0:36 AM, 27th June 2013, About 12 years ago 116
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Why on earth would The Mortgage Works “TMW” agree to three year AST’s?
More to the point, why would landlords and tenants?
It has always been legally possible for landlords to offer AST’s for up to 3 years and indeed in theory for any fixed term though a term longer than 3 years, even by one day, means the agreement must be executed as a Deed and witnessed. However, until now, you would almost certainly be in breach of your buy to let mortgage conditions if you agreed to a tenancy of more than 12 months. TMW have broken the mould by agreeing to allow landlords to offer 3 year AST’s. However, in my opinion they are doing nobody any favours including themselves.
I have read Shelters arguments about offering stable rental contracts and to some extent I can see where they are coming from. However, I think the concept of longer term AST’s are potentially dangerous for landlords, tenants and mortgage lenders. Perhaps the most compelling evidence for this belief is that Shortholds first made their appearance courtesy of The Housing Act 1980 in the guise of Protected Shortholds. These tenancies had to be granted for a minimum 5 year term and came with other restrictions on notice being given and rent increases.
Although an improvement on the then Secure tenancy regime The Protected Shorthold was not popular with Landlords and the lesson was surely learned with the improved terms applying to Assured Shortholds as introduced in the Housing Act 1988 and amended since.
People with children in schools and also retired people want more security of tenure but not at the risk of being tied to one property if their circumstances change. What these tenants don’t like is the idea of a landlord having the ability to serve notice on them after just six months regardless of whether they have been model tenants and just got settled or not. I sympathise with that and I’ve met several people who have been in that exact position. Indeed one of my former employees was forced to move twice in less than 18 months through no fault of her own. She was a model tenant but in one case the landlords decided to move back to their former property and in the other case the landlords decided to sell. My employee had a disabled daughter and it was very important to her to keep her daughter settled in the same school. She had done nothing wrong but had to deal with a lot of stress and worry, not to mention the expense of having to move.
If a landlord grants a three year AST there is no ability to gain possession on “no fault” grounds under section 21 of the Housing Act 1988 unless there is a break clause that can be operated to shorten the originally stated fixed term. This of course defeats the object of a longer term tenancy, certainly from the tenant’s viewpoint. What this means is that there is absolutely no way to legally evict a tenant during the first three years unless the tenant is in breach of their tenancy agreement as mandatory possession will not be available to the Landlord.
What’s wrong with that? I hear you say.
Well just consider a few “what if” examples:-
The list is a very long one already and I could go on. The killer blow for me from a landlords perspective is that if the tenant doesn’t comply with the tenancy agreement the only way to get possession before the end of the fixed term is by mutual agreement with the tenant, or by serving a section 8 notice for the breach. This can be and often is challenged though the serious arrears Ground 8 is a mandatory ground, whereas a section 21 notice cannot be challenged other than on its legal validity and ability to enforce it. The reality though is that possession cases under section 8 can be challenged and dragged through the Courts for several months. That could mean months of no rent or a tenant who abuses a landlords property or occupants of neighbouring properties.
My advice to all landlords is not to offer more than a 6 months AST in most cases, 12 months for some student type accommodation where re-letting part way through the academic year is more difficult.
To do so is crazy in my opinion.
I’ve read David Lawrenson’s points of view and whilst I concur that a lender “could” appoint a receiver of rents until it is possible to serve a section 21 notice I just can’t see why lenders would agree to that. Perhaps they are doing it just for a bit of positive PR from the do-gooders and hoping that landlords aren’t stupid enough to actually offer three year AST’s?
The mind boggles!
The bottom line for a mortgage lender is surely the ability to be able to recover their debt as quickly as possible if they need to isn’t it? Agreeing to a three year AST not only devalues their security but it also massively limits their recovery options for up to six times longer than they need to commit to, i.e. 3 years instead of six months.
What if their circumstances change? Do they really want to be tied into paying their landlord for the full three years? Do they really want their estate to be charged rent for the entire contract period if they die? Committing to a three year tenancy cuts both ways. Most tenants would prefer the flexibility of a tenancy with a Council or a housing association because they are not tied in for a fixed period but do enjoy greater rights of tenure. However, Housing Associations only provide around 50% of the UK rental stock with the other half being provided by the Private Rented Sector.
A Deed of Assurance is a relatively simple legal agreement which sits alongside an Assured Shorthold Tenancy Agreement “AST”. It is a separate agreement between landlord and tenant which does not affect the landlords rights to serve notice or to obtain possession, therefore it does not affect the rights of a mortgage lender either. However, it does offer tenants peace of mind.
From a tenants point of view, a Deed of Assurance provides far more flexibility than a long term tenancy because they are only tied in for 6 months and can then move on if they need to. What a Deed of Assurance offers in addition to an AST though is peace of mind.
