RLA News Service

Response to Communities and Local Government’s consultation paper – lender repossession of residential property: protection of tenants

1. Introduction

The Residential Landlords Association (“RLA”) has over 7000 subscribers. Our members are landlords in the private residential sector who rent out accommodation in all of the sub-sectors of the market, including relating to families, working people, young professionals, students and benefit claimants. Members are involved with renting out all types of property including single dwellings, flats, shared houses and houses in multiple occupation. We are one of the two national landlords associations in England and Wales. We have supported reform so as to protect tenants who find themselves facing eviction as a result of lenders repossessing mortgaged properties. Our overriding concern is that such evictions inevitably bring the Private Rented Sector in to disrepute. Our objective is to promote a professional private rented sector where tenants, as consumers, can choose to live feeling secure in their own homes so long as they themselves comply with their tenancy obligations. Unfortunately, some tenants, through no fault of their own, face the trauma of eviction often at short notice or even without any warning at all. We believe that reforms can be effected whilst protecting the position of lenders in this situation.

2. General Approach

Our view is that it is important that action is taken at the earliest possible opportunity to protect the interests of tenants. It is no good leaving things to the last minute. We also consider that so far as possible the existing tenancy contract should be honoured (up to a maximum of 12 months). In return, the lender should be entitled to collect the rent so as to reduce outstanding mortgage interest/capital and obstacles to the lender doing this should be removed. Protection should apply to mortgages granted by commercial lenders; not in the case of private mortgages where wholly different considerations apply. In those (relatively few) cases some minimal protection is still required. Effectively, we are therefore advocating that so far as commercial lenders are concerned so called “unauthorised” tenancies should effectively be put on the same footing as “authorised” tenancies. We believe that this can be done without undue detriment to lenders.

3. Some legal issues

The RLA considers that some legal issues need to be borne in mind in formulating policy:-

(1) Mortgage lenders do not wish to go into possession because of the relatively onerous responsibilities both legislation and case law places on a mortgagee in possession. At the moment, the only option open to a lender is to appoint a receiver of the rent but this can be an expensive procedure. We, therefore, believe that simplified intermediate procedure needs to be introduced by legislation to assist the mortgage lender to collect the rent without the mortgage lender either going into possession or having to appoint a receiver – see further below.

(2) Under the law as it stands, if a mortgage lender does collect the rent then he becomes mortgagee in possession and where the tenancy is “unauthorised” the tenancy becomes binding on him. Obviously, if the tenancy is authorised it is binding on him anyway. Case law, however, indicates that in the case of “unauthorised” tenancies which become binding on the lender in this way it is not necessarily on the same terms as the tenancy which was entered into between landlord/borrower and the tenant. It may instead be an annual or periodic tenancy. Clearly reform is needed to ensure that it is the actual tenancy which would become binding on the mortgage lender, if this were to occur in the case of “unauthorised” tenancies. The tenant should be in a no better or no worse position than he is vis a vis the landlord/borrower. We believe that tenancies should become binding.

(3) The tenancy relations between the landlord/borrower and the tenant may well differ. Indeed, these may mean that what was thought to be an authorised tenancy is, in fact, an unauthorised tenancy as against the lender. Normally, the landlord/borrower will have granted an assured shorthold tenancy to the tenant. This may well be for a fixed term e.g. up to twelve months or possibly six months. On the other hand, it may simply be a periodic tenancy. Additionally, not only may the tenancy be an assured shorthold tenancy but, if things have been done properly, the landlord may also have given the Ground 1 notice under Ground 1 in Schedule 2 to the Housing Act 1988. This, in turn, imports Ground 2 into the tenancy which the mortgage lender can then rely upon. In practice, one suspects strongly that this does not happen regularly although some lenders may well require it as part of their requirements to the creation of an authorised tenancy which is binding on them. Of course, even if Ground 2 can be invoked, (assuming if the requisite notice has been given) the mortgage lender stepping in to the shoes of the landlord would need to be able to either invoke a break clause under the tenancy agreement if there was a fixed term tenancy or, alternatively, the mortgage lender could rely where appropriate on the periodic nature of the tenancy so as to give a Section 8 notice. One issue which could be looked at would be whether the Housing Act 1988 provisions would be amended so as to give a lender who wished to sell special rights as regards termination so as to protect their position. The RLA would not be in favour of this because of our preferred approach to the problem.

(4) There are significant practical problems around establishing whether a tenancy is authorised or unauthorised as against a mortgage lender. Case law seems to suggest that the onus of proving that a mortgage is authorised would, effectively, lie on the tenant. The landlord, by then, would probably have lost interest anyway in many cases. This can be difficult. For example, the general requirements of a mortgage lender may well be set out in the original offer letter when the mortgage was first arranged. This would not be available to the tenant. These general requirements do not normally appear in the mortgage deed itself which is available to the tenant. Even if the tenant is able to access the relevant documentation it may well turn out, particularly in the case of buy to let mortgages, that some procedural requirement has not been observed by the landlord. We have already referred to the need, in some cases, to go through the Ground 1/Ground 2 procedure when the tenancy was granted. In reality there may, therefore, be more unauthorised tenancies out there than first thought.

