Commercial Property Focus - May 2010
Government Protection For Tenants Whose Landlords Face
Repossession
The increased number of repossessions caused
by the recession has been well documented. But those tenants who
had to be evicted from their homes because their landlords
defaulted on their mortgages have received considerably less
attention. The Council of Mortgage Lenders recently issued figures
that suggested that lenders took 46,000 homes into possession in
2009 and of these, it is estimated that around 2,500 involved
tenancies that are unauthorised by law. Unauthorised tenancies
arise when landlords grant residential tenancies without the
consent of their lender and in breach of their mortgage
agreement.
The increased popularity of letting, coupled
with the effects of the recession in recent years, has resulted in
a greater number of unauthorised tenants being evicted. Due to the
significant impact on those affected, the Government has introduced
legislation to protect those tenants who are made homeless through
no fault of their own.
The Mortgage Repossession (Protection of
Tenants etc) Act 2010 had its second reading in Parliament on
29th January 2010 and will come into force later this
year. But what exactly is the current legal position for tenants in
this situation and how far will this new law go to help them?
It is a standard condition of most
owner-occupied mortgages that the borrower may not rent out the
property without the consent of the lender. However many
borrowers rent out their properties without informing their lender,
in breach of their mortgage agreement. In those cases, if
mortgage arrears build up and the lender seeks to repossess the
property, the tenancy agreement will not be binding on the lender
and the tenant is often required to move out of the property on
very short notice and without being given the opportunity to find
alternative accommodation.
The statutory protections from eviction that
normally assist tenants in this situation do not bind the lender,
who is entitled to take back the property free from the tenant’s
interest. Even if a lender knows that a tenant is living in the
property in question, this will not amount to a grant of consent.
From a tenant’s perspective, often a tenant will only be alerted to
the problem when bailiffs arrive on their doorstep with a notice of
eviction requiring immediate possession. At this stage it is
usually too late for the tenant to take any meaningful action to
stop their eviction.
Previous legislation has attempted to correct
this perceived unfairness against tenants. In 2008, the mortgage
possession pre-action protocol was introduced to provide assistance
for those likely to lose their homes because of mortgage default
and to encourage lenders to treat repossession as a last resort. In
2009, further changes were made to the civil procedure rules to
require lenders to notify occupiers of an intended possession
hearing. But this change has only been partly effective as notices
are only to be addressed to “the tenant” or “the occupier” which
means they are often discarded by the tenant as junk mail,
particularly in blocks of flats.
Despite these measures, problems still persist
for tenants including the fact that the amount of notice they
receive is dependant on how quickly the local court can process the
claim and set a date for the possession hearing. If tenants do make
it to the hearing, the present system provides little a court can
actually do at the possession hearing to assist tenants that are
due to be evicted.
The new legislation will seek to address this
by giving unauthorised tenants the right to suspend a possession
order for two months being an equivalent notice period to the
minimum notice required to be given to authorised tenants under an
assured shorthold tenancy, the most common form of tenancy in the
private rented sector. It also entitles unauthorised tenants to
delay the warrant of execution (which is what the lender uses to
actually recover possession) by two months if the tenant did not
apply to court before the possession order was made e.g. because
they did not receive the notification. Tenants would be entitled to
one period of suspension only. It is envisaged that the lender
could choose to collect rent directly from the tenant during the
suspension period without creating a new tenancy between the lender
and the tenant. However, this new level of protection will not be
made available to tenants with rent arrears or those in breach of
their tenancies.
This draft bill supports the Government’s
promise to help households struggling with their mortgage
repayments and to drive down the number of tenants losing their
homes. It is hoped that the proposals will add to the vitality of
the housing market and promote a strong well-managed private rented
sector, something that is sorely lacking at the moment.
David Tabinor is a Partner in the
Commercial Property team at Weightmans LLP, david.tabinor@weightmans.com
This article first appeared in the
Estates Gazette.