Tenants of Repossessed Properties and the Role of Receivers
If a mortgage company wants to repossess a property due to mortgage arrears it will generally apply to the local county court for a possession order against the borrower. The law governing this type of case is broadly aimed at situations where the property is the borrower’s home.
The legal position may be different if a property is lived in by tenants.
Mortgage Repossessions and Tenanted PropertiesThe correct procedure for a mortgage company to follow will depend on whether the tenancy of a mortgaged property is authorised or unauthorised.
If a tenancy is unauthorised the mortgage company is entitled to adopt the usual possession procedure to obtain a possession order against the borrower. The tenant will have little or no say in any possession proceedings. Many landlords use ordinary homeowner mortgages to purchase buy-to-let properties. When this happens any tenants in the property will almost certainly be unauthorised. However, a tenancy could be unauthorised even if the landlord did take out a buy-to-let mortgage. The terms of some buy-to-let mortgages require the landlord to obtain the written consent of the mortgage company before entering into a tenancy agreement – if he fails to do so any tenancy may be unauthorised.
A different procedure applies if a tenancy is authorised. In this case the mortgage lender should not use the standard mortgage repossession procedure to obtain vacant possession of the property. Instead they should appoint a receiver to collect the rent from the tenants. It is quite probable that at some point the mortgage company will still want to repossess the property from the tenants – although this may depend to some extent on its market value. If the lender does wish to obtain vacant possession of the property they should then issue a landlord and tenant possession claim against the tenants.
Whether a tenancy is authorised or unauthorised is a complex area of law. Anyone concerned about the status of their tenancy should take independent legal advice. Charities such as Shelter and the Citizens Advice Bureau can offer free, expert advice on housing issues.
Why Mortgage Lenders Appoint ReceiversDuring the economic downturn many of the borrowers who have fallen into difficulties with their mortgages have been landlords. This means that there is likely to be an increase in the number of receivers being appointed to administer tenanted properties. Indeed, if a property is in negative equity, the mortgage company may decide to allow any tenants to stay in the property, paying rent, until property prices go up.
Some lenders may even decide that it makes financial sense to allow an unauthorised tenant to stay in the property until it can be repossessed and sold. If a mortgage lender accepted rent from a tenant in this situation it could be argued that they have authorised the tenancy, thereby giving the tenant greater rights to stay in the property. By appointing a receiver to collect the rent from an unauthorised tenant, the mortgage lender avoids creating any direct legal relationship between themselves and the tenants.
Although receivers are appointed by the mortgage lender and clearly act on their behalf, in legal terms the receivers act as agents for the borrower. This gives the lender added protection because it means that they should not be sued by the borrower for any fault, perceived or otherwise, of the receivers. If, for example, a borrower believes that a repossessed property has been sold at too low a price or that insufficient efforts have been put into marketing a property, their argument would be with the receiver rather than the lender.
What Receivers DoThe basic powers of receivers come from the Law of Property Act 1925, which is why these types of receivers are often referred to as LPA receivers – or even LPAs. The Act gives them two basic powers:
- To demand and receive rent or any other income due from the property. This includes the power to sell the property to realise its financial value;
- To insure the mortgaged property against fire damage, out of the rental income he receives, if told to do so by the mortgage company.