Mortgages and problems with residential tenants’ pre-mortgage tenancies


With the surge in mortgage repossessions, and a large buy-to-let market, it is timely to revisit the issue of the priority (or otherwise) of tenants in relation to mortgagees seeking possession.

As a general proposition a tenancy granted before the mortgage is usually binding on the mortgagee. One route normally deployed by the mortgagee is to seek a form of consent from all adult occupiers, including tenants and licensees, that their rights of occupancy are subordinate to the rights and powers of the mortgagee.

Despite case law some mortgagees persist in the belief that all tenants can subordinate their interests. That is wrong. The key is determining the nature of the tenancy.

Two cases provide salutary lessons for mortgagees.

Skipton Building Society v Clayton (1993) 66 P&CR 223 – A property was originally held in the names of Mr and Mrs Browne. It was then conveyed into Mr Browne’s sole name to assist him in obtaining a loan on mortgage. Mr Browne’s business failed and he approached the Mortgage Advice Centre. They offered to purchase the property for £26,000 on terms that Mr and Mrs Browne would be granted a licence to continue to occupy the property rent free for their joint lives and the life of the survivor of them. The property was valued a little later at £80,000. On 16.3.89 Mr Browne entered into an agreement with the MAC whereby for the consideration of £1,000 he granted them an option to purchase the property for £25,000 subject to the condition that on completion they would grant Mr and Mrs Browne a licence to occupy. Mr Browne forged Mrs Browne’s signature on the relevant documents. MAC applied to the society for a mortgage advance of £56,000 to be secured on the property. MAC represented that the property was vacant and was not subject to any existing tenancy. The loan was made and the repayments were not met. On 20.6.89 at MAC Mr Browne forged Mrs Browne’s signature on documents purporting to cancel their licence to occupy. A possession order was made on 22.10.90. Mr Browne then applied to set aside the order on the basis that he and Mrs Browne were protected tenants under the Rent Act 1977. They were joined as parties. It was held that they were tenants of the property and their tenancy was binding on the society. The society appealed on 3 grounds: firstly, by their conduct Mr and Mrs Browne were estopped from asserting priority; secondly, at the date of the mortgage they were mere licensees albeit in occupation but they did not have an overriding interest within section 70(1)(g) of the LRA 1925; and thirdly, there was nothing on the facts to give rise to a constructive trust in favour of Mr and Mrs Browne. The Court of Appeal disagreed. MAC was perfectly entitled to charge their leasehold interest in the property. They did not tell Mr Browne of their initial intention to mortgage the property and indeed never told him that the mortgage would affect or prejudice his interests in the property. Mrs Browne knew nothing of the transactions and the forgery of her signature until a month or so later. By this time the mortgage had been executed. She could not have been taken to ratify the creation of the charge simply because she took no steps to complain to the society or anyone else. Whilst the licence agreement was contrived to circumvent the consequences of Street v Mountford the provision that MAC was to have possession, management and control of the property was a sham. It was a device to disguise the grant of a tenancy. The 1989 agreement gave MAC a benefit consisting of the discount in value of the property. Mr and Mrs Browne were entitled to a tenancy by virtue of the 1989 agreement and it was a tenancy to which section 149(6) LPA 1925 applied: any lease at a rent or in consideration of a fine for life or lives shall take effect as a lease for a term of ninety years determinable after the death of the survivor of the original lessees, by at least one month’s notice in writing. Whilst the society was the victim of a fraud it was the fault of MAC rather than Mr and Mrs Browne.

Woolwich Building Society v Dickman [1996] 3 All ER 204 – The facts were very different but the result was the same. The property was a long leasehold flat, owned and registered by the mortgagor but occupied by his in-laws as tenants under a tenancy protected by the Rent Acts. The mortgagor applied for a loan to clear his business and revenue debts. The broker made it plain that the property was occupied. The society’s valuer, who inspected the property, was told that the occupants were tenants and this was reported to the society. Although the society’s policy was not to lend on tenanted property the loan was approved. The society treated the case as though the tenants merely shared occupation with the mortgagor as part of his family. The society obtained forms of consent from the tenants. When the mortgagor defaulted and possession proceedings were brought the tenants defended on the basis that their tenancy was binding on the society. There was no suggestion that the consents were obtained by undue influence. The fact that one arm of the society erroneously believed that the tenants were simply occupiers did not effect the import of the consents. The society was prima facie entitled to rely on the consents as express agreements to subject the tenants’ rights of occupation to the possessory rights of the society. However section 98(1) of the Rent Act 1977 provides that a court shall not make an order for possession of a dwelling-house which is let on a protected tenancy unless the court considers it reasonable to make such an order and certain specified conditions are satisfied. The tenancy was an overriding interest at the time of the charge and was an interest to which the charge was subject. The relationship of landlord and tenant between the society and the tenants came into existence when the mortgage was created: the society would derive title under the original landlord and therefore fell within the definition of landlord contained in section 152(1) of the RA 1977. Therefore the claim for possession by the society fell within section 98(1) and no ground was made out.

So the moral of the story is, whether you act for mortgagee or tenant, investigate the nature of the tenancy. The interest of a protected tenant, who is in actual occupation of the dwelling-house, will bind a mortgagee and that interest cannot be ‘postponed’.

Karen Shuman