Tenant’s Rights can Bind Mortgagee
Where a lease or tenancy has been granted before the mortgage was entered or if the mortgagee has consented to the lease or letting, it binds the mortgagee. This means that the mortgagee can only take possession of the property, subject to the lease. The mortgagee in possession takes possession of the rents, not the property. The mortgagee effectively becomes landlord in place of the borrower.
In order to obtain vacant possession of a leased or rented property, the mortgagee will have to agree a commercial arrangement with the tenant to vacate the property or will otherwise have to wait until the end of the lease. In residential cases where there is no fixed term lease, the mortgagee as landlord can terminate on notice for the purpose of a sale.
Where Lease binds Mortgagee
A lease or tenancy will bind the mortgagee under the following circumstances
- it is granted under an express power in the mortgage;
- it is granted under the statutory rights and these rights have not been excluded by the mortgage;
- it is granted with the express or implied consent of the mortgagee; or
- the mortgagee treats the tenant as its own.
In a residential investment property mortgage, the loan offer or other documentation may contain a consent for the mortgagor to lease or grant tenancies. In this case, the bank is likely to be bound by a lease or letting under the terms of the consent.
Direction to Pay Rents
A direction to a tenant to pay rent to a designated bank account which is charged to the lender should not by itself make the mortgagee, a mortgagee in possession with the consequent responsibilities that this may bring. Provided the rents are merely directed to be paid, but no control is assumed over the management of the property, the mortgagee should not become a mortgagee in possession. If the mortgagee goes further and takes any significant degree control, it may be deemed a mortgagee in possession. A middle course may be to appoint a fixed charge receiver. See our separate chapters on these issues.
Mortgagee’s Power to Lease
The Law of Property Act permits certain types of lease unless the power has been removed in the mortgage deed. The Act allows agricultural and occupational leases on terms not exceeding 21 years. A building lease for a term not exceeding 99 years may be granted. The leases must be at the best rent obtainable without a premium. There are certain other terms and conditions. The powers to lease are usually removed in most bank’s mortgages.
Where a pre-existing tenant consented to the mortgage or acts in a manner to the mortgagee that implies the tenancy doesn’t exist, then the mortgagee will not be bound by the tenancy or lease. Therefore, it may be desirable that the tenant acknowledges that the tenancy is subject to the mortgage so that the mortgagee takes priority. This means the mortgagee would be entitled to take possession of the property and terminate the lease or tenancy.
Where a second mortgage is granted after the initial mortgage and the lease is granted between the dates of the mortgages, the mortgagee will not be bound unless it has consented. Strictly speaking with registered title, the mortgagee does not obtain legal title until the charge is registered. Where the tenancy is granted after the execution of the charge but before registration, the tenancy or lease would bind the mortgagee, even if the mortgagor granted the tenancy in breach of the charge.
Mortgagee Demanding rent
The tenant does not have to pay the rent to the mortgagee until notice has been given. If a tenant pays the rent to the mortgagor after notice to pay the mortgagee, he can be compelled to pay the mortgagee.
If a mortgagee demands the rent and treats the tenant as its own, it may be unable to later deny the tenancy. This can happen by actual payment of the rents to the mortgagee. However, the terms of the tenancy will be not necessarily the same terms of the old tenancy between the mortgagor and tenant. By accepting rent, a periodic tenancy might arise. Alternatively, the mortgagee might be interpreted in the circumstances, as adopting the existing lease or tenancy. This could have a damaging effect on the value of the security.
