I am thinking of investing in a buy-to-let property. How does it work if I buy a flat with a sitting tenant? Is there anything I should be aware of?
Purchases of residential properties subject to an existing tenancy are not particularly unusual and when a buy to let property is being purchased, it may be considered beneficial to have a good tenant in situ.
However, there are a number of potential pitfalls and issues, which make it vital that anyone seeking to purchase such a property is properly advised by an experienced conveyancer and surveyor.
The following is a non-exhaustive list:
1. It is not legally possible to evict a residential tenant without first obtaining a court order and any attempt to do so will be a criminal offence (Section 1(2) Protection from Eviction Act 1977).
2. Most lenders and well-advised purchasers require the tenancy to be an Assured Shorthold Tenancy (“AST”), which is a type of tenancy that can be can be brought to an end by the Landlord giving the tenant at least 2 months’ notice (known as a “Section 21 Notice”) which must not expire before the end of the term in the tenancy agreement. However, the Section 21 Notice will be ineffective unless certain formalities and requirements have been fully complied with (as to which, please see 3 below). Other types of tenancies are likely to be less acceptable. These include the following:
a) Regulated Tenancies
Most tenancies (and there are exceptions) granted before 15 January 1989 will be regulated tenancies pursuant to the Rent Act 1977. A regulated tenant has full security of tenure and can even transfer their tenancy to a surviving spouse or relative. When the agreed term of the tenancy expires, the landlord can only recover possession of the property by obtaining a court order, which will only be granted if one of the mandatory or discretionary grounds is satisfied and, in the case of discretionary grounds, the court is satisfied that it ought to exercise that discretion in favour of the landlord. Furthermore, the landlord can only charge a “fair rent”, which if not agreed must be referred for determination to a Rent Officer and the amount of the “fair rent” will be limited by reference to the retail prices index, which in past years has significantly failed to keep up with increases in residential property rental values on the open market.
b) Assured Tenancies (which are not assured shorthold tenancies)
Tenancies of this type could be granted on or after 15 January 1989. Until 28 February 1997, the Landlord could serve a notice on the Tenant stating that the tenancy would be an AST rather than an Assured Tenancy, but since 28 February 1997 (following the coming into force of the Housing Act 1996), most tenancies have automatically been ASTs. Where the tenancy is an Assured Tenancy which is not an AST, the tenant will have security of tenure, in that when the term in the tenancy agreement expires, the landlord will not be able to remove the tenant without obtaining a court order for possession on one of the statutory grounds, in this case set out in Schedule 2 of the Housing Act 1988. The tenancy can also be brought to an end by the landlord exercising a break clause in the tenancy agreement. Again, there are exceptions, so that not all tenancies granted during this period will be assured tenancies or ASTs. Unlike regulated tenancies, the rent in Assured Tenancies does not have to be a fair rent, but a full market rent will be payable on any holding over and if this cannot be agreed, then it must be determined by the Residential Property Tribunal.
c) Long residential leases
These are leases which were originally granted for a term of more than 21 years. As the question was about buy to let properties rather than “ground rents”, this type of tenancy falls outside the scope of the question.
3. In the case of ASTs, to ensure that you are able to serve a valid Section 21 notice and thereafter obtain an order for possession, your legal and property advisors must check that none of the circumstances exist which may prevent you serving a Section 21 Notice. For example, a landlord cannot serve a Section 21 Notice unless it has first complied with the following requirements:
a. The tenant must have been provided with all of the following:
i. an energy performance certificate (EPC) free of charge;
ii. a gas safety certificate;
iii. a copy of the current version of the Ministry of Housing, Communities and Local Government publication, “How to rent: The checklist for renting in England”.
If this was not done before the start of the tenancy, then attempting to regularise the position by providing this information after the tenancy has started is unlikely to help and cases have in fact been decided on the basis that doing so will not cure the problem.
b. If the tenant has paid a deposit, it must have been protected in an officially recognised Tenancy Deposit Scheme (“TDS”) within 30 days of the landlord receiving the deposit and the tenant must have been provided with information about that scheme and the deposit. If there has been a failure to comply, the Landlord must not only repay the deposit to the tenant, but must also pay the tenant compensation of between 1 and 3 times the amount of the deposit. A Section 21 Notice cannot be served until the deposit has been repaid. Even if the relevant requirements have been complied with, where there is a TDS in place, obtaining payment from the tenant’s deposit to fund repairs to damage caused by a tenant can be rather tortuous and uncertain, as in the absence of agreement by the tenant, a dispute resolution process must be followed.
4. Subject to exceptions, in respect of residential tenancies not exceeding 7 years, Section 11 of the Landlord and Tenant Act 1985 implies into the tenancy agreement obligations on the part of the landlord to keep in repair the structure and exterior of the premises and to keep in working order the water and space heating installations, installations for the supply of water, gas and electricity, as well as sanitary equipment such as baths, sinks and toilets. There is also a term implied by Section 9A of that Act that the premises will be fit for human habitation and will remain fit for human habitation throughout the tenancy.
5. Care will need to be taken to ensure that there has been no breach of the “Right to Rent” provisions of the Immigration Act 2014 as well as noting when any follow-up checks will be required, to avoid liability under the scheme. The purpose of these provisions is to prevent those whose immigration status does not permit it to rent residential accommodation in the United Kingdom. Landlords and agents who rent properties without carrying out the appropriate right to rent checks are liable to a penalty fee of up to £3,000. In addition to that, Landlords commit an offence if:
a. the landlord knows or has reasonable grounds to believe the premises are occupied by a disqualified adult (regardless of whether they are a tenant under or named in the agreement), and has not taken reasonable steps to end the tenancy within a reasonable time period, or
b. a tenant continues to occupy the property and the landlord does not notify the Secretary of State as soon as reasonably practicable where the landlord knows or has reasonable cause to believe that the tenant’s leave to remain in the UK has expired during the course of a tenancy.
6. You must ensure that your conveyancer serves the relevant statutory notices on the tenant following completion of your purchase, for example Section 3 of the Landlord and Tenant Act 1985 provides:
“(1) If the interest of the landlord under a tenancy of premises which consist of or include a dwelling is assigned, the new landlord shall give notice in writing of the assignment, and of his name and address, to the tenant not later than the next day on which rent is payable under the tenancy or, if that is within two months of the assignment, the end of that period of two months….
“(3) A person who is the new landlord under a tenancy falling within subsection (1) and who fails, without reasonable excuse, to give the notice required by that subsection, commits a summary offence and is liable on conviction to a fine not exceeding level 4 on the standard scale.”
7. You should be aware that purchasing a residential property with a sitting tenant could result in additional tax liability. For example, you may have to pay a 3% Stamp Duty Land Tax surcharge if you already own a property or are buying through the medium of a company. In addition, if you are buying a residential property through the medium of a company, then you will have to pay Annual Tax on Enveloped Dwellings if the property is valued more than £500,000. In recent years, the Government has also introduced other tax measures to make it less attractive than previously to acquire properties on a buy to let basis, so you will need to obtain expert financial advice before proceeding.
James Whiteley, Partner in the Commercial Property Department at JPC Law