(5) As the consultation paper points out, any occupier only has very limited rights, if any, to take part in the mortgage possession proceedings and this is an issue that needs to be dealt with by way of an amendment to the Civil Procedure Rules.

4. Lack of knowledge regarding tenancies

As the consultation paper highlights, the major difficulty is that the lender may not be aware of the presence of the tenant. Even in the case of a buy to let mortgage it may not be clear whether there is a tenancy in place at the time the mortgage possession proceedings are commenced. Where the lender is aware that there is a tenant the lender may well not know the identity of the tenant. Our experience is that lenders particularly “secondary” lenders are cavalier regarding these matters. Furthermore, mortgages are often transferred on and the current holder of the mortgage may not do all that they ought to establish the circumstances and may not hold the relevant records. Experience shows that mortgage lenders are loathe to disclose information to tenants and they play things very close to their chests. It is acknowledged that lack of knowledge of situation is even greater in the case of residential mortgages which have turned into cases where tenancies have been entered into by the landlord/borrower. Clearly the bulk of mortgage repossessions are from residential owners/occupiers where no tenancy is involved so it is appreciated that universal requirements can place an undue burden on a mortgage lender. We also have to cater for those cases where the landlord/borrower “simply hands the keys in”.

5. The RLA approach

The RLA advocates the following approach to the problem:

(1) All occupiers of mortgage properties should be given the right to appear at and make representations at any mortgage repossession hearing without the need to be joined in as a party. In appropriate cases where there is an issue of substance the Court would have the discretion to add the tenant as a defendant to the proceedings.

(2) This would extend to all unauthorised tenants as well as tenants. This is the Government’s Option 2. Effectively, as Option 2 suggests we agree that it would be right to give the Courts power to postpone the date of possession for a period of 2 months if the Court is satisfied that there is a genuine tenant (whether authorised or unauthorised). This is in line with the two month notice period required under Section 21 of the Housing Act 1988 and also the two month minimum period which is needed in the case of Grounds 1/2 under the 1988 Act. It should apply to private mortgages as well as commercial lenders.

(3) We believe that the Government should go further than is proposed in paragraph 3.5. Where a suspended possession order is made in the case of a tenanted property then there should be an obligation imposed on the lender to return to Court to seek the Court’s permission to enforce the order. The tenant should be given notice of this hearing where known.

(4) In all cases where a lender wishes to repossess the property against the tenant (whether authorised or unauthorised) where possession has been surrendered voluntarily by the landlord/borrower there should also be a guaranteed minimum period of 2 months for the tenant to vacate. This puts the tenant in the same position as in Section 21 or Grounds 1/2 apply

(5) Civil Procedure Rules should be amended so that the mortgage lender is required to state whether he has given consent to a letting or where he has received any information regarding the property being let. This should apply whether or not the mortgage is a buy to let mortgage or whether it is a residential mortgage intended for owner/occupation. In those cases where there is potentially a letting or the lender is aware of a letting then Option 3 should apply an enhanced requirement to serve notice of the possession proceedings as soon as they have been issued. This is consistent with our “sooner rather than later” general approach. This would be a half way house which would reduce the burden in relation to those properties which were not known to be tenanted properties or properties which could be tenanted.

(6) The existing requirement for a generalised notification to the occupier would continue as at present but we would suggest that any such letter should be addressed to the occupier/tenant and posted to the property as at present.

(7) We agree with Option 4 namely the introduction of a new notice of intention to enforce possession. All tenants, including unauthorised tenants, should then have the opportunity to apply for a delay. Delivery of the notice should be in an enhanced manner as suggested.

(8) Where the RLA differs from the consultation proposals is that in our view all existing tenancies (including unauthorised tenancies) should bind the mortgage lender (other than in the case of private mortgages) according to the terms agreed with the landlord up to a maximum of 12 months from when the current tenancy was granted. There should, however, be an overriding right for the mortgage lender to apply to apply this provision if there are exceptional circumstances. One example would be “last minute” tenancies created to thwart claims for possession. Some safeguards might be needed e.g. in respect of tenancies created/renewed if Court possession proceedings for possession have been commenced. Likewise if there was some overriding pressing need to sell the property with vacant possession. This would mean that the tenant (including an unauthorised tenant) would then, within reason, effectively get what they bargained for when they entered into the tenancy agreement. In return the mortgage lender would be entitled to collect the rent.

