New class of tenancy

I have been a ‘fan’ of Merryn Somerset-Webbs commentary on the unfolding financial crisis and the resulting property crash.

In last weeks Financial Times Merryn brought up the changing nature of the lettings market and the need for a rethink on the tenancy agreement to facilitate a more long-term type of let within the private rented sector. I thought that it would be worth responding to her with my own particular view on how the legislative environment could evolve to accommodate changing demand patterns within the private rental sector.

A copy of my letter is reproduced below and I’d be interested in any views from our landlords on this subject so please post your comments.

Hi Merryn,
Thanks for your thought provoking article in this weeks FT.

You eloquently highlight the issues surrounding the changing nature of the private residential market and the need for it to change to facilitate more long term lets.
I agree that the UK’s residential rental market would indeed benefit from an increased availability of long-term lettings as we move towards a more mature European based renting model. Recent figures from Savills highlight the fact that the UK seems on course to see the private rental sector reach 20% of all households, up from 14% currently. I myself am a landlord with a portfolio of residential properties predominately let to long-term tenants.

The Housing Act 1988 liberalised the lettings market by introducing two classes of tenancies; the widely used Assured Shorthold Tenancy which most landlords and tenants choose to use, partly because it gives them the flexibility to end the tenancy quickly. The other much less widely known is the Assured Tenancy which gives the tenant full security of tenure.

What we need now is a hybrid of the two.

I agree with your call for a regulatory environment and tenancy that accommodates long-term and short term rental models within the private rental sector providing the choice that that our housing market is moving towards.

What is needed is a tenancy that would allow the tenant full security of tenure for an extended period but also enabling the landlord to regularly increase the rent inline with market rents. We have seen just recently how rapidly rents can move, both up and down in response to changes in demand and supply.

The Housing Act did introduce the Assured Tenancy; however the lack of take up of this type of tenancy amongst private landlords reflects the inability of the landlord to obtain vacant possession at the end of any fixed term tenancy and the resulting differential in the value of the asset. A property without full vacant possession will be generally worth 40% less than the vacant possession price.

Encouraging long-term letting amongst private landlords

The obvious solution it seems to me would be a tenancy that would grant the tenant the rights under the current Assured Tenancy for a period say of 1-5 years. At the expiry of this the tenancy would automatically become a 6 month fixed term Assured Shorthold Tenancy, allowing the landlord the right to obtain possession at the end of the 6 months fixed term by issuing a section 21 notice. This would give tenants the certainty of a long term letting whilst also providing the landlord the guarantee of vacant possession at the expiry of the fixed term tenancy.

Financial incentives also required

The other problem on encouraging a more long-term letting culture amongst landlords is that there is very little financial incentive to give up the possibility of vacant possession for a significant time; even where the landlord intends to hold their investment for the long-term. Most landlords despite the popular perception that we are all ‘wheeler dealer’ types in the ‘property ladder’ mould. Figures from the Association of Residential Letting Agents for instance suggest that the average time a landlord holds a residential investment property for is 17 years.

In essence there is no problem within long-term lets. For many landlords it is actually advantageous because it saves on re-letting costs and potential voids costs.
The government could easily incentivize a proportion of landlords to let under a modified tenancy by allowing landlords that offer tenancies on these longer term lets the ability to hold their property in a SIPP. As well as offering incentives for existing landlords to offer long-term lets it would also encourage new landlords to invest their pension pot in an asset class that is ideally suited to the nature of pension provision. That is an asset class that grows inline with the economy; has a low level of value volatility and pays a regular and generally rising income.

In essence the interest of private landlords, tenants, taxpayers is fundamentally aligned. We don’t need a revolution in housing legislation, more a tweaking of the current legislation and tax laws to help facilitate private landlords to respond to the evolving lettings environment.

Regards
Chris Horne
Editor
Property Hawk

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You have made no mention of the fact it is damn nigh impossible to arrange finance (mortgage) on a property that is not on an AST (I’ve had a property on a PSLS which was a long (5 year) contract, which I extended to 8.5 years eventually. Mortgage companies will NOT lend on it in the current market, nor would they in the "good times".

Hope these points help. Thanks for your great articles.

Gary Payne

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Hi

I found your letter regarding a potential new tenancy interesting however I would like to add the following comments.

It must be noted that it would be a nightmare to link specific tenancy types to tax incentives, property taxation is complex enough and it would be very difficult to demarcate specific income and expenditure streams to different tenancies.

One point missed is the value and risks of a long lease .

The risk to the landlord of default during the assured period could prove expensive and already I am encountering tenants securing tenancies who have no intention of paying rent after the first couple of months as they know their rights to stay for as long as possible prior to flitting and starting again with another landlord. One of the positive elements of the AST is section 21 can be served on a no fault basis a bit like a divorce so it takes away the recrimination of enforcing grounds and subsequently reduces hostility and tension to both parties.

As the long tenancy has a value maybe they should be sold and formally traded in a conveyancing type transaction. A lease of five years at a rent of £100pw produces a instant liability to the landlord of £26,000 which is why lenders are reluctant to lend to landlords issuing such leases. However if the landlord and tenant brought or sold the lease with a clause for non payment the default risk could be reduced. I must admit though I am unsure of the value and what a fair price should be but they should not be handed out for free. In London some properties bought and sold have leases of 100 years or less and they change hands for hundred of thousands of pounds so therefore a value of say 10-20% of the purchase price could be relevant for a 5-10 year lease.

Most difficulties occur during the initial months so maybe a long lease could be earned after successfully managing a series of shorter tenancies.

Hope you find my comments useful and interesting.

Oliver

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Dear Chris, Thanks for this – lots of interesting points and I hope that the authorities will soon begin to see sense on this one. Best wishes, Merryn