Landlords Bible : Terms of a tenancy - outline of the terms of a tenancy agreement.

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THE TERMS OF A TENANCY AGREEMENT

Once a landlord has identified an acceptable tenant and all the letting references have ‘checked out’, the next stage for a landlord is to get the tenant to enter into a tenancy agreement. Does the landlord need to bother with a formal tenancy agreement? Well the short answer is actually no. Landlords may be surprised to discover that they can grant a tenancy verbally; providing the tenancy meets the following conditions:

it takes effect on the day it is granted
it is for a term not exceeding 3 years, and
it is at the best rent which can reasonably be obtained without a premium being taken (one off capital payment for the beneficial interest of the lease)

However, I would never recommend this to landlords, even if the tenancy is to a friend or relative. This is because the enforcement of possession or alteration of the terms of the tenancy is more expensive for a landlord without the documentary evidence of a tenancy agreement, because accelerated proceedings are not available. Please note accelerated possession proceedings, do not mean fast!

Generally a tenancy agreement is beneficial for both the landlord and the tenant and therefore a tenancy agreement is used in almost all letting cases. As a landlord you know that you have a tenant for a certain period of time, normally 6 months with an Assured Shorthold Tenancy (AST). In return the tenant has a basic security of tenure during which time they cannot be ‘booted out’ by a landlord, unless they as the tenant stop paying the rent. It is worth mentioning before going on, that in law two or more persons are described as ‘a tenant’. Therefore, even when there are a number of separate tenants occupying a landlord’s investment property under a single agreement, legally they are referred to as the tenant (singular).

The current legislation originates from the Housing Act of 1988. This heralded the deregulation of residential tenancy law by introducing two new types of tenancy; the Assured Tenancy (AT) and the Assured Shorthold Tenancy (AST). Prior to these tenancy types, residential lettings were largely governed by the provisions of the 1977 Rent Act. This archaic bit of residential tenancy legislation had been yet another nail in the coffin of the private rental sector. It saddled landlords with tenants that had security of tenure (i.e. virtually impossible to get them out).

The reform of the tenancy legislation in the Housing Act of 1988 was in many ways the beginning of the ‘buy-to-let’ property revolution. It dispelled, hopefully for ever, the spectre of rent restriction and unreasonable levels of security of tenure. These two factors were largely responsible for the continued decline of the private letting sector. The 1988 Housing Act was subsequently amended by the 1996 Housing Act. This updated lettings procedures and made it even easier for landlords to let property without the worry that the landlord would be unable to get their investment property back at the end of the tenancy’s term.

The assured tenancy

As I have already said it is possible for landlords to create a residential tenancy without a formal tenancy agreement. However, a tenancy agreement is useful to a landlord. It sets out in clear terms the rights and responsibilities of both the landlord and tenant. If disagreements arise then this tenancy agreement will be useful in settling disputes which may ultimately go as far as the Courts.
What types of tenancies are there and what are my rights and responsibilities as a landlord?

There are two main types of tenancy concerning the letting of residential investment property. The Assured Tenancy (AT) and the Assured Shorthold Tenancy (AST). There are a number of circumstances when neither assured tenancy can be granted and these are set out in Box A.

BOX A

Restrictions on assured tenancies
In most circumstances it will be possible to grant an Assured Tenancy, the following are the exceptions:
1. Corporate lets are excluded from the Act as tenants must be ‘individual’. Therefore, if landlords wish to make a corporate let they will need to obtain a specific letting agreement
2. Holiday homes are excluded because the tenant must occupy the property as his ‘only’ or principal home. (the law however, recognises that it is possible for a person to have more than one ‘home’ and that this occupation does not have to be continuous)
3. The Housing Act 1988 came into force on 15 January 1989. Only lettings entered into on or after that date can be an Assured Tenancy or an Assured Shorthold Tenancy.
4. High value properties are excluded so where rent payable is over £100,000 per annum these tenancies are excluded from being an Assured Shorthold Tenancy.
5. Very low rent investment properties with rents of less than £250 pa or £1000 pa in Greater London are also outside the provisions of the Housing Act.
6. Business tenancies
7. Tenancies of agricultural land
8. Lettings to student tenants by specified educational bodies, such as universities and colleges.
9. Lettings by resident landlords
10. Crown, local authority and housing association lettings

Don’t be fooled by the similarity in the tenancy names. The two types of assured tenancies are very different tenancy animals.

