Peter Calls An Expert: Valuable Advice And Support From Those ‘In The Know’
The tenancy agreement is one of the most important documents you will encounter as you progress through your journey as a buy-to-let property investor. It is the contractual agreement that you are making with your tenant and should contain information outlining every single aspect of the tenancy you are agreeing.
Previously, these agreements have been written in vast paragraphs of indecipherable ‘legalese’, but there is happily now a general swing towards a more ‘plain English’ style. This makes everything much simpler for both parties to understand and is just as valid as those puffed-out by (some) solicitors to justify their giant fees.
For the purpose of this article I am describing an AST or Assured Shorthold Tenancy, as this is the one you will most likely be using. It enjoys the protection of the Housing Law 1988 (Amended by the Housing Act 1996) and must fulfil all of the following criteria:
1. The tenant(s) must be individuals (i.e. not a company or organisation).
2. At least one of the tenants must occupy the property as their main or principle home.
3. The annual pure rent (rental without any bills or services included) must not exceed £100,000.
4. The Landlord must not enjoy Resident Landlord status. If you cannot establish any one of the above, for instance if you have a company wanting to let your property or you wish to charge more that £100,000 p.a., then you will need another type of tenancy. If you wish to see a full copy of the Housing Act, it is available at most technical bookstores, but believe me it ’s very long and tedious reading.
The tenancy agreement is normally prepared by the letting agent who will charge you an additional fee for this. In my agency in London this was on average £75 + VAT, but figures vary wildly from agency to agency and it is sometimes possible to negotiate - particularly if you are a multiple landlord and are bringing more business their way. The tenant will also usually be charged.
There is no law that says that you cannot produce your own tenancy agreement, but I would offer a word or two of caution. Unless you are very familiar with the relevant property laws and the clauses you may need, it could be a false economy if you’re doing it to save money. The agents who prepare your tenancy should have taken several courses to enable them to prepare a watertight contract that protects you as their client, and will also contain all the legal requirements that will ensure it stands up in court should you unhappily find yourself in that situation. Tenancies must also be in accordance with the Unfair Terms in Consumer Contracts regulations 1999, issued by the Office of Fair Trading. If your agency-prepared tenancy does not comply with any of these requirements you are able to seek recompense from the agency for negligence.
That said, if you really still want to do it yourself try and get examples of as many as you can. The other option is to get an independent company to prepare a personalised one for you at a cheaper rate. You can download one from the Residential Landlords Association for £9.50 (rla.org.uk), or free if you’re a member.
I am always wary of a Tenancy Agreement that is too short, as it really needs to get very detailed to cover as many eventualities as possible. Remember, though, that it will never be absolutely perfect, as no matter how long an agent has been in the business, situations can arise that simply have never come up before. I currently produce Tenancy Agreements for individuals on a regular basis and have yet to produce one under 14 pages long. This may seem excessive, but has proven itself over and over again to be the most comprehensive form of insurance, and provides clients with a welcome safety net in disputes.
The following are things that should all appear in a good Tenancy Agreement:
- Landlord’s full name and address (wherever that may be on the world).
- Full names of all Tenants over 18 years and their current address.
- The address of the premises, including anything included (garage, shed) and anything to be excluded.
- The dates of commencement and termination of a tenancy. A tenancy that begins on July 6th 2011 will finish on July 4th 2012.
- The amount of rent payable, when and how often it is to be paid, how it is to be paid and to whom it is to be paid.
- The amount of deposit and whoever will be holding this. Currently (although this may be about to change) Landlords are able to hold onto this, but your agent will be more used to holding it as stakeholder or as agent for you.
- A Definitions page which should include a narrative explaining all the main terms used in the Agreement e.g. Joint and Several Liability (more on this later).
- Name and address of the Agency and name and address of whoever is actually managing the property, if it is not them. l Tenants Obligations and Landlords Obligations - this will be the bulk of the agreement and includes what is/isn’t permitted, what is expected of whom, and who pays for what. Some of these issues are governed by Statute (Law).
