James Woodhouse, a property litigation specialist with Wantage law firm Charles Lucas & Marshall says new legislation will go some way to protecting tenants of ‘unauthorised tenancies’

In times of economic hardship, many property owners find themselves unable to keep up with mortgage repayments. If sufficient arrears accrue, the mortgage lender is entitled to exercise its right to proceed with a sale of the property, even though the legal estate is vested in the borrower.

To sell the property with vacant possession, the lender will need to exercise its right to possession. During the first quarter of 2010, the courts of England and Wales made 14,373 possession orders in mortgage repossession claims.

In most instances the property will be a family home and here there is some degree of protection for home-owners. Where the property is a ‘dwelling house’, the court has discretion to adjourn the proceedings, grant a suspended order or postpone the date for delivery of possession, if the borrower is likely to be in a position to pay sums due within a reasonable period.

However, in some cases the property will be occupied not by the borrowers themselves but by tenants of the borrowers.

Most mortgage deeds (with the obvious exception of buy-to-let mortgages) will explicitly exclude the borrower’s ability to create tenancies out of the freehold title — or at least require the lender’s consent.

Some borrowers will not be aware of this and proceed to grant tenancies regardless — in that event the lender will not be bound by the tenancy.

As a result, tenants of mortgaged property may discover they have limited rights of occupation once their landlord has, for whatever reason, defaulted on mortgage repayments.

To many it appears unfair that unsuspecting tenants should face eviction from their homes as a result of their landlord falling behind with mortgage repayments.

The Government has attempted to address these concerns by introducing legislation which goes some way to protecting tenants of ‘unauthorised tenancies’.

The old law It is a requirement of the existing rules that any occupiers are given notice of the commencement of proceedings for possession at least 14 days before the hearing of the claim.

This has enabled tenants with a legitimate interest to apply to be joined to the proceedings. However, to date, where the tenancy has been granted without the consent of the lender, tenants have been unable to ask the court to exercise its discretion to postpone the possession date.

The new law The Mortgage Repossessions (Protection of Tenants) Act 2010 is designed to ‘protect persons whose tenancies are not binding on (lenders) and to require (lenders) to give notice of the proposed execution of possession orders.’ The Act is due to come into force next month.

The Act will apply to ‘unauthorised tenancies’ — essentially assured or regulated tenancies which are not binding on the lender — of dwelling houses.

It provides that qualifying tenants will be able to apply to the court for a postponement of the date for delivery of possession by up to two months.

If the court has already made a possession order, qualifying tenants will, in certain circumstances, be able to ask the court to stay execution again by up to two months. The rationale behind these provisions is to give tenants more time to find alternative accommodation.

The Act also entitles occupiers to notice of the lender’s intention to execute a possession order. A period of 14 days from service of the prescribed notice must then pass before the possession order can be executed.

These provisions are good news for tenants of mortgaged property. It affords them a greater degree of protection if, in the event of possession proceedings, it transpires that the tenancy was granted without the lender’s consent.

It should be noted, however, that in determining whether it is ‘reasonable’ for the court to exercise its powers to postpone the possession date, etc, the court must have regard to any breach of covenant on the tenant’s part.

Presumably this means that if an unauthorised tenant is behind with rent, the court may be less inclined to postpone the possession date.

Landlords may discover that the date by which their lender can repossess the property is delayed as a result of intervention by their tenants.

This may be good news or bad news depending upon property market conditions.

However, many lenders will be displeased with their borrowers for having contributed to a delay in the possession date, and it remains to be seen whether lenders will seek to impose ‘penalties’ on their borrowers for granting unauthorised tenancies.

o Contact: James Woodhouse, Charles, Lucas & Marshall, 01235 771234. Web: www.clmlaw.co.uk