(9) Under the RLA proposals the mortgage lender would be entitled to serve a statutory notice to collect the rent on the tenant which would then mean that all future rental payments (including any unpaid arrears) would become payable to the lender direct. This would, however, not constitute the lender as mortgagee in possession. This could be done without the need to appoint a receive of the rent which would save costs. This would apply to both authorised and unauthorised mortgages. If the tenant then failed to pay the rent the landlord would be given a statutory right to repossess the property. To protect a lender normally any outstanding counterclaims by the tenant as against the landlord could not be set up against the lender, although again it may be appropriate in exceptional cases to give the Court a discretion on this point. For example, a tenant could not take a disrepair point against a landlord to avoid paying the rent to the lender. It can be difficult for some tenants e.g. students to obtain alternative accommodation for the balance of the academic year.

(10) The tenancy itself would become binding so that the mortgage lender could then repossess at the same time and on the same terms as against the tenant as the landlord borrower could have relied upon.

5. Response to questions/comments

Question 1 – We believe that the problem is actually more common than the consultation paper suggests. We do regularly receive reports of Bailiffs turning up without warning to evict tenants in this situation. As the consultation paper predicts we believe that this problem will grow because of the so called accidental landlords.

Question 2 – As indicated above, we support the proposal to give the Court the power to postpone the date of possession to allow tenants to move. Indeed, our response goes further. We consider that it is important that the tenant is alerted to the situation at the earliest opportunity. Indeed, this may lead to the tenant contacting the landlord/borrower who, in turn, will then get in touch with the mortgage lender and even come to some arrangement. We are aware of cases where this has happened. It is also wholly wrong for the tenant to be evicted at short notice. This is distressing. As already pointed out, this brings the private rented sector into disrepute.

Question 3 – We have already set out our views on Options 3, 4 and 5. In our view, Option 3 should be employed in those cases where there is known to be a tenant or there is a likelihood of a tenant being present. Option 4 should be adopted but in an extended way. As regards Option 5 we believe that this is too much a last minute approach. By then it is unlikely that anything really can be done to retrieve the situation.

Question 4 – We believe that it is often the case that impact assessment makes a number of assumptions which it may prove difficult to verify. Not being mortgage lenders we do not have the necessary access to the data to make meaningful comments.

Question 5 – We believe that there are other options which would better meet the policy objective and we have already identified these above.

Question 6 – No – we believe that whilst Options 2 and 4 would help the situation a more radical approach is needed to deal with the problem in the case of commercial lenders as outlined in our response above. We believe that this can be achieved whilst still striking the right balance between the rights of commercial lenders and tenants.

Question 6 – We have already said that we believe that the answer to the problem goes further than the Government’s preferred approach. We believe that by protecting the tenant and ensuring that the rent is paid to the mortgage lender the mortgage lenders position can still be protected even though effectively the existing tenancy (including tenancies of unauthorised tenants) becomes binding on the lender (up to a maximum of 12 months).

Question 7 – We consider that these provisions should apply in the case of all tenancies of dwellings i.e. residential accommodation. The parallel to be drawn upon would be the Protection from Eviction Act 1977. We do not believe that giving an unprotected tenant a minimum of 2 months protection is out of the way in these circumstances. Obviously, if the tenant does not have any statutory protection (e.g. as assured tenancies/assured shorthold tenancies/Rent Act protected tenancies) then they are not going to obtain any additional protection because we are not suggesting that the mortgage lender should be put in any worse position than the landlord (subject to the 2 month minimum).

Question 8 – We believe that ordinary post should be the method of service for the general letter which must be sent to occupiers once Court proceedings for possession have been commenced. However, where there is an enhanced requirement this should be a requirement to hand deliver/affix to the premises. One of the practical problems is in multiply occupied blocks e.g. flats. A general requirement of the Courts is to go no further than the postman could have gone.

Question 9 – Production of the original tenancy agreement if available signed by the landlord or at least a copy. It will also be appropriate to ask for evidence of payment of rent, particularly in those cases where there is a verbal tenancy. Evidence of payment of housing benefit may be appropriate in cases where the tenant is claiming housing benefit. The objective should be to establish if there is a genuine tenancy.

Question 10 – The essential question is whether there is a genuine tenancy in place. Under our alternative proposals it would not necessary be a key element anyway.

Question 11 - We have already dealt with this above. In our view the tenancy should become binding on a commercial mortgage lender. We have also suggested a statutory notice directing payment to the lender procedure which would avoid the need to appoint a receiver and also avoid the mortgage lender becoming a mortgagee in possession.

6. Conclusion

The RLA supports the Government in its intentions to take action which it believes will enhance the respectability of the private sector which will benefit landlords and tenants generally, without providing undue consequences for commercial mortgage lenders. However, we feel that the proposals need to go further than is currently suggested to deal with the situation. There may often be a fine line between authorised and unauthorised mortgages which may very much turn on technicalities. So long as safeguards are in place we believe that the answer is to equate unauthorised mortgages with authorised mortgages which will help solve this serious problem.