The Assured Tenancy gives a tenant extensive security of tenure. This means that at the end of the agreed term the tenant does not have to leave a property, having the legal right to stay unless the landlord can establish grounds for possession (see notes). Assured Tenancys also allows tenants the right to have their rent referred to the Rent Assessment Committee (see Box B) if the tenants consider it to be excessive. This type of tenancy was set up largely for tenants wanting greater security of tenure. For most landlords and tenants it is not suitable. This is because from a tenant’s perspective one attraction of renting is that it offers short term flexible rental accommodation. Whilst what a landlord wants; is to be able to charge a market rent and obtain vacant possession of their investment property quickly and easily.

BOX B

Rent Assessment Committee
The Rent Assessment Committees are bodies that emerged during the days of regulation, where the concept of ‘fair rent’ prevailed. Fair to whom I always ask? The landlord, the tenant, the regulator; a misnomer if there ever was one!
If a rent assessment committee receives a referral; its’ job is to determine and set the amount of rent payable to a landlord. These Rent Assessment Committees usually comprise of three members (a lawyer, a property valuer and a layman). They first inspect the investment property. Then the Rent Assessment Committee has an informal hearing where the landlord or tenant can advance any arguments about the proper level of rent. It is possible for the Committee to make their decision purely on consideration of the relevant papers if the landlord or tenant agrees.

Generally, the Rent Assessment Committee only make a determination if there are sufficient numbers of dwellings in the locality let on Assured Shorthold Tenancies and the rent payable is significantly higher than the prevailing rate. The Rent Assessment Committee compares the rents being charged for similar properties in the locality and then decides the rent on the basis of these ‘comparables’, (although the rent should never be less than the market rent). The Committee can either agree the rent proposed by the tenant or set a different rent (the rent can be higher or lower). The amount of rent that the Rent Assessment Committee finally decides upon is usually back dated to the beginnings of the claim period.
The Rent Assessment Committee’s real function is to provide a ‘check and balance’ in the letting system and allow a tenant recourse if they think they are being exploited by a landlord. Ironically, it can only function when there are sufficient properties with which to compare rents with. In this situation competitive pressures are likely to keep property rents at market levels anyway. The reality therefore is as with most ‘checks and balances is it’s rarely used.

For these reasons the vast majority of tenancies are Assured Shortholds. Prior to 28th February 1997 all tenancies were Assured Tenancies (AT) unless a notice was signed to indicate an Assured Shorthold Tenancy. The undoubted popularity of the Assured Shorthold Tenancies with landlords and tenants over its’ more restrictive ‘cousin’ meant that from the 28th February 1997 this situation reversed and all assured tenancies automatically become assured shorthold tenancys (AST) unless otherwise stated. Given the prominence of the Assured Shorthold Tenancy (AST) it is this I will concentrate on.

THE TERMS OF THE TENANCY AGREEMENT

The terms of the tenancy agreement effectively set out the rights and responsibilities of the landlord and tenant. The Terms are normally contained under a series of headings.

Landlords should be clear that the law acts in such a way as to allow the tenant to do what they like with the property. It’s important therefore that if any activity is to be prohibited, that this is written into the tenancy agreement.

However, your scope to act is limited by the European Union directive on Unfair Terms in Consumer Contracts Regulations. This states that whilst the rest of the tenancy agreement remains valid, the terms which are ‘unfair’ to the tenant will be void.

Therefore, if there is anything specific that is not covered by a standard tenancy agreement you should seek legal advice, or refer to the “Guidance on Unfair Terms in Tenancy Agreements” which should assist in phrasing any alterations to standard terms.

It can be obtained from:

ODPM Free Literature, PO Box No.236, Wetherby, LS23 7NB.
Tel 0870 1226 236 Fax 0870 1226 237 odpm@twoten.press.net

The following are the main headings of a standard Assured Shorthold Tenancy Agreement (AST), together with notes on what should be included within them and how these terms may and should not be altered. It is worth noting that most landlords do not and are not required to get into this level of detail on the tenancy agreement.

This is because they simply buy or acquire a standard Assured Shorthold Tenancy Agreement (AST), most of which have a set of ‘standard’ terms and clauses which make them suitable for most lets. However, it is always worth being aware of what makes up the ‘bare bones’ of a tenancy agreement should problems a rise or where you may want to enter into a non ‘standard’ letting. If you do need to modify an tenancy agreement you are always best advised to seek suitable legal opinion first.

