Things to watch out for with company lets

Firstly, lets to companies are not assured shorthold tenancies (ASTs).
The reason for this is that the act which set up the protective code which governs ASTs, the Housing Act 1988, specifically states that its provisions apply only to ‘individuals’ i.e. not to artificial beings such as companies.

Companies are businesses (so the argument goes) and do not need the protection that the act gives.

What this means is that ‘company lets’ (as they are called) are governed by the underlying ‘common law‘, the legal rules which regulated tenancies before the Rent Act and Housing Acts came along to change them.

The main practical effect of this is that:

• you should not use the standard AST agreements found in shops and on the internet, but a tenancy agreement designed for company lets (we provide one at Landlord Law)
• You don’t use section 8 or 21 possession notices. The correct form of notice is an old style Notice to Quit
• The procedure and paperwork for evicting tenants is different

Then you need to consider why these people want to rent via a company let.
There are a number of reasons. For example:

• It may be tax related.
• It may be so that they can provide accommodation for a number of staff and directors on a short term basis.
• Or it could be to provide accommodation for an employee or director who would not pass normal referencing.

You should therefore be careful with company lets. Although they can be lucrative, bear in mind that you do not really have any control over who the company places in the property once let (technically you can take steps to repossess for breach of contract but practically this is difficult to do during the fixed term, for anything other than rent arrears).

You therefore need to take steps to protect your position, before the property is let.

I would suggest :

• Doing a search against the company at Companies House. If your property is an expensive one, consider buying a more detailed report and (in particular) checking the last few years’ accounts
• Taking a guarantee from at least one director, preferably two
• Checking carefully the references of the guarantors and getting credit checks done
• Asking for details of the person(s) who will be living in the property and checking them also
• Either letting for no longer than six months at a time, or ensuring that (for longer lets, eg a year) the tenancy agreement has a break clause.

You should also take a tenant/damage deposit. The good news here is that as this is not an AST you do not need to protect it in a tenancy deposit scheme, as the tenancy deposit regulations only apply to ASTs.

If you are careful, as with all tenants, you should, hopefully, have a good letting experience.

(This change is due to come into effect for landlords in Wales on 1 December 2011)

High rent common law tenancy changes

This is a just a reminder of what all landlords of high rent tenancy properties ought to know already.

At the moment all tenancies with a rent of between £25,000 and £100,000 are ‘common law‘ tenancies. On 1 October 2010, all these tenancies will change automatically to assured shorthold tenancies.

There are a number of points leading on from this:

• Notices to quit should no longer be served if you want tenants to vacate
• You should now serve section 21 and section 8 notices instead
• The accelerated possession procedure will now be available to you (but not during the first six months after 1 October 2010), and
• You will now need to protect the tenancy deposits

So far as deposits are concerned, the advice coming from the government appears to be that they do not need to be protected until a new tenancy agreement or renewal form is given to the tenant.  However most advisors are suggesting that deposits be protected anyway as a precautionary meausre.  It is free if you use the DPS.

If you want to evict your tenant under s21, note that you may not be able to do this until after April 2011.  It is being suggested that, as the properties are ‘new ASTs’ (ie not replacement ASTs) the six month period during which a possession order cannot be made, as set out in s21 of the Housing Act 1988, will apply here.  Which I suspect will annoy many landlords.

Landlords of older tenancies are warned that tenants may acquire greater security of tenure on 1 October.  This was discussed on this post here.

Are you aware of any other pending problems with this change?

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Update: The Communities and Local Government web-site has published a FAQ page here.

I often get people emailing me with a problem and saying “What is the law which covers that?”.  The answer to which is often “There isn’t one”.  Not if you mean Act of Parliament law.

Non lawyers often seem to think that there is this vast body of statute which details everything, so that somewhere there will be an act of Parliament saying whether their landlord has to get rid of the wasps nest in the loft and how long their notice period should be.

Some of these things will be covered by statute but others won’t.  What do you do then?  This is where the Common Law comes in.

The theory of common law

The theory is that there is this great underlying body of common law which covers everything, and this is then, from time to time, changed (or perhaps clarified) by an Act of Parliament which lies on top of it.  If for any reason the Act does not apply, then the underlying common law will.

