What rights do renters have against repossession?
A decade of soaring house prices has priced many people off the property ladder, and the current credit crunch and lack of mortgage credit means increasing numbers of people are opting to rent rather than buy. In many ways, renters may seem immune to the rise in the number of repossessions but, if their landlord is one of the many borrowers forecast to default on mortgage payments, then they are still at risk of losing their home.
Citizens Advice says tenants are the hidden victims of the credit crisis, as they could find themselves forced out of their home through no fault of their own, often at very little notice.
The latest figures from the Financial Services Authority (FSA) show that the number of possessions (where a lender, having been granted a possession order by a court, is able to sell the property and use the proceeds to reduce or pay-off the debt) has increased by 71% since last year, and with 312,000 mortgages is arrears at the end of June, this figure is expected to increase going forward.
The government has introduced new legislation designed to protect homeowners from repossessions. Under new rules that came into force on 19 November 2008, mortgage lenders on the verge of repossessing a property now have to demonstrate to the courts that they have explored all other options before they are given the green light.
But despite this additional protection, repossessions are likely to continue to rise, as the pending recession, rising unemployment and mortgage payment shock continue to hurt households across the UK.
With that in mind, what protection do tenants have if their landlord fails to keep up payments on a property and their home is repossessed?
Sadly, tenants have very little rights at all. If a lender is given possession of a property by the courts then most tenants have no automatic right to stay in it. But it largely depends on the rental agreement in place.
The vast majority of people who rent from private landlords will have an assured shorthold tenancy (AST), as this has been statutory since 28 February 1997.
Your tenancy will either be fixed-term, which is usually from six months to one-year, or it might be a periodic tenancy that rolls on a week-to-week or month-to-month basis.
If you are within your fixed-term AST when the property you rent is repossessed then the lender must honour that agreement. So, if a bank, building society or other type of lender takes possession of the property, then they have to continue to act as your landlord and appoint a receiver of rent.
As long as your fixed-term AST lasts you cannot be evicted from the property. However, once this expires, you right to stay in your home comes into doubt.
Steve Hilton, spokesman for the National Landlords Association (NLA), says that on the day that your fixed-term AST ends the lender (or whoever is in possession of the property) has the right to issue you with a Section 21, which is your notice to vacant the property within two months.
If your fixed-term AST has already expired by the time the property is repossessed (i.e. you are on a periodic tenancy contract that rolls on either week-by-week or month-by-month) then the lender has the right to issue you with a Section 21 notice immediately. Again you’ll have two months notice to vacate the property.
If your landlord’s mortgage on the property was not a buy-to-let deal, or they didn’t have permission to rent it out by the lender, then you have fewer rights. The lender can take possession of the property and issue a Section 21 immediately, again giving you just two months before you must leave.
Remember, you cannot be issued with a Section 21 unless you have been in situ for at least six months – this is your statutory right.
If you remain in the property for more than two-months after a Section 21 has been issued then you will be considered an unlawful occupant, and you risk being evicted by the bailiffs and potentially criminal proceedings. Although no separate court hearing is needed, you must be receive written notice if a bailiff is appointed.
There are exceptions, however. Citizens Advice says that, in very limited circumstances, your tenancy may be binding on the landlord's lender.
This means the lender will become your landlord after the repossession and will need a separate court order to evict you. This might occur if you were living in the property before your landlord took out a buy-to-let mortgage.
A glimmer of hope?
Just because the lender has the right to evict you two months after a Section 21 has been issued, doesn’t mean they will.
Bernard Clarke, a spokesman for the Council of Mortgage Lenders, says tenants should bear in mind that the current market conditions (that is, very low levels of housing transactions and falling house prices) might persuade lenders to ‘hang fire’.
“An increasing number of lenders may decide to keep possession of the property rather than look to sell it,” he explains. “Keeping the pre-existing tenants in place means they can still make money off the property to put towards the mortgage debt.”
Hilton, of the NLA, agrees: “I expect some lenders will look to hold onto properties in their possession and wait for house prices to rise”.
In addition, the government says it wants to change the law so tenants are given a minimum of two months’ notice if they have to leave a property because it is being repossessed by a bank or building society.
However, there are concerns that the new measures might not fully protect rental tenants. For example, if a landlords doesn’t have a buy-to-let mortgage, then the two months notice period might not apply.
The Council of Mortgage Lenders (CML) says that many tenants might not even be aware of whether their landlords has a buy-to-let mortgage (which recognises their tenancy) or a ‘normal’ owner-occupier loan (where tenancy is not recognised).
Michael Coogan, director general of the CML, says this important legal distinction is complicated.
"Everyone sympathises with the position of good tenants who were unaware their landlord was not paying the mortgage,” he adds. “For the minority of tenants whose landlords should never have been renting out the property at all, we look forward to working with government towards a resolution that appropriately balances the outcomes for lender, borrower and tenant."
If you do find yourself in the unfortunate situation of potentially losing your home as a result of your rental property being repossessed, then the advice is to continue paying your rent as usual.
If you fail to pay your rent for more than two months in a row, then your landlord (or the lender in possession of the property) can issue you with a Section 8 notice – giving you just 14 days to vacate your home.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.