Description of the property
Obviously, a legal tenancy agreement will need to clearly identify the property that it refers to. The full address of the property should therefore be included. Particular care is needed when letting part of a building, where the exact extent of the accommodation being let should be specified e.g. front bed sitting room No.7, with shared kitchen and bathroom – these are often referred to as the ‘common parts’.

Payment of rent
The tenancy agreement should specify that payment of rent is made in advance. If not the ‘Common Law’ implication is that rent is payable in arrears. This is unacceptable as it puts you at a greater risk of not receiving rent whilst still having to potentially meet your mortgage payments.

The intervals for payment must also be stated. Rent should be paid on a monthly basis although other intervals are allowable such as weekly or four weekly. Where rent is paid weekly the landlord is obliged to provide the tenant with a rent book. This and the fact that you will have an increased volume of payments along with the associated petty administration, is why you should avoid if possible this frequency of payment. If other intervals are chosen (for example six monthly), the assured tenancy mandatory ground 8 for repossession may not be available to the landlord.

Interest on arrears
Ensure that a term is included in the tenancy agreement that allows the landlord to add interest to any arrears. It should be charged on a daily rate, say Bank of England base rate plus 5% is considered reasonable.

The levying of this charge should act as a disincentive for late payment and also compensate the landlord for the loss of interest on monies they should have received.

I once took legal action to reclaim outstanding rent. The interest on this came to £42. Not huge; but it compensated me in part for the time and effort involved in taking proceedings. Unfortunately, it is not possible to reclaim these costs. It is nevertheless acceptable to make an administration charge for each late payment. A provision for this should also be included.

Council tax
The liability for the Council Tax will generally fall on your tenant. However in sharing arrangements such as a House in Multiple Occupation (HMO), the landlord is responsible. The rental figure charged should reflect this and a provision should be inserted allowing the landlord to increase the rent to take into account any increase during the tenancy.

In other cases, the tenancy agreement should contain provisions stating that the rent is exclusive of Council Tax and require the tenant either to pay it to the local authority, or to reimburse the landlord should he/she become responsible.

Water chargesUtility
It is assumed that the tenant pays for these charges. If this is not the case an express term should be included stating the required arrangement within the tenanyc agreement.

Repairs and decoration
It is very likely that Section 11 of the Landlord and Tenant Act 1985 (see Appendix Box) will apply to the letting. This imposes an obligation on the landlord (where the tenancy is for a term of less than seven years) to repair the structure and exterior of the property. If the property includes a garden, it is wise to include an obligation on the tenant to maintain the garden. In practice whether they adhere to it will depend on the amount of work involved and whether they have ‘green fingers’.

Alterations
Thankfully tenants are prohibited from deliberately damaging your property! Again it is always advisable to have an express clause within the tenancy agreement stating this.

Use
The law allows the tenant to use the property for what ever purpose they choose, unless the tenancy agreement states otherwise. It’s therefore wise to restrict the property’s use to that of a single private dwelling. Also impose an obligation on the tenant not to: cause nuisance or annoyance to neighbouring occupiers, damage the house or contents in any way and carry out illegal activities.

Insurance
In a short tenancy (such as Assured Tenancies), the landlord will normally insure the premises as he/she has the most valuable interest in the property. However, there should also be a clause that obliges the tenant not to do or, omit to do anything that might affect the landlord’s insurance.

Assignment
Under common law, a tenant can freely transfer the tenancy to whomsoever they wish. For this reason an express provision should be included in the tenancy prohibiting transfer. You don’t want to let to one person and then find that they have assigned the tenancy to their drug addicted cousin!

Subletting
In the case of a shorthold tenancy, there is a danger that where the tenant is allowed to sublet, they could grant an assured tenancy to their tenant. The problem for you as landlord is that this tenancy agreement would be with your tenant not you. This would give this subtenant full security of tenure. The statutorily implied prohibition to this applies only to periodic tenancies and so an express provision is needed which prevents this, unless the landlord gives their express consent.

Address for service
Under Section 48 of the Landlord and Tenant Act 1987 no rent is lawfully due from a tenant unless and until the landlord has given the tenant notice of an address in England or Wales at which notices can be served. Therefore, make sure you include the appropriate notice in the tenancy agreement stating a Welsh or English correspondence address.

Rent increases
It goes without saying that you will want a provision allowing you to increase the rent during the tenancy. However, the prescriptive nature of an ‘escalator’ clause, such as the one that specifies that the rent rises 5% pa; means in practice it is probably easier to rely on the statutory provisions. Section 13 of the 1988 Housing Act provides a mechanism by which rents can be increased to what ever you think the market can bear.

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