Here is a question to the blog clinic from Neil who is a landlord.
Due to careful mortgage arrangements and business considerations, I have four flats with no mortgages. This enables me to arrange mortgages on my properties that are up to current standards so I can purchase properties that need upgrading or obtain the best interest rate by offering a flat(s) that gives all the monies needed at 65%.
I was pleased with this arrangement until I read that section 8 ground 2 states “the mortgage in question has to predate the start of the tenancy.” So, when I take out a mortgage on a property that is already let to a tenant with no mortgage on it, the mortgagee can not use section 8 ground 2 even though my tenancy contract states “The landlord hereby gives the tenant(s) notice that the dwelling-house is subject to a mortgage granted before the beginning of the tenancy and possession of the dwelling-house might be recovered on ground 2 in Schedule 2 of the Housing Act 1988.”
My concern is that a potential mortgage company could discover there is no mortgage on the property and thus refuse to grant a mortgage.
My questions are:
- is it possible to change my contract wording,
- ensure there are mortgages on all properties before let which could be financially inefficient or
- some other solution that does not require mortgaging all properties.
I can not believe I am the only landlord in this situation.
Answer
This is the wording of the ground:
The dwelling-house is subject to a mortgage granted before the beginning of the tenancy and
(a) the mortgagee is entitled to exercise a power of sale conferred on him by the mortgage or by section 101 of the Law of Property Act 1925; and
(b) the mortgagee requires possession of the dwelling-house for the purpose of disposing of it with vacant possession in exercise of that power; and
(c) either notice was given as mentioned in Ground 1 above or the court is satisfied that it is just and equitable to dispense with the requirement of notice;
and for the purposes of this ground “mortgage” includes a charge and “mortgagee” shall be construed accordingly.
So you are right in saying that it only applies for mortgages that exist at the time of the grant of the tenancy.
Your notice in your tenancy agreement will be invalid as it is not true – as the property was NOT subject to a mortgage granted before the beginning of the tenancy.
So what is the law where a borrower or mortgagor has already granted a tenancy before taking out the mortgage?
This is not really my ‘area’ but I have consulted ‘Residential Possession Proceedings’ by Gary Webber and Daniel Dovar which has informed me as follows.
The legal situation where the tenancy pre-dates the mortgage
The borrower will no doubt be obliged to disclose the fact of the tenancy to the lender before the loan is granted. In which case the tenancy will be binding on the lender,
If the lender is not informed of the tenancy, does not have actual knowledge of it and if the tenancy would not have been apparent from a reasonably careful inspection of the property then the tenancy will not be binding on the lender (and if the tenant suffers from this their remedy will presumably be against their landlord, for example for breach of warranty).
If you want to change this so the tenant is bound by the mortgage, then you could ask them to sign a new agreement which includes a section where they acknowledge “that any right of occupation I may have now or later is postponed to the rights of the mortgagee”. Or just get them to sign a separate form to this effect. If the tenant is willing to do this.
However, if the tenant has statutory protection (which most do) then this consent will only have effect if it is then protected by way of a notice on the register at the Land Registry.
So unless this is done (ie the tenant agrees in writing and this is then be protected by notice at the Land Registry) the lender will be bound by the tenancy.
If the tenancy is binding on the lender
However, the fact that the tenancy is binding on the lender does not mean that the lender has no rights and can never obtain possession from the tenant.
The legal position is that the mortgage operates as a concurrent lease. Under this, the lender is entitled to possession as against the borrower under the terms of the mortgage. If the lender elects to do this, the lender will then stand in the shoes of the borrower / landlord and take over any rights that the landlord had.
In which case the lender will, once they have ‘taken possession’ from the borrower, have the right to end the tenancy, for example under section 21 (if this is something that the landlord would have been entitled to do) and can direct the tenants to pay the rent to them in the meantime.
And finally
If you want to take out a mortgage on a tenanted property, you will need to disclose the fact that it is tenanted to the lender. If you don’t they will be seriously unhappy with you and I suspect this would go on your credit record which would make it difficult if not impossible to obtain loan monies in future.
Once they are aware of the situation it will be up to the mortgage company what they decide to do.
They may require you to get the tenant to sign a form giving consent, although you may experience some difficulties in getting tenants to agree to this.
Otherwise, the lender will have to decide whether they are happy just to rely on their right to take over the tenancy should the borrower default on payments. Or not, in which case you may have to approach another lender.
I don’t deal with this type of work myself so hopefully others better informed than me will comment below on their experience in this situation and on what happens in practice.
Dealings with land are (usually) subject to previous dealings. If there is already a mortgage on the land, then any tenancy you were to grant is effectively subject to that mortgage, at least insofar as the mortgage lender will not be bound by it unless they consented to it. Ground 2 reflects that the tenancy is subordinate to the mortgage lender’s interest .
If there is already a tenancy when the mortgage is granted, then its the other way round. The tenancy is already a feature of the land and the mortgage is subject to it. Although a typical AST won’t be registered with the Land Registry, it will generally constitute an overriding interest within the meaning of the Land Registration Act 2002 and will bind the lender (or a purchaser for that matter) regardless. The justification for ground 2 doesn’t apply because the tenant has the prior and, in that sense, stronger interest in the land.
The suggestion of having the tenant sign something to postpone their interest to that of the mortgage lender is an interesting one, although Defending Possession Proceedings cites Woolwich Building Society v Dickman [1996] 3 All ER 204 as authority that this will be ineffective. Perhaps it is being suggested that registering the postponement with the Land Registry would change the position. I don’t know.
Ultimately it is down to the lenders, when provided with the full facts, to decide whether they want to lend to Neil and if they do and have later difficulties in recovering possession, that is their problem. I am not sure that the availability of ground 2 is particularly important given that they will usually have access to s21.
Thanks, that’s a much better answer than mine!
Interestingly there was a question on our Landlord Law members forum recently about getting a tenant to sign a ‘transfer document’ whose purpose was to allow the lender the right to evict the tenant should the property be repossessed. My answer was (more or less)why on earth would the tenant want to sign that?
It seems to me that the situation is similar if you change mortgage lender whilst the property is let, and possibly if you remortgage with the same lender.
I wondered about this too, but as far as I know the s2 notice doesn’t have to name the lender, just note the fact that the property is mortgaged, so I assume that any new lender just steps into the shoes of the old one?
Hi, leading on from this, could somone please confirm what happens if (with a correctly written ground 2 clause in an AST) and the borrower defaults and the lender takes ownership of the property. What happens then? the lender can rely on the ground 2 clause, but can they evict the tenant? and if so how? i.e. do they go through a section 21 process the same as a landlord would? or does the lender have a different enforcement procedure ?
If the lender takes possession of the property they will then ‘stand in the shoes’ of the landlord and take over the rights and obligations of the landlord. So if the landlord could have used section 21, so will the lender once they have taken possession.