- Break Clauses and Option to Determine - this outlines when both the tenant and the landlord may give notice to terminate the contract and the period of that notice.
- Date, Signatures and Witness Signatures.
Things that may need to be added if the circumstances require it include: Re-decorating during the tenancy, pets, children, smokers, picture hooks and wall fittings, satellite dishes, additional phone lines or power points, installation of additional appliances, provision of a cleaner or gardener.
All of the above issues generally require a specific clause to be added to cover you. The golden rule here is never assume that it is obvious where the responsibility lies in any situation - if it isn’t in your tenancy the tenant could successfully dispute it in court. Your tenants or a judge may interpret things that may seem logical to you very differently!
For example, if your property comes with a garden consider the following:
- Who is responsible for maintaining the garden?
- Does this include pruning and lopping of trees and shearing hedges?
- What happens when some plants die?
- Who is responsible if the neighbour’s cat digs up the flowerbeds?
- Are tools provided? (Lawnmowers, ladders etc.)
- Who maintains the tools?
- Where should they be kept?
- Is a gardener provided?
- Who decides exactly what he does?
- Who pays him and when and how?
- How often does he come and how does he have access?
- Who insures him against injury?
- What happens if he falls out with your tenant and they refuse access?
- What happens if he damages something in the property? As you can see, this is just one example of the kind of queries that can arise from the simple fact that you have a garden with your property and they need to be addressed within the tenancy in the form of an additional clause.
If you are paying an agent for your tenancy you should have the right to expect that they create individual clauses for your particular property if necessary. This can easily be added into the templates that most agents use and you shouldn’t be fobbed off with their standard one, if you believe that you’re not being covered adequately. If they don’t know how to word a particular clause correctly (and, to be fair, they do sometimes get quite complicated) then they should take legal advice. This should be included as part of your fee - they’ll probably use it again somewhere else down the line, anyway.
Make sure you understand everything that is written in your Tenancy Agreement and if you don’t - ask . If your agent cannot explain something to you then why is it there and why are they asking you to sign something that no one understands? Don’t be afraid to ask what if … ? For this reason you should be given a draft copy of your tenancy in plenty of time to be able to ask questions and suggest changes.
The Tenancy Agreement must always be signed by the tenant and any guarantors or surety mentioned in it before the keys are handed over. Once your tenant has keys they have possession and if you have no agreement you have nothing to govern the tenancy and it will be very difficult to get them out if you need to. Remember that faxed or computer generated signatures are not applicable in court. It is best practice to make your tenant initial each page of the document in case some “go missing” from their copy.
The Stamp Act 1891 states that in order for a Tenancy Agreement to be introduced as evidence in court, it must be stamped. This is done by sending either one or both parts to the Inland Revenue (within 28 days or you will incur a fine) along with the duty payable. Your agent should take care of this and be aware what the duty is (usually minimal). The charges go up considerably if the original period of the Tenancy is one year or longer and it is for this reason that most of them are dated one year less one day.
It is very important that both you and your tenants understand the meaning of the term “Joint and Several Liability” (which should be explained both in the Tenancy and verbally). It means that as individuals each person mentioned as a tenant (or guarantor or surety) is personally responsible for the entire rent and any other obligations as laid out in the agreement. Your tenants need to clearly understand that if someone leaves it ’s up to them to make up the rent etc for the remainder of the term, and that you will not be wasting your time chasing their friend for one third of the rent who has since returned to Australia! Towards the end of the first term of the tenancy both Tenant and Landlord should sign a document known as a Memorandum of Extension (or Renewal). It effectively extends the terms outlined in the original Tenancy Agreement for another fixed term (usually another year). Tenants should be approached before the final notice period and asked if they are intending to stay and, if so, their signature is required on this one-page document. If you don’t get confirmation either way of what their intentions are they are free to leave the property at the end of the fixed term without giving you any further notice. If they indicate at this stage that they don’t wish to stay after the expiry then you have adequate early warning to begin your marketing and find another tenant in good time. If the tenant wants to stay but refuses to sign this document they will revert to a Statutory Periodic Tenancy. This is, effectively, a month-to- month tenancy and still governed by the terms of the original tenancy but during this time they are only obliged to give you one month’s notice (most Landlords ask for two). This is not ideal for you as a Landlord and if you are using an agent they should have established what your tenants are doing and issued Memorandums well before the notice period agreed.
