Five justices at the UK’s highest court unanimously dismissed an appeal by 45-year-old Fiona McDonald, whose home in Witney, Oxfordshire, was bought by her parents in 2005 for her to occupy as a tenant.

Having got into financial difficulty the parents were unable to maintain the loan interest payments on the property. Consequently the lender who provided the parents with the money for the property sought to reclaim possession of the house.

Fiona McDonald argued that it was not a proportionate response to the circumstances she faced, but the judges ruled that human rights laws do not apply in possession claims between private parties.

Lawyers said the ruling on Wednesday had prevented “a major expansion of human rights into private contractual disputes”.

Mark Routley, head of property litigation at law firm TLT, said the decision was welcome news for “landlords and lenders alike” adding that human rights arguments in a number of cases where appeals were on hold pending the outcome of the McDonald case would “now fall away”.

He said: “Today’s judgment has been on the watch list across the property and financial services sectors and beyond because it raised for the first time the prospect of expanding the use of the Human Rights Act into litigation between private individuals.

“Had the case succeeded, it would likely have been a deterrent to investment in the buy-to-let mortgage market and in property generally. It could have seen the role of the court significantly extended so as to alter the basic principle of freedom of contract.”

Mr Routley added: “However, the Supreme Court has made it clear that provided a private landlord complies with the relevant regulations in the Housing Act, the court must order possession.

“It is not for the court to apply its discretion and decide whether granting the possession order is proportionate in the circumstances.”

In a written ruling, Supreme Court president Lord Neuberger and deputy president Lady Hale said: “Sadly has had psychiatric and behavioural problems since she was five.

“An experienced psychiatrist explained in his expert evidence that she had ‘an emotionally unstable personality disorder and at times when her mental state has deteriorated she has presented with frank psychotic symptoms’.”

They outlined how the 45-year-old’s parents decided to buy her a property using a loan - for which she paid them rent - but they encountered financial difficulties with their business and were unable to keep up with the payments.

Ms McDonald was served with a possession notice in 2012.

A year later a judge at Oxford County Court ruled it was not required to consider the proportionality of making an order for possession against a residential occupier.

She later lost a challenge at the Court of Appeal before taking the case to the UK’s highest court.

The Residential Landlords Association (RLA) said it formally intervened in the case to ensure that the legitimate right of landlords and lenders to reclaim possession at the end of a tenancy or lending period remained.

RLA Policy director, David Smith, said: “It is sad that it has taken this particular case to clarify this important point of law, but if the appeal had been allowed it would have completely undermined the ability of landlords to reclaim possession of their property at the end of a tenancy.

“It could have opened the door to those tenants who might seek to make false accusations to remain in a property.

“This would have severely damaged the confidence of landlords to rent properties and lenders to provide the funds for the new homes to rent the country needs.

“Whilst welcoming the court’s judgement, it does act as a reminder that landlords should be clear that they can keep up with mortgage payments, even through difficult financial times.”