So for example, there is a big act, the Housing Act 1988, which set up a statutory code governing rented properties created since 15 January 1989 (before that the Rent Act 1977 applied).  But in some circumstances (eg if the tenant is a limited company, or the let is a genuine holiday let)  the act does not apply.  We then have a common law tenancy.  One which is governed by the common law rules rather than those set out in the Housing Act.

Finding the common law

How do you find out what these common law rules are?  The answer is often “with great difficulty”.  The common law is Judge made, and has been built up over the centuries by Judges deciding cases.  You need to find a case which applies to your situation, and then you may have your answer.  But not always.

For example it is not the facts which are important but the reason for the  decision (what lawyers call the ratio decidendi).  If you have a situation involving a border collie and an engine driver, you are not necessarily looking for a report of a case involving a border collie.  That case with the spaniel and the elderly lady may be more relevant.  If indeed the point of law involves an animal at all. It could be all about the engine driver, or drivers in general.

Then there is the level of case.  A case decided by the House of Lords (now the Supreme Court) is binding on everyone (in the UK that is) whereas a County Court decision is binding on no-one (although it may be persuasive).

So how do Judges decide a case if there is no Act of Parliament and no relevant case law?  The theory is that there is an answer.  They just have to find it, as Michaelangelo found the statute inside the block of marble.

• They  look at case law covering similar situations
• They look at custom and practice (often going back many years)
• They look at what courts have decided in similar situations in other countries (particularly those with common law legal systems)
• They look at respected academic legal writings, government and industry reports, and perhaps reports in Hansard
• They consider what would be fair and just in all the circumstances
• Sometimes they also consider the impact of a certain decision and whether or not this is something they can do or whether it should be left to Parliament (e.g. Lord Hoffman in Birmingham City Council -v- Oakley [2000] House of Lords)

Many important areas of law are almost completely Judge made.  For example the law of negligence is based on a famous case called Donoghue v. Stevens in 1932.

But this is all a bit difficult for people just wanting to know whether they are entitled to ask their landlord to repair the fridge.

This is why I set up the Landlord Law site.  So there is somewhere, at a reasonable cost, where people can go to find out answers like this (in a landlord and tenant context), and if there is no obvious answer, discuss it on the site forum.

But bear in mind that for some situations there may be no law or decision covering the point.  It may need someone to take a case to the Court of Appeal or even the Supreme Court before we can discover what the answer is.

In this situation all you can do is act in a way which you think is fair and just, and hope for the best.

Photo by Hello. I am Bruce.

As you should be aware by now, on 1 October (unless the coalition government decide to change things) all non regulated/common law tenancies where the rent is between £25,000 and £100,000 will convert automatically to assured shorthold tenancies.

Except that some of them won’t.

As pointed out by the PainSmith blog, in some circumstances, the tenancy will become an assured tenancy.  Which will be very serious, because assured tenants have long term security of tenure.  This means it is very difficult to evict them.

So a tenant who now can be evicted after service of a 4 week Notice to Quit, will then only be vulnerable to eviction if they fall into arrears of rent, or if the landlord is able to find them suitable alternative accommodation.

When a common law tenancy will convert to an assured tenancy

The situations where tenancies will convert to assured tenancies are:

• Where the tenancy was an assured tenancy originally but turned into a common law tenancy after the rent was increased to more than £25,000, or

• If the tenancy was created before 27 February 1997.  The reason for this is that for a tenancy created before 27 February 1997 to be an assured shorthold tenancy, the landlord had to serve a section 20 notice, properly drafted, on the tenant before the tenancy agreement was signed.  If all parties thought that the tenancy was to be unregulated, it is most unlikely that this will have been done.

This rule change will not affect many properties, but where it does, it will be a very significant change and will substantially affect the value of the property.

Solutions

If you are a landlord of a long running high value tenancy you need to consider whether this is likely to happen to you.  If so, there are two courses of action you can take.

• Evict the tenants as soon as possible  This is the safest course of action.

• Sign a deed of surrender and then re-let as an AST.  This is suggested by PainSmith on their blog post.  It is better to do this than nothing.  However you would run the risk that if you later wanted to evict the tenants, they might be able to challenge the validity of the surrender, if in fact they continued to live in the property uninterrupted.

What do you think?  Do you think a surrender and re