Receivers and existing tenancies

Receivers and tenants

I was recently browsing through some online auction properties when I came across one of particular interest. It was an apartment in Dublin 4, a penthouse in the so-called "posh" part of the city. Being the posh part of the city, one would have expected the apartment to be selling for around €150,000 more than its advertised starting price. True that these auctions often start at rock bottom prices to draw the crowds, but this seemed well below rock bottom. What, I wondered, could be wrong with it? Violation of building regulations? Fire safety hazards? Was it haunted? Perhaps by the ghost of 2011 when these apartments legitimately sold for such low prices? None of the above. In fact, the apartment was subject to a residential lease which had been entered into back in 2011 for a term of 25 years. The rent was roughly half the rent one would normally expect these days. It got me thinking about a number of similar cases I had come across in the course of my own practice and I thought I would share a few comments about the status of such leases, specifically whether they are valid as against a receiver of the property.

The mortgaged property

A receiver was appointed to the property back in 2016 under the terms of a mortgage entered into by the landlord in 2005. He had apparently been trying for some time to remove the tenant so he could sell at the bumper price achievable with vacant possession. The tenant, however, was not prepared to surrender his bargain without a fight. Served by the receiver with a notice purporting to terminate the tenancy, the tenant made a complaint to the Residential Tenancy Board for adjudication under section 121 of the Residential Tenancies Act 2004. The Adjudicator found in favour of the tenant, meaning that the receiver was left to sell the property with tenant in situ in circumstances where the tenant was paying a bargain basement rent for the next decade or so.

Why the receiver could not evict the tenant

In coming to his conclusion, the Adjudicator relied on section 112 of the Land and Conveyancing Law Reform Act 2009. It is a peculiar section in the way it is worded. It states that a mortgagor of property may lease the property with the written consent of the mortgagee, but such consent must not be unreasonably withheld. However, it appears that a tenancy created without the mortgagee/bank's consent is not automatically void. Instead, it is "voidable" at the option of the bank which can terminate it by proving (a) that the tenant had actual knowledge of the mortgage at the time he entered into the lease and (b) the lease had prejudiced the bank.

Proving that the lease had prejudiced the bank should be straightforward in most cases (presumably it can be done by obtaining a valuation from an estate agent comparing the likely sale price of the property with and without the tenant in situ). The first part of the test, proving that the tenant had "actual" knowledge of the existence of the mortgage is not only difficult, it is close to impossible. How can a receiver appointed by a bank some ten years after the creation of a tenancy be expected to prove what a tenant actually knew at the time he signed the tenancy agreement? If the tenant says "I did not know about the mortgage" then what evidence could the receiver produce to rebut that statement? Perhaps the receiver could ask the landlord to make a statement to the effect that he told the tenant about the existence of the mortgage. But the truth is that many borrowers/landlords in these situations are unwilling to even speak to the receiver, let alone assist him in legal proceedings. Even if a landlord does co-operate, a tribunal may not be prepared to take his word since there is a clear benefit for the landlord if his property is sold at the highest possible price, even if it is being sold by a receiver.

Did the receiver miss the fine print?

The most interesting thing about section 112 is that it probably had no application at all in the context of the case to which I refer. The section specifically states that it applies only to mortgages which were created after the commencement of Part 10 of the 2009 Act. Part 10 was commenced on 1st December 2009. The mortgage in the case was entered into in February 2005. Therefore, the adjudicator was clearly wrong to refer to section 112 at all. Instead, the case ought to have been decided under that section's predecessor, section 18 of the Conveyancing Act 1881. The latter legislation is not dissimilar in its terms to section 121 of the 2009 Act, with one major exception. The Act of 1881 specifically states in section 18(3) that it applies only to occupational leases which are less than 21 years in duration. In other words, section 18 of the old legislation would probably not have saved the tenant in this case (his lease being more than 21 years).

Would the result have been any different had these matters been drawn to the adjudicator's attention? Probably not. That's because, after considering the applicability of the 2009 Act, the adjudicator then went on to state that the receiver effectively had no locus standi to challenge the validity of the lease since he was "an agent of the landlord". That rationale is both legally dubious and disturbing in its potential implications for receivers of properties with tenants in situ. It effectively bars receivers from ever challenging a lease wrongly made by a landlord without the landlord's express permission.

Some final thoughts

To be fair, the adjudicator in this case did ask the receiver for a copy of the mortgage, which the receiver was unable to produce. Perhaps if the receiver had produced a copy of the mortgage, the decision would have been different. In fact, the receiver did not have the mortgage deed and, arguably, failed to discharge the onus of proving that the mortgage was entered into prior to commencement of the 2009 Act.

The scenario is not unusual. The only thing that makes this case stand out is the length of the lease in these circumstances. No doubt, the new purchaser of the property will wonder if he/she is bound by the tenancy. But that is a question for another day.

Author: Mahmud Samad BL
Publication date: 16th July 2020