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Mortgage lenders evict tenants too easily say LettingFocus.com

In the press at the mo’ there is a lot of stories about tenants who get evicted from a property where their landlord lets out their property without the lenders consent and then failed to pay the mortgage.
It seems unfair on good tenants to turf them out when they have done nothing wrong and it seems to me that the mortgage lenders are still not doing enough to help out.
To illustrate this I had a correspondence with the Council of Mortgage Lenders about this.
Please read it and make your own mind up.

The Council of Mortgage Lenders (CML) in a press release said: “……..Lenders are also sympathetic to the position of tenants of landlords who have failed to gain consent to let their property, but the legal position is more complicated. Lenders have contractual obligations to the borrower, despite their breach of the mortgage terms, and there are also potential legal constraints on their ability to collect rent from tenants in this position. The CML looks forward to working with the government to resolve these complexities and ensure that the notice period for these tenants is consistent with the lender's other legal obligations.”

So, at LettingFocus.com we asked the CML: “Can you elaborate on what “the legal constraints and obligations” are please?”

They replied: “Basically it's the potential conflict of interest between what may be best for the tenant and best for the borrower.
Lender's contractual relationship is with borrower not tenant (and so lender has duty to obtain best price that can reasonably be obtained etc, which could potentially be compromised).
Also, lender can't collect rent without recognising (ie authorising) the tenancy – (which) changes the legal status of the tenancy. If this conflicts with the best interests of the borrower, the lender's actions could be contested.
Plus there is also - not a legal point but a relevant one - the fact that on a case-by-case basis the lender may end up assessing that its own commercial position will be worse - ie its losses will be greater - if it authorises the tenancy (with the costs that may involve) and cannot sell until later than if it takes possession and sells sooner.
None of these issues apply with bona fide buy-to-let, only with owner-occupier mortagges where the borrower has failed to get consent to enter into a tenancy.

We replied: “We wonder, notwithstanding the points you make, that it may be in best interests of everyone if the lender were to accept rent, in those cases where the tenant is up to date with previous payments to their errant landlord.
The lender could take the rent and then re-sell property with tenants in it.
Speaking as a landlord-investor I would love to buy a repossessed property which had a tenant in it from a lender, especially where the lender could show me that they have received all the rent on time from said tenant from the time they took it over as a receiver of the rents.
I’m sure I’m not alone in this.
I would benefit by getting a property with tenants in it who I know have paid rent…. Surely that would be better than having it stand empty having stood neglected for 6 months, and possibly damaged by tenants who were cross they have been evicted through no fault of their own.
I wonder whether this has avenue been explored fully by the lenders.
OK, you may have to change your existing Agreements with your borrowers but I can’t see why it would not be possible to do this.

The Council of Mortgage Lenders retorted with this: “Well, there are several points here – including that as a lender you can’t just unilaterally change the contract you have with your borrower (even if you would like to, and even if your borrower is in breach), that the valuation of a tenanted property is discounted from an open market value valuation and you may therefore be accused of not getting best price and worsening the borrower’s shortfall etc etc – that also need to be considered!
I think the overall point is that dealing with these issues is just not quite as straightforward as it looks – and is actually quite difficult to deal with on a “one-size-fits-all” basis, as circumstances will vary and assessing the likely outcome of different courses of action is also difficult.
However, thanks for your thoughts and I can certainly assure you lenders are not idle on these issues and are trying to work solutions (including of the type you describe) that make sense.

At LettingFocus, our view still remains that as landlords we would love to buy a property with good tenants already in it and if a bank could confirm that they had paid rent on time during the period the property had been repossessed from their errant landlord, so much the better.
I’m sure that with that assurance, properties with tenants in them would fetch a premium price when sold, not a discount.
So, I think the CML and the mortgage lenders could at least try to re-sell these properties with tenants in the property. The rent could be used to pay off mortgage debt owed by the defaulting landlord and the property could sell faster.
And best of all a good tenant would not lose their home.
Let me know if you agree.
ABOUT LETTINGFOCUS.COM and DAVID LAWRENSON
I’m David Lawrenson of LettingFocus.com - the property investing experts. Read Property Articles.
I’m the author of “Successful Property Letting” which for the last 3 years has been the UK’s top selling property book - buy Property Investment Book.
The new edition is for accidental and experienced landlords and is fully up to date with all the recent changes to tenancy deposit schemes, HMOs, licensing and capital gains taxes.
I’m an expert property writer and property speaker - and I run the well known landlords blog that you are reading now.
I contribute to newspapers and a host of property websites, write a number of columns in the press and I provide general advice on property letting and consulting to anyone looking to buy property for themselves or to let out. I can help private individuals with any aspect of buying property or buy to let.
What’s unique about lettingfocus.com is that we offer independent unbiased advice on renting out and investing in property because unlike most people in the buy to let and property “advice” business we are not linked to a property company, developer, agent or bridging loan financier and do not receive commissions from these sources.
On the contrary, we are often asked to evaluate other property investments.
Find out about some great deals we have arranged at our Landlords Links page.
Copyright: David Lawrenson 2009. This blog is updated roughly once a week.
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