Tenants left homeless by defaulting landlords

What rights do renters have if lenders want to repossess their homes?

Tenants may like to think themselves immune to the property crash, but substantial increases in the number of landlords in arrears has put more renters at risk of losing their homes too.

When landlords struggle to meet their mortgage payments, lenders are able to seek court orders for possession, whether the properties are occupied or not. Tenants can be left with little or no time to find new accommodation. On top of this, many lose any rent they've paid in advance and possibly even their deposits.

Council of Mortgage Lenders (CML) statistics show that 1,700 buy-to-let properties were repossessed in the first quarter of 2009, compared with just 900 in the first quarter of last year.

In an effort to combat this problem, the Government announced earlier this year that legislation would be introduced to give all tenants a minimum of two months' notice if living in a home that has been repossessed.

The promise, made before the latest cabinet shuffle, was welcomed by housing charities Crisis and Shelter after they and several other organisations highlighted the number of tenants made homeless after their homes were repossessed. "We now hope that the new minister will honour this commitment and introduce these changes as soon as possible," says Leslie Morphy, the chief executive of Crisis.

In the meantime, tenants need to know where they stand if their homes are at risk of repossession. Those whose landlords took out a buy-to-let mortgage should get some protection. And those who began renting a property after 28 February 1997 will have an assured shorthold tenancy (AST).

These agreements are typically either fixed, often for six months or a year, or periodic, and rolling from one week or month to another. In these cases, lenders who take possession of the property will usually be bound by the tenancy agreement, unless the tenants are in breach of its terms and conditions. So tenants with a fixed agreement in place can stay put, complete their contractual period and then have two months' notice to vacate the property. With a periodic contract, the lender is free to issue two months' notice immediately.

Where the real problems start is with landlords renting out properties under a standard residential mortgage, and therefore without consent from the lender. In these cases, the landlords are in breach of the terms of their mortgage contracts and the tenants are unauthorised.

The lenders are under no obligation to uphold the tenancy agreements and tenants can be evicted with 14 days' notice. The recent surge in accidental or reluctant landlords, who are unable to sell their homes and opt instead to rent them out until the property market picks up, has meant that far more tenants are in this worrying situation.

Once properties have been repossessed, tenants cannot delay eviction, but all may not be lost as lenders can appoint what is known as a receiver of rent. "A receiver will act as a landlord and manage the property as well as collect the rent," says Bernard Clarke from the CML.

This was the case in 2,400 instances in the first quarter of 2009, up from just 100 in the first quarter of 2008. A receiver, typically a member of the Royal Institution of Chartered Surveyors, allows the tenant to remain in the property until the lender has decided what to do with the property.

Tenants are advised to continue paying their rent as usual, even if they are concerned about repossession, because failure to pay rent for two months or more in a row will mean that a landlord (or the lender if it has been repossessed) will consider that a breach of contract and can serve a Section 8 notice under the 1988 Housing Act – giving tenants just 14 days' to leave the property.

The Government has taken some steps to offer more protection for tenants. Changes that came into effect in April ensure that tenants now get seven weeks' notice if their landlords are called to attend repossession hearings. But if the hearing concludes with a decision to repossess, the tenant then has a fortnight to relocate.

But many tenants are unaware of these notices because they leave post not addressed to them personally unopened, thinking it is junk mail, or belongs to the landlord.

"The first and most important thing is, if you get a letter addressed to the occupier, always open it and read it because the court is obliged to write to whoever is in the property before repossessing it," says John Socha, the vice-chairman of the National Landlords Association.

The problem arises because tenants are not directly involved in the repossession procedure. The mortgage agreement is between the landlord and the lender, not the tenant, so the lender deals with the landlord alone. Also, while landlords are free to comb through credit checks and references to deem how reliable a prospective tenant is, it is not so easy for tenants to make similar checks on a potential landlord.

Tenants looking for more security should do a couple of things before signing contracts. First, they should verify that their landlords have consent from their lenders to let out the properties. Second, since all deposits must be put into one of three deposit protection schemes, they should ask which scheme is being used.

Landlords can also take steps to protect themselves and their tenants. Landlords struggling to meet payments should talk to their lenders straight away. Despite statistics showing a substantial increase in the number of repossessions, lenders will work towards alternatives and many offer repayment holidays of several months to give landlords a reprieve from paying their mortgages until they can organise their finances.

Experts recommend that landlords set up buffer or reserve funds equal to at least two months' rent for protection against tenants missing payments, particularly for landlords relying on rental income to cover their mortgages.

They can also serve a Section 8 notice if at least two months' rent is unpaid and some landlords may also want to look into paying for rent guarantee insurance to cover for loss of rental income. These policies should pay out for missed rent payments, as well as legal fees if a tenant has to be taken to court.