What other types of tenancy agreement are there?
So far I have almost exclusively concentrated on the Assured Shorthold Tenancy (AST).
Most landlords let using an Assured Shorthold Tenancy (AST.) This is because as I have already said they offer a high degree of flexibility to both landlord and tenant. Importantly from a landlords’ point of view, they allow them to obtain possession of a rental property easily and quickly should they want to sell. However, as well as the Assured Tenancy there are a number of alternative tenancies which landlords may want to consider. Several will not be suitable for the ‘newby’ landlord due to their specialist nature. However, as a landlords experience and confidence builds they offer opportunities to broaden a landlords portfolio.
The most common of these alternative tenancies are:
1. Regulated tenancy
2. Private sector leasing schemes (PSLS)
3. Company or corporate lets
These are tenancies that were created prior to 15th January 1989 and are governed by the Rent Acts 1977. Properties let under this tenancy type are let on rents that are often 50-70% of the market rent. This is because they are subject to a system of rent controls resulting in the tenant only paying a ‘fair rent’. In addition to restricted rent levels, tenants occupying properties under these tenancies are almost impossible to evict by a landlord. As a result they sell for about 70-80% of vacant possession value (without tenants). Landlords who invest in properties subject to these tenancies do so in order to benefit from the capital uplift when the tenancy comes to an end. Typically this comes about following the death of a tenant. The value of these types of property investment often reflect the age and health of the tenant.
The main advantage for a landlord of acquiring these properties are that the capital costs are significantly less than they would be if bought with vacant possession and that they offer the potential of a 30% uplift to a landlords capital investment almost over night should the tenant leave or die. The other is that whilst the rent maybe less than a what would usually be seen as a fair rent the fact that the tenant remains for many years as long as they continue to pay, the landlord will have no rental voids and no letting fees.
There are however a number of disadvantages for the landlord:
1, The terms of the tenancy means that unlike the Assured Tenancy (AT) there is potentially a succession in the tenancy. Therefore if the tenant has a family member living with them during the 12 months before they die as their only or principal home, then that family member may be able to succeed to the tenancy as an Assured Tenant. To put it brutally, an opotunistic landlord buys the property with a 90 year old dear who is diabetic with one lung and a dodgy ticker. She duly obliges and ‘pops her clogs’ within 12 months. The landlord is rubbing their hands anticipating the 30% profit they have made in the investment in less than a year, only then to find out that unbeknown to the landlord her 34 year old international marathon running son has been living with her for the last year. ‘Gutting!’ These succession tenants are hard to evict but a landlord will at least be able to charge a market rent.
The nature of the tenancy means that a landlord will not be able to obtain a buy-to-let mortgage on these properties. Therefore they tend to be bought by a landlord using cash or by large organisations using commercial finance.
The other big disadvantage to a landlord is that non payment of rent is only a discretionary ground for possession. This means that even where a tenant stops paying rent to the landlord the courts do not automatically have to grant the landlord possession. The reality is that particularly where the tenant is classed as vulnerable they will be able to remain in residence and pay a small proportion of the rent to the landlord.
The result of these drawbacks is that many of the properties are bought by specialist investment companies and not individual landlords. The other group of property investors tend to be wealthy individual landlords that can afford to speculate on obtaining vacant possession without having to worry about a specific timescale to receive their return.
Private Sector Leasing Schemes (PSLS)
Private sector leasing (PSL) is a relatively new concept. It allows private landlords to lease their properties through a management company to a local authority.
The largest of these management companies is Orchard & Shipman plc (O & S) who have now run a contract in Hillingdon, Middlesex for over 4 years to manage and maintain 900 flats let to tenants on benefits. The project proved so successful that Orchard & Shipman started running a second scheme in Edinburgh. There, just as in the Hillingdon model, Orchard & Shipman can provide guidance to landlords considering property purchase and then maintain and manage the properties for them. In return, the landlods get a 3-5 year contract and yields of about to 5-6%. Landlords who join the scheme must furnish and decorate their properties and pay for all the running repairs such as faulty boilers. However, any damage caused by the tenants is paid for by the Council or Orchard & Shipman under a separate dilapidation clause. The properties are managed by Orchard & Shipman for which they receive a retainer from the councils. Rent is paid quarterly in advance to the landlord by the Council. This means that there should never be a problem for a ‘geared’ landlord to find the money to meet any monthly mortgage payment as the money will already be in their account.
The main advantages for the landlord of this type of scheme are:
The owners get a fixed contract often of between 3-5 years. This guarantees the rent for the period of the contract meaning that the rent is paid regardless of whether there is a tenant in place. This means that landlords escape the ‘curse of the rental void’ for the entire contract period.
The landlord does not pay any management fees as the properties are managed by the managing agent who is paid by the Local Authority
There are no letting or property marketing costs for the landlord as the Council allocates the tenant to the property.
Are there any drawbacks for landlords?
The biggest is that a landlord has signed over the property to the Council for several years which will prevent the landlord from selling the property with vacant possession during this time. The other may be that the rent a landlord receives may not be as great as that available in the private sector. This is something that will very much depend on the property, the scheme and the local market. The best thing for landlords interested in this type of scheme is to check with the local council to see if they operate one or try a search on the Internet. Where these schemes do operate they will normally be looking for limited numbers and are popular with landlords. So landlords will need to act fast.
Company and corporate lets – Agreements
This type of let to a company can be very lucrative if a landlord manages to secure one.
This type of tenancy lies outside the scope of the Housing Act 1988 and are governed by contract law. Therefore landlords will have to obtain an agreement specifically drafted for company letting. There are ‘pro forma’ copies available but the very specific nature of company lets means it may be necessary for a landlord to have one drafted by a lawyer.
Company lets cannot be assured tenancies and in some ways this can be advantageous to landlords, because this type of tenant does not enjoy the full statutory protection afforded to individuals. This type of tenancy is also different from an Assured Tenancy (AT) in that the property is actually let to the company, with their employees usually occupying the dwelling as licensees of the tenant.
Something for a landord to be aware of is; if the company is allowed to conduct a business from the premises, they can apply for protection using the Landlord & Tenant Act 1954. A landlord can prevent the 1954 Act applying by keeping the tenancy term under six months (not if a series of consecutive tenancies amount to 12 months or more). Landlords should ensure they prevent this by inserting the appropriate clause. Landlords also should remember that even though the tenant is a company, this still will not protect the landlords income should it go bust or default on its’ payments. In these circumstances at least the company has no security of tenure and a landlord should be able to obtain possession relatively quickly.
Company lets are very common in some of the major cities or even large houses within the commuter belts of metropolitan areas. The advantage to the landlord is that quite frequently a premium in the rent can be negotiated, particularly where a landlord is able to offer some additional services to the tenant. I remember one time having the boss of a Japanese textile business renting one of my properties. He wanted various things doing to the property including satellite TV. I obliged and at the same time negotiated a significant uplift in the rent with his employers. The name of the game in a company let is the landlord keeping the tenant happy. If a company is prepared to pay rent in some cases for several years then that member of staff is obviously important to the organisation. The tenant is likely to have moved with the job, which is often a personal wrench for the individual concerned. Therefore, if the company can keep their new employee happy, they are more likely to retain them and are hence reasonably amenable to their wishes.