In this recent judgment, the Court of Appeal considered whether the claimant mortgagee had expressly or impliedly consented to an unauthorised tenancy by accepting third party payments on the mortgage account.

The Facts

In January 2008, the Claimant advanced monies in respect of the purchase of a residential property (“the Property”) secured by way of a legal charge. The mortgage contained a term that excluded the borrower’s statutory power to let and prohibited the borrower from granting a lease of the Property without the consent of the Claimant.

In August 2009, the second Defendant in this case (“the Tenant”) entered in a residential tenancy agreement to occupy the Property. On 14 December 2009, an agent of the Claimant visited the Property as the mortgage account had fallen into arrears. The agent was informed by a child that his parents were renting the Property, but that they were not present at the time. On 18 August 2010, the Claimant’s solicitors wrote to the ‘tenants and occupiers’ of the Property confirming that the terms of any tenancy agreement would not be binding on them. On 5 April 2011, the Claimant issued possession proceedings against the borrower (and another who was involved in mortgage fraud) and a claim for possession against ‘Persons Unknown’, to which the Tenant was joined as second Defendant.

The Tenant was in attendance at the possession hearing that was listed in July 2011. The Tenant submitted that, not only had she been making third party payments directly towards the mortgage account, but that the Claimant was aware that the payments were being paid by a tenant of the Property. The Claimant submitted that the first time that it became aware of the Tenant was at the possession hearing.

It was held that there was no evidence to support the contention that the Claimant had expressly or impliedly consented to the tenancy agreement. Deputy Master Cousins made an Order for possession and sale of the Property, declaring that the Claimant was entitled to rely on its legal charge. This Order was stayed pending the outcome of the claim against the Persons Unknown and the Tenant, for which Master Teverson also granted an Order for possession. The Tenant appealed this decision to Deputy Judge Anderson, which was dismissed. The Deputy Judge rejected the Tenant’s appeal that the Claimant had waived its right to enforce the mortgage and was bound by the tenancy. The Tenant then brought a second appeal.

Appeal Judgment

At the second appeal hearing, the second Defendant was required to adduce evidence that the Claimant had known that the third party payments had been made by the occupier of the Property. The second Defendant failed to convince the Court that the Claimant was aware that the third party payments were being made by the second Defendant and the appeal was dismissed. The Tenant was referred to as a trespasser.


This is a positive result for lenders. It highlights that, in some circumstances, an unauthorised tenancy agreement will be binding on a lender if third party payments are made by the tenant on behalf of the borrower. The tenant will need to show that the lender had knowledge that the payments are being made by the unauthorised tenant.

In practice, however, third party payments can be a source of difficulty when repossession litigation has been commenced and it is important to remember that each case will be considered by the Court on its own merits. Despite the recent ruling, it is possible that unauthorised tenants will continue to argue that these payments create or acknowledge a beneficial interest in the security property.

To avoid this issue arising, a prudent lender should require all third parties wishing to make payments towards the mortgage account to sign a declaration confirming that they do not acquire any interest (legal or beneficial) in the property.

For further information, please contact Georgina Squire or the Partner with whom you usually deal.