A Deed of Assurance is a document in which a landlord promises to pay an agreed level of compensation to a tenant if possession is obtained within a given time period. I have never had to pay out compensation and because I’m in the business to provide quality tenants with quality accommodation long term I see absolutely no reason why I would ever need to.
The compensation amount offered by the landlord can be anything but obviously the idea is to agree something which is meaningful to both parties. For example, I offer to pay anything between £1,000 and £5,000 compensation if I obtain possession within the agreed period, providing the tenancy conditions have been observed impeccably by the tenant of course.
Similarly, the agreed period can be as long or short as makes sense too. Typically I offer 3 or 5 year terms but I would happily consider a longer period if the circumstances were right. What this means to the tenant is that if I obtain possession within the agreed period I will pay out compensation. This doesn’t stop me serving notice on a model tenant, it just means that if I obtain possession the tenant is compensated for their inconvenience.
But what if the tenant has not complied with the tenancy? Well that’s covered too. If the tenant does not comply the compensation isn’t payable, that’s very carefully worded into the Deed of Assurance by the solicitors who drafted it. Obviously there could be a dispute over whether the tenant had complied with all of the reasonable conditions in the AST and in that case the tenant would have to make a claim against the landlord for the compensation through the Small Claims Courts.
Deed of Assurance is not for everybody – by offering a Deed of Assurance a landlord is agreeing to pay compensation if they obtain possession of a property within a time scale they commit to with their tenant. It doesn’t always make sense for a landlord to make such a commitment but in some circumstances it can pay dividends. If in doubt, take professional advice.
The simplicity of the Deed of Assurance is its strength. Chief Ombudsman Lewis Shand Smith confirmed this by saying “The Deed of Assurance clearly sets out what the tenant can expect from the landlord and vice versa. In a sector where clarity might be lacking, this is a fantastic development”.
Demand is very high from tenants who want/need greater assurance from their landlord that they are not going to have to move after just six months even if their tenancy has performed impeccably. Whilst a Deed of Assurance doesn’t actually provide tenants with any greater security of tenure, it’s certainly the next best thing. It’s a landlords opportunity to put his money where his mouth is, or perhaps more to the point, it’s a tenants opportunity to ask a landlord to do so when a landlords says words along the lines of “if you comply with your tenancy you can stay here for as long as you want”.
In practice, by providing properties which appeal to the types of tenants who want extra peace of mind in terms of stability they are also prepared to pay for that peace of mind. Many of my properties are typical family homes near to good schools, otherwise they are suburban bungalows which appeal to baby boomers and retired people. When I explain what a Deed of Assurance is to them they love it and often choose my properties over comparable properties for that reason alone. In many cases I’ve had several people bidding against each other to move into one of my properties despite there being plenty of comparable alternatives at lower prices. The reason they are prepared to pay more is for that peace of mind and legally documented assurance.
Conclusion
If you have the right type of properties to attract long term, good quality tenants, don’t stitch yourself or your tenant up with a long term AST or Shelters Stable Rental Contract. Consider the benefits to all concerned of offering a Deed of Assurance instead. Give your tenants the peace of mind they want and an incentive for them to perform to your requirements impeccably. It’s then a true win/win situation. Tenants know that if they perform you will have to pay up if you take possession of your property. On the flip side you may well stand a far better chance of being able to attract the tenants you really want, a premium rent and less voids periods too.
To purchase the Deed of Assurance document template please see below. The price is £97 for unlimited personal use.
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Mark Alexander - Founder of Property118
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Sign Up21:50 PM, 27th June 2013, About 12 years ago
@PJ - making it law to offer longer term tenancies is one of the fears I didn't raise in my article.
I can assure you there is a market where tenants want to know they can stay long term. I also agree that it's accidental landlords who cause most of the problems, it was in both cases affecting my former employee.
The GOOD Landlords Campaign isn't just about the Deed of Assurance of course. It's about establishing a brand for serious landlords whose intention is to remain in the letting business for a considerable period of time. That's not to say we stop people with just one property joining though. Our primary mission is to facilitate the sharing of best practice. We are totally reliant on donations and sponsorships to achieve this.
Would it be wishful thinking for us to be offered some sort of grant from Shelter or Crisis to support our efforts? You would think they would want to support initiatives like ours wouldn't you? I'll not be holding my breath but if they do decide to help I will be shouting it from the rooftops. Same goes for any lenders or other people and organisations who can provide support. We even give people a mention in our Newsletter when they choose to make a donation to The GOOD Landlords Campaign, even if it's just a one off £50 donation 🙂
David Lawrenson
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Sign Up9:28 AM, 28th June 2013, About 12 years ago
Just a few observations.
