Remortgage Property With Sitting Tenant

A sitting tenant is a tenant who has the legal right to remain in a property, typically under a regulated or protected tenancy agreement. The term is most commonly associated with tenancies created before the Housing Act 1988, which gave tenants significant security of tenure.

The key types of tenancy that create sitting tenant situations include:

• Regulated tenancies created before 15 January 1989, which give the tenant the right to remain for life at a fair rent set by the Rent Officer
• Protected tenancies under the Rent Act 1977, offering similar protections
• Assured tenancies created between 15 January 1989 and 28 February 1997, which provide security of tenure unless specific grounds for possession are met
• Statutory tenancies which arise when a protected tenancy ends but the tenant remains in occupation

It is important to distinguish between a genuine sitting tenant with protected rights and a tenant on a modern assured shorthold tenancy (AST). Tenants on ASTs have more limited security of tenure and are generally not considered sitting tenants in the traditional sense. Properties with AST tenants are handled under standard buy-to-let lending criteria.

The presence of a sitting tenant typically reduces a property's market value because the buyer cannot gain vacant possession. Discounts of 20 to 40 per cent or more are common compared to the value with vacant possession.

A sitting tenant affects your remortgage in several important ways.

Reduced property value. Because the property cannot be sold with vacant possession while the sitting tenant remains, its market value is reduced. Lenders base their loan amount on the property's value, so this directly affects how much you can borrow.

Limited lender options. Many mainstream lenders are reluctant to lend on properties with sitting tenants due to the reduced value, limited marketability, and the complexity of the legal position. You may need to approach specialist lenders who understand this type of property.

Valuation challenges. Valuing a property with a sitting tenant requires specialist knowledge. The valuer needs to assess the property's value in its current state (with the tenant in situ) as well as its potential vacant possession value. Comparable evidence for properties with sitting tenants can be scarce.

Rental income considerations. If you are receiving rent from the sitting tenant, this will be at a fair rent level (for regulated tenancies), which is typically significantly below market rent. Lenders who do accept these properties may take the reduced rental income into account.

Legal complexity. The legal framework around sitting tenants is complex, and lenders will want their solicitors to review the tenancy arrangements carefully. This can add time and cost to the remortgage process.

While the number of lenders willing to offer a remortgage on a property with a sitting tenant is limited, options do exist.

Specialist buy-to-let lenders and niche mortgage providers are generally more likely to consider these properties than mainstream high street banks. Some private banks and building societies may also have more flexible criteria.

When approaching lenders, be prepared to provide comprehensive information about the tenancy, including:

• The type of tenancy agreement in place
• The current rent and how it is determined
• The tenant's history of occupation
• Any succession rights that may apply
• Details of the property's condition and maintenance

A specialist mortgage broker with experience in properties with sitting tenants can be invaluable. They will know which lenders are active in this area, what terms are typically available, and how to present your application for the best chance of approval.

Be aware that rates on mortgages for properties with sitting tenants may be higher than standard residential or buy-to-let rates, reflecting the additional risk and reduced marketability from the lender's perspective.

When assessing a property with a sitting tenant, lenders will also consider the potential for tenancy succession, which can extend the period before vacant possession is achievable.

Under the Rent Act 1977, when a regulated tenant dies, their spouse or civil partner may succeed to the tenancy as a statutory tenant. In some cases, a family member who has been residing in the property may also have succession rights, though this has been limited by subsequent legislation.

The possibility of succession means that vacant possession may not be achievable even on the death of the current tenant, which can further affect the property's value and lender appetite.

Some landlords explore the option of negotiating with sitting tenants to surrender their tenancy in exchange for a cash payment. This can be a mutually beneficial arrangement, but it requires careful negotiation and legal advice. If successful, achieving vacant possession can dramatically increase the property's value and open up mainstream remortgage options.

It is essential to handle any negotiations sensitively and legally. Harassment or unlawful eviction of a sitting tenant is a criminal offence, and the tenant's rights must be respected at all times.

Understanding how properties with sitting tenants are valued is important for setting realistic expectations about your remortgage.

A valuer will typically assess the property on two bases: the value with the sitting tenant in place and the vacant possession value. The lending will be based on the lower, sitting tenant value.

The discount from vacant possession value varies depending on several factors:

• The age and health of the tenant (which affects how long they are likely to remain)
• Whether succession rights exist
• The level of rent being received
• The condition of the property
• The location and demand for similar properties

Typical discounts range from 20 to 40 per cent, though in some cases the discount can be larger. This means that even if you have significant equity based on the vacant possession value, the available loan amount may be considerably lower.

Lenders offering mortgages on properties with sitting tenants typically require lower loan-to-value ratios than for standard properties, often in the range of 50 to 65 per cent of the sitting tenant value. This provides the lender with additional security given the property's reduced marketability.

If you are looking to remortgage a property with a sitting tenant, here are some practical steps to help guide the process.

Understand your tenancy. Before anything else, ensure you have a clear understanding of the type of tenancy in place and the tenant's legal rights. A solicitor specialising in landlord and tenant law can help clarify the position.

Obtain a realistic valuation. Consider commissioning an independent valuation from a surveyor experienced in properties with sitting tenants. This will help set realistic expectations about borrowing capacity.

Compile comprehensive documentation. Gather all tenancy agreements, rent records, correspondence with the tenant, and details of the property's condition. Complete documentation demonstrates professionalism and helps the application progress.

Engage a specialist broker. A broker with experience in this area is likely to be your most valuable resource. They can identify suitable lenders, advise on the best approach, and manage the application process on your behalf.

Consider your long-term strategy. Think about your broader plans for the property. If you are hoping to eventually achieve vacant possession, this may influence the type of mortgage product you choose and the term you select.

Budget for higher costs. Properties with sitting tenants may involve higher arrangement fees, valuation costs, and legal fees than a standard remortgage. Factor these into your planning.