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Tenants and Buy-to-let Mortgages

By: Louise Smith, barrister - Updated: 15 Oct 2012 | comments*Discuss
Tenant Buy-to-let Mortgage Landlord

The last few years has seen a boom in the buy-to-let market. Many people with no prior experience of letting property have become landlords in the belief that it was an easy way to make money and a sure-fire property investment.

So inexperienced and ill-informed were many of these novice landlords, that repossession of their investment property was always a distinct possibility.

Whilst judges are reluctant to grant possession orders over a borrower’s home, they may be less concerned about making a possession order in respect of an investment property.

Tenants and Ordinary Residential Mortgages

Unfortunately, many landlords do not actually have buy-to-let mortgages on their rental properties. Buy-to-let mortgages are often more expensive than a conventional mortgage and may have different terms and conditions. Therefore many landlords have used residential mortgages to maximise their profits.

This puts tenants in a very precarious position. In most cases a tenant in a property subject to an ordinary residential mortgage is classified as an unauthorised tenant and has no rights to stay there if the mortgage lender seeks to repossess it. In fact, they have no rights even to attend the possession hearing, although most judges will allow tenants to come in and hear what is said. However, the situation may be different if the tenancy agreement pre-dated the mortgage.

Tenants and Buy-to-Let Mortgages

A tenant whose landlord has a buy-to-let mortgage should be in a more secure position than a tenant of a conventional mortgage. However, this is not inevitably the case.

Many buy-to-let mortgages state that the borrower must obtain the written consent of the lender for any tenant. If the landlord puts a tenant in the property without getting the consent of the lender, technically, the tenant is in exactly the same position as a tenant of a conventional mortgage, as described above.

Where a landlord has obtained the lender’s consent for a tenancy, or where the consent is not required, the situation is different – the tenancy is authorised. The situation will also be different if the tenancy agreement pre-dated the mortgage. In either of these circumstances the tenant may have the right to remain in the property even if the landlord has fallen into arrears with the mortgage. Although the lender has a right to repossess the property as against the borrower, it does not have the right to vacant possession and must take the property with the tenant.

Appointing Receivers in Respect of a Tenanted Buy-to-Let Property

Where a mortgage lender wishes to take possession of a buy-to-let property occupied by authorised tenants the correct procedure is to appoint receivers. The receivers will then collect the rent from the tenants. However, it is highly unlikely that this will be the end of the story. Most lenders will still want to obtain vacant possession of the property, so that it can be sold on the open market for the best price obtainable, in order to clear the mortgage debt. To do this they will issue landlord and tenant possession proceedings, as a “mortgagee in possession”, against the tenant.

Mortgage Lenders Seeking Possession Against Tenants

There are specific legal provisions relating to possession cases brought against tenants by a mortgagee in possession. In principal the tenant should have been given notice at the start of the tenancy that possession could be sought on the basis that the mortgage lender was seeking possession. However, judges have the power to grant possession, even if that notice was not given, if they think it is reasonable to do so. If the lender’s case is correctly brought, the judge must give them possession of the property.

A tenant facing repossession on this basis must be given two months’ notice that possession is required. Therefore, whilst an authorised tenant is clearly in a better position than an unauthorised tenant they still face the threat of eviction. The sensible thing to do would be to liaise with the receivers to find out what the lender intends to do. However, many tenants may take the view that it would be sensible to start looking for alternative accommodation as soon as possible.

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