One thing we can all agree on - Section 8 Procedures could and should be speeded up - this is one area of some concern WRT longer term tenancies, identified correctly by a few of you. It does need looking at.
As a matter of interest, in my own letting business all the tenants started on 6 months fixed term contracts and all have rolled over onto monthly periodic. Many have been on these "monthly periodics" for over 5 years, and no, they have not asked me for a longer fixed term. However, I do trust all my long standing tenants and would offer all of them a longer term tenancy if they asked (providing the lenders allowed it, which most still do not).
Indeed, another contributor has hit the nail on the head: My tenants know and trust me - and believe me when I say I'm not planning on selling anytime soon, (and I will also keep rents about 10% under the going market rate as long as they stay because I value good tenants like them).
So, they are happy with monthly periodics.
This sort of relationship is, of course, the basis of a good trusting landlord - tenants relationship.
However, all that said, I think you have to realise the issue that is being played out in the real world - and that is, it smply looks bad that landlords are (for whatever reason) only prepared to offer 6 or 12 months fixed terms currently.
You simply cannot expect the media to understand the issues / argument re Section 8 recoveries vs the relative "speed" of Section 21 - it is just too boring for the mass media to get their heads around and explain to the public.
Sure, we need a debate about recovery speed in Section 8 - and that debate shoud be had with the politicians and law makers.
The fact remains that where landlords can have the freedom to offer longer term deals to tenants they know and trust, this is a good thing (even if few or even none ever do it).
Once longer term tenancies are allowed by all lenders, you can then start to have the debate about why most will not take it up in practice - which will allow commentators like me and others to explain that most will not do it because of slowness of Section 8 recoveries. And that will surely be a good thing.
Mark Alexander - Founder of Property118
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Sign Up9:38 AM, 28th June 2013, About 12 years ago
@David Lawrenson - you've explained your point very well. My worry is that if all lenders start offering long term AST's before the issues are resolved with possession we may be railroaded into using them. I think TMW are playing right into the hands of Shelter here and very few are considering their next move. Shelter wield far more power and political persuasion than you and I David. If the majority of lenders start offering longer term tenancies and landlord don't offer them you can bet your bottom dollar on Shelter putting pressure on the Government and Councils insisting that we offer them. I can see it all becoming part of an FSA landlord regulation thing. Can you imagine it, regulators demanding proof that we offered long term tenancies, fines if we can prove it even if we did offer them, etc. etc. Why do I feel like the only one who can see a very large sh1t storm heading our way?
David Lawrenson
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Sign Up10:08 AM, 28th June 2013, About 12 years ago
Makr, you make a good point.
Sadly, for reasons I can never deduce landords are very shy of joining the landlords assocns - and the assocns therefore lack the political clout they should have - partly due to lack of members and hence lack of resource (though I admire greatly what NLA and RLA and others do get done with the resources available).
Agree, we landlords do need to fight harder to get our voice heard so that the end game you paint is not the one that comes to pass.
Mark Alexander - Founder of Property118
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Sign Up10:40 AM, 28th June 2013, About 12 years ago
@David L - I've never really understood why more Landlords don't join a landlords association, I belong to two and I know a lot of portfolio landlords who are members of two or more. Perhaps it's because they fight each other too often and their ego's create bitter rivalries? We hoped The GOOD Landlords Campaign would go some way to uniting them but it appears they see that as competition too. We all have some common goals, i.e. protecting the interests of landlords and sharing best practice but it seems that whatever one organisation does the other does the exact opposite or criticises it or at best ignores it. A good example of that is the Deed of Assurance. It has been ignored by the landlords associations and indeed Shelter to a very large extent. You'd think they would all want to understand it at the very least would you? Seems a bit like a "not invested by us = not promoted by us" attitude to me.
PS - if they just asked for a copy of the Deed of Assurance document template I would happily send it to them. They've not asked! If they wanted to explore or challenge the legal mechanisms used in the Deed of Assurance I would happily put them in touch with my legal advisers. They've not asked!
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Sign Up12:01 PM, 28th June 2013, About 12 years ago
In reponse to the follow up to my initial submission, I would not throw out any tenant who was paying on time and who looked after my properties.
I have a written testimonial from one of my tenants who was with me for 12 years which I will show to any new tenant.
In every case since I have shown it to prospective new tenants they have all been very satisfied.
Mark Alexander - Founder of Property118
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Sign Up13:37 PM, 28th June 2013, About 12 years ago
@Ian Ramsey - I have very similar testimonials. Many who have commented here no doubt have the same, that's because we are very different to accidental landlords who are only renting properties for now whilst it is convenient for them to do so. Much of the negative press about landlords which annoys people like you and I is caused by the amateur end of the market. Do we agree on that?
