Playing the Long Game

Written by John FitzGerald

The level of home ownership in the UK has now dropped to its lowest level since 1987, according to recent figures from the Department for Communities and Local Government.

The need for large deposits, the tight amount of stock for sale and rising house prices means that the private rented sector is continuing to grow, with 17% of UK households living in rented accommodation.

The Assured Shorthold Tenancy (AST) is,of course, the norm in the sector. Most landlords will grant an AST for either six months or a year, frequently with a break clause at the end of the first six months. At the end of the fixed term, the landlord can either grant a fresh AST or let it slip into a statutory implied tenancy.

These types of arrangements provide flexibility for both tenants and landlords. Tenants may not wish to be tied in to a long-term contract. At the same time, the landlord has the right to regain possession of the property at the end of the fixed term, so long as two months’ notice is given.

This ensures the landlord is not restricted if he or she wants to increase the rent, replace the tenant or occupy, renovate or sell the property.

However, organisations such as Shelter are arguing that with this flexibility comes a lack of security. It wants to see longer tenancies, particularly for families with
children at school, to provide stability and certainty.

For landlords contemplating a longer term AST, however, there are number of factors that should be considered.

There are no legal restrictions on the minimum or maximum length of an AST, although a tenancy for longer than three years will need to be executed by deed and those over seven years will need to be registered with the Land Registry.

A lease granted for more than 21 years will fall under the definition of a ‘long lease’, bringing with it further rights for the tenant.

Added security for the tenant can also be beneficial for the landlord as rental income is guaranteed for a longer period of time and the landlord will not face the possibility of having to seek a new tenant as regularly. This may be desirable in a market where future rental figures are in doubt.

Tying in a tenant for a lengthier period of time also reduces costly void periods. To ensure that outgoing expenditure can be met, it may sometimes be better to risk aren’t slightly lower than market value in order to be assured of a continuous income stream, rather than face periods of no income whatsoever.

Landlords offering a slightly lengthier tenancy will also pay less annually in tenancy renewal commissions, if they are with an agent that charges these fees. Longer tenancies may also attract more established tenants, who are more likely to pay their rent on time and look after the premises, in this way protecting the value of their landlord’s capital investment.

In sharp contrast, in a buoyant rental market a landlord who grants an AST for too long is in jeopardy of seeing his rental income drop dramatically below the current market level. One option, especially where the landlord may wish to replace the tenant, is to have a break clause. This would still require a two-month notice period; however, its very existence may discourage more long-term tenants and as a result may be resisted during negotiations.

Typically, it is necessary to include rent review clauses within the tenancy
agreement. The review process may incur further cost for the landlord if it is linked to the market rate, and the benefit of retaining a long-term tenant will have to be
determined within this context.

The review cost can be reduced if the rental increase is based on an increase in the Retail Price Index or a fixed rate. In prime urban areas, particularly in parts of central London, such review clauses could provide the danger of the reviewed rent tipping the property above the maximum rent for an AST, which is currently rent in excess of £100,000 a year.

Also, ASTs can only be granted to individuals, rather than companies, and as a result landlords will have to consider their position carefully.

Common law tenancies

Tenancies outside the framework of an AST are common law tenancies, where the landlord must ensure that the tenancy agreement explicitly states the triggers by which the landlord can bring the lease to an end.

Section 21 notice procedures do not apply to these types of tenancies as the landlord will be automatically entitled to take possession of the property at the end of the term.

This in itself doesn’t mean that a landlord will not have to go to court to obtain possession. The time scales involved, in what could be lengthy proceedings for an order for possession to evict a tenant, should always be taken into account by landlords when considering the desirability of certain tenants.

Ultimately, no tenancy agreement exists in a vacuum, and it will be up to the landlord and the tenant in each individual case to negotiate the terms that are most appropriate and important to them.

Contact the Author

John FitzGerald

Gordon Dadds