create a new tenancy by demanding rent from the tenant.[16] This means they are normally only appointed in cases where the tenancy is authorised by the mortgage lender.

When the receiver can demand rent

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.[17]

Once a mortgage lender has appointed a receiver to deal with the rental property and receive rent payments, the lender has taken possession of the property. It does not need to issue separate court proceedings to get a possession order.

The lender or the appointed receiver can exercise a power of sale without obtaining a possession order against the borrower. The power of sale allows the lender to sell the property to someone else.

When the power of sale is exercised, the buyer of the property becomes the new landlord and is bound by the tenancy. This does not happen often, as most buyers normally require vacant possession on completion of the sale.

Read more about the tenant's rights when a property is sold on Shelter Legal.