Tenancy is not binding on the lender

If the landlord does not live in the accommodation and has granted a tenancy after the 1st December 2017 (whether or not the tenancy is in writing) it is likely that the tenancy is a private residential tenancy.  

A private residential tenancy which has been granted without the lender's consent could amount to a default on the mortgage of the landlord. [1] A lender may also apply to repossess if the landlord falls into mortgage arrears. As such the prospects for a private residential tenant remaining to remain in the property long term are poor.

However the lender must still take separate legal action to either end or void the tenancy. [2] Where a lender is successful in repossessing the property from the landlord the tenancy passes to the lender. [3] The tenancy cannot be ended except in accordance with Part 5 of the Private Housing (Tenancies) (Scotland) Act 2016. [4] In practice, this means the lender must then apply to the First Tier Tribunal for an eviction order before they can remove the tenant.

The legislation covering private residential tenancies provides a ground for eviction if the lender is entitled to sell the property. See Private residential tenancies - Grounds for possession for more information.

Where a lender is attempting to take possession and the tenancy is a common law tenancy the position of the tenant is not secure. It seems likely the tenant would only have the right to remain in the house until legal action was taken against them personally, either by way of reduction of the lease (this is where a court annuls the tenancy), or an action for ejection in a sheriff court. It would be difficult to defend such an action.

If the tenant is an assured tenant, s/he is in a much stronger position. This is because the decree for repossession obtained by the lender against the borrower is valid only against the borrower. The decree does not affect the position of the tenant residing in the property and they are entitled to continue residing in the tenancy until a court order for possession is obtained against the tenant. [5]

Even though the borrower may have granted a tenancy unlawfully, the lender must take separate legal action for recovery of possession on discovering that the tenant is still in the accommodation. This can be done by raising an action in terms of ground 2 of schedule 5 of the Housing (Scotland) Act 1988 in the First Tier Tribunal Housing and Property Chamber. This ground is designed for lenders who are in possession as a result of default by the borrower. It allows the lender to recover possession against the tenant providing that a notice to this effect is contained within the tenancy agreement and the tenant was given notice of this prior to the commencement of the tenancy. In practice, this is rarely if ever done. However the tribunal has the power to dispense with the requirement to serve such a notice if it is satisfied that it is reasonable to do so. In addition, the tenancy should also be terminated lawfully by means of notice to quit. Unlike for other grounds, the lender is not required to show the court that it is 'reasonable' to grant decree for eviction against the tenant.