We have already issued guidance for lenders dealing with arrears on owner-occupied mortgages, which came into effect at the end of January. But this does not cover most buy-to-let mortgages. The new buy-to-let guidance comes into effect in September but, since it reflects existing practices, much of it is already being upheld.
The guidance applies to loans agreed in England and Wales where, at the time the mortgage was taken out, both borrower and lender clearly understood that the property was to be let to a tenant.
Buy-to-let is a different type of lending, with some key differences from residential mortgages, including:
the fact that the borrower should not be living in the property and, unlike the owner-occupier, does not therefore risk losing the roof over his head;
buy-to-let loans are not usually regulated by the Financial Services Authority or the Consumer Credit Act;
the need to recognise that tenants and others could be affected by the decisions that lenders take, but that the lender’s main concern continues to be its relationship with the borrower; and
the borrower may not be an individual but a corporate body, and the mortgage and the property may be part of a larger portfolio.
The lender’s options
The guidance asks lenders to act fairly towards their customers and to take individual circumstances into account. In most cases, lenders will not consider enforcement action until all other options have failed – just as they do for owner-occupiers.
If the position cannot be resolved then, in England and Wales, lenders have a range of options in cases of arrears on buy-to-let properties, including:
seeking a court order for possession;
appointing a receiver of rent, usually under the Law of Property Act;
receiving rent directly from a tenant;
selling the property, with or without vacant possession; or
opting for a combination of these choices.
The guidance reinforces that lenders are flexible and do not adopt a “one size fits all” approach to dealing with cases of arrears. Instead, they use the full range of available options.
Implications for tenants
It is important to understand that, where a lender obtains a possession order against a borrower, it does not necessarily amount to an order for possession against the tenant.
If there was a tenancy before any mortgage was agreed, the lender will normally only take possession subject to the terms of the tenancy. If the lender wants vacant possession in these circumstances, it will be bound by the tenancy agreement. And where a tenancy was agreed after the loan but the lender consented to it, the lender seeking possession will also have to accept the terms of the tenancy.
Most buy-to-let mortgages automatically give consent to tenancies. So, a lender seeking vacant possession will usually be bound by the tenancy agreement, as long as its terms and conditions are being complied with.
Non buy-to-let tenants
There are some instances where a home-owner has granted a tenancy without the lender’s consent. There may also be rare buy-to-let cases where a tenancy is unauthorised. In these cases, the lender will not usually be bound by the tenancy agreement.
Where this occurs, the lender should, however, consider carefully whether seeking vacant possession is the right option. In deciding what to do, the lender should also take into account the position of the tenant as well as their primary obligation to the borrower.
It is quite likely that the tenant may not have known there was a mortgage on the property and will therefore be unaware of any lender requirements for letting it. In this case, the lender needs to look at the tenant’s position carefully and be sensitive to the fact that, if they choose to seek vacant possession, the tenant could end up losing his home because the borrower has acted wrongly.
What the lender does in these circumstances will depend on a number of factors. If, however, the borrower is complying with the terms of an assured shorthold tenancy, paying the rent to the lender or to the lender’s receiver, and there is no conflict with the lender’s primary responsibility to the borrower, the lender should consider:
whether, bearing in mind all the circumstances, it would be fair to the tenant to give him a reasonable period of notice to find somewhere else to live; and
how long any period of notice should be.
On 13 May, the then housing minister Margaret Beckett announced the government’s intention to legislate. We issued a press release in response.
Details of the proposed legislation are sketchy at present. The announcement refers to the government’s intention to “change the law to ensure that tenants have a minimum two months if they have to leave their home because their landlord has been re-possessed.”
We understand that the proposal is for consultation to take place over the summer with a view to legislation being in force by 2010. It is not clear, however, where this will sit in the legislative programme.
Our guidance is intended to reinforce fair treatment of buy-to-let borrowers who fall into arrears.