Tenancy Agreements probably now sound very complicated (and, believe me, these are just the most important aspects I’ve covered here) but they are in place to protect you in the best possible way. Laws and regulations are being reviewed all the time, and so it will most likely get easier and easier for the lay person to understand. So, treat your Tenancy Agreement with the respect it deserves, but do try not to let it get in the way of your enjoyable and very profitable future as a landlord.
Main Types Of Tenancy In General Use
Assured: This tenancy, introduced by the Housing Act 1988, gives the tenant maximum security of tenure, as long as all the terms of the tenancy are complied with, even after the fixed period has expired until the landlord obtains a possession order by proving to the court that he has grounds for possession, or the tenant gives one month’s notice. Note: a landlord does not have an automatic right to possession of the property when the tenancy comes to an end.
Assured Shorthold: This is a type of Assured tenancy, but the security of tenure is limited, (created by the Housing Act 1988). This type of tenancy was introduced to encourage landlords to let property, by reducing worries over security of tenure. An Assured Shorthold Tenancy does not have to be for a fixed initial term but may be if both the landlord and tenant agree. The fixed term may be for less than six months, however the tenant has the right to stay in the property for a minimum of six months. A court cannot grant an order for possession of the property during the first six months except in limited circumstances. Some of the circumstances are:
- When there are rent arrears of at least 2 months/8 weeks (if the rent is paid weekly).
- When the tenant dies.
- If the property is the landlord’s main home and he needs to return to it to take up residence.
- If a mortgagee exercises power of sale.
- If the property needs to be demolished or reconstructed.
- If the property is out-of-season holiday accommodation.
- If the property is out-of-term student accommodation.
The tenancy can be ended by a landlord at any time after six months provided any fixed term has ended. At the end of the fixed term the tenancy will become periodic, continuing on a monthly basis, until either the tenant gives one month’s notice or the landlord gives two months’ notice.
On or before two months of the anniversary date of the tenancy, the landlord or agent must serve notice on the tenant that vacant possession of the property is required on expiry of the agreement. As long as this is done correctly, if the tenant does not vacate the property the court must grant the landlord an order for possession. If the notice is given at a later date, the landlord must wait for two months from the service of the notice before he can commence full proceedings for possession.
Company: An agreement outside the security of the Housing Act 1988, as the company is not an individual, therefore cannot be a party to an Assured or Assured Shorthold tenancy. Both parties to the agreement are bound by the covenants contained therein. This type of tenancy falls outside of the security of the Housing Act. The tenant would be a limited company, registered at companies’ house with the house usually being occupied by employees of the company. The landlord may be able to obtain a higher rent from a company but should note that the property may be subjected to higher than normal wear and tear. A company has no security of tenure and must leave at the end of the fixed period, unless the tenancy is renewed.
Holiday: To create this tenancy, the tenant must be genuinely on holiday.
Resident Landlord: If the landlord is resident, the tenancy is not an Assured or Assured Shorthold, but comes under general contract law.
Out of Season Let: This is an Assured tenancy, giving the landlord protection to let a holiday home out of season, or an educational institution letting out university accommodation during vacation periods. Changes were made to the Housing Act 1988 following the Housing Act 1996, which came into effect from 28th February 1997. The most important changes involve the type of tenancy agreements signed. Since this date, all new private tenancies are deemed to be Assured
Shorthold Tenancy Agreements unless the agreement states other wise or written notice is given that it is not.
Properties Attracting a High Rent: Properties which attract high rents, currently in excess of £100,000 per annum, fall outside the security of the Housing Act. The tenant will not therefore have the benefit of security of tenure and the landlord can obtain possession upon expiry of the term at any time provided two months’ notice is given. For most landlords it is important to be able to recover possession of the property. It would therefore be more usual for an Assured Shorthold Tenancy to be granted.