A number of MPs have also raised concerns, spurred by constituency cases involving tenants who have been paying their rent and fulfilling all their other obligations but who nonetheless find they are at risk of losing their home.
We sympathise with tenants who find themselves in this position. So, what can lenders do in cases where the tenant is paying their rent, but the landlord is not using this money to meet their mortgage commitments?
Different types of mortgage
Tenants in these circumstances fall into two distinct groups, and are affected in quite different ways. The first are those whose landlord has a buy-to-let mortgage, and these tenants are generally in a much stronger position.
The second group comprises those whose landlord has a residential mortgage. A borrower with this type of loan should seek the permission of the lender before renting out the property. Where the lender agrees, it will be bound by the tenancy agreement. That provides protection for the tenant, should the lender need to take possession of the property or appoint a receiver because the borrower stops paying the mortgage.
In some cases, however, a borrower with a residential mortgage decides to rent out the property without telling the lender, in contravention of the mortgage agreement and perhaps even fraudulently.
We share the concerns of advice agencies trying to help tenants in this position. Those tenants have been disadvantaged through no fault of their own. But so too has the lender. Indeed, it is quite likely that neither the lender nor the tenant will even be aware of each other’s interest in the property. Both have been put in a difficult position because of the irresponsible behaviour of the borrower.
But while lenders sympathise with tenants in this position, it is important to understand that their legal responsibility – reinforced by regulatory requirements – is to the borrower, and not to the tenant. The lender has an obligation to minimise arrears and get the best price possible for the property. This is likely to lead the lender to seek possession of the property quickly. In this situation, the tenant has few rights.
So how common is this problem? Recent television coverage of the issue reported it against the backdrop of our forecast of 75,000 mortgage possessions this year. The reality is, however, that only a much smaller proportion of total possessions – perhaps 4,000 this year, or around 5% of the total, according to the Department for Communities and Local Government (DCLG) – will involve residential mortgages where the lender discovers the property is occupied by tenants.
Buy-to-let mortgages
If tenants are renting from a borrower with a buy-to-let mortgage, they are in a better position. Here, the tenancy is normally binding on the lender if it needs to take enforcement action against the borrower/landlord. The tenant will have the statutory right to notice under their assured shorthold tenancy.
Instead of seeking possession, the lender may choose to appoint a receiver, who will, as far as the tenant is concerned fulfill the role of the landlord, maintaining the property and collecting the rent.
Under an assured shorthold tenancy, a tenant is entitled to the remainder of their contractual period – which is typically six months but can be longer – as notice and to a minimum of two months at the end of that period. In practice, a lender or receiver will often allow the tenant to remain beyond the notice period until rent arrears are paid off or the tenant chooses to leave.
Sometimes, a property may be sold with a sitting tenant. This is rare, however, because the lender has a responsibility to the borrower to obtain the best price for the property, which usually implies sale with vacant possession.
Advice agency campaign
A number of organisations, including Crisis, Citizens Advice, Shelter and the Chartered Institute of Housing launched a campaign at the end of last month to help tenants when the lender takes enforcement action. The campaign calls for courts to be able to delay possession to allow tenants to find an alternative home.
But if there is a residential mortgage on the property, giving the tenant more time to find a new home could put the lender in conflict with the borrower, particularly if it means mortgage arrears build up and the property is eventually sold for less than would have been the case if it was marketed straight away.
The campaign also calls for notices to occupiers to be made more obvious and perhaps to carry a risk warning. As long as there is no conflict with data protection or other requirements, we support this and had made a similar proposal to the government.
The position of the government is uncertain. The DCLG originally indicated that if the problems could be resolved by the industry, it would not intervene. More recently, however, it has indicated that it may legislate, though probably not in 2009.
The CML’s view
In those cases where the tenant is paying no rent or not looking after the property, the lender will want to seek possession as soon as possible, rather than allow the landlord’s arrears to build up or the condition of the property to deteriorate.
We agree, however, that there is a need to review the current arrangements for giving notice to try to ensure there are no nasty surprises for ‘good’ tenants, who are paying their rent in full and on time and looking after the property. We accept there should be a debate over what is a reasonable period of time for them to move out.
Good tenants should not be put at a disadvantage – and nor should lenders – by the irresponsible behaviour of a small number of landlords. We look forward to working with the government and advice agencies on effective measures to help the small number of tenants affected.