If so, how can we help tenants to learn how to identify a professional landlord and distinguish them from the amateurs and indeed the criminal elements operating in our industry?
How can we persuade the law makers and tax collectors to impose the full weight of the law on the criminal elements and drive them out of this sector without adding more layers of regulations and stealth taxes on good landlords?
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Sign Up0:47 AM, 29th June 2013, About 12 years ago
Can't ever see an FSA or similar insisting that if I take a tenant on I have to give them the option of a long term tenancy which then means inability to use S21 process.
Now if govt changed the eviction laws so I can have a tenant removed by police after 2 missed rent payments if I so desire and also removal using a S21 process after 6 months or a 2 month notice if the tenant fails to comply with the AST terms.
Then I am more than happy to sign up for a long term tenancy providing I can review rent annually.
However the likes of Shelter wish to keep the eviction laws the same and force LL to offer long term tenancies.
It ain't never gonna happen.
Will we have govt insisting we use a certain shop to buy our food and the prices we should pay!!??
Yeah right!!
Govt is in a right state re it's housing policy.
The last thing it needs to do is p--s off the PRS.
LL can sell their properties BUT tenants can't and will never be able to afford them for many years until wages have increased and mortgage criteria is loosened.
So I am not concerned about any govt insisting what I should do with my private capital.
Govt needs the PRS more than the PRS needs the govt.
Quite a few LL could just bale out and take their cash leaving tenants in a parlous position and lenders holding onto billions of negative equity stock as LL should go out of business.
Shelter won't get it's way UNTIL govt changes eviction laws.........................................
I want to see Shelter campaigning for changes in eviction laws to allow LL to get rid of tenants who don't comply with their AST immediately; none of this silly County Court stuff...which will NEVER happen.
LL will then be falling over themselves to take on all sorts of wrongun tenants.
Even I would if I knew I could have them removed by police once they had missed 2 rent payments!!
So LL will just ignore any facility any lender allows whatever Shelter want.
Terry Lucking
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Sign Up7:13 AM, 29th June 2013, About 12 years ago
We rarely get asked for a tenancy with a longer initial term than 12 months and the vast majority are for 6 month initial terms (letting 650 ish annually). Our average tenancy (measured on all ending) is 560 days.
For those very rare occasions where a private tenant requests more than 12 months they almost all request a break clause in case their circumstances change. We would insist a break clause is included for both parties at 12 month intervals (or less).
In 14 years in this industry I have not come across one private tenant who wants to commit to such a long term including that of benefit claimers. We have a number of tenancies that have run for 10 years or more with happy landlords and tenants including some to tenants in receipt of LHA.
We need a much faster mechanism to end an AST during the fixed term if longer term ASTs are to become a real option for the PRS.
Mark - I like the principle of the DOA and will keep it in mind for the rare situation we are asked set up an AST for 2 years or more; thank you.
Mark Alexander - Founder of Property118
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Sign Up9:44 AM, 29th June 2013, About 12 years ago
Good morning Terry
All very good points.
I have a few rhetorical questions/scenarios to get they grey matter pondering of anybody reading this.
QUESTION / SCENARIO ONE
How many amateur or accidental landlords tell agents they want tenants who will stay a long time and then change their minds?
How many section 21 notices have you had to serve on tenants who have behaved impeccably due to the above circumstances?
By comparison, perhaps as a percentage of occurrences, how often does that situation arise when dealing with a portfolio landlord?
When tenants are served a section 21 notice and are asked to move despite having been model tenants and having been told their landlord wanted to rent long term and subsequently changed their minds, how do those tenants feel?
How does it reflect on you?
QUESTION / SCENARIO TWO
Could it be that tenants rarely ask to tenancies longer than 6 months because they have been conditioned not to do so?
Hasn't the answer always been the same, i.e. "no sorry, can't do that, landlords/lenders will not allow it."
I heard of a very interesting experiment regarding conditioning which I think is relevant here. The scientist put fleas into a glass jar and left the lid off. They all jumped out of course. Then they put the fleas back in the jar and put gauze over the top of the jar. After a short period of time the fleas stopped hitting the gauze but kept jumping to within a millimetre of the gauze. they had been conditioned. When the gauze was removed the fleas did not jump out. The scientists then applied ever intensifying heat to the bottom of the jar. The fleas didn't die, they all jumped out.
My point is this; tenants have been conditioned that 12 months is the maximum AST. However, the media, the government and the likes of Shelter are turning up the heat. We have seen one lender jump a bit higher and the rest will do the same as the heat intensifies. This will be a game changer and we all need to prepare for it.
OTHER POINTS
I totally agree with your point when you said ....
"We need a much faster mechanism to end an AST during the fixed term if longer term ASTs are to become a real option for the PRS."
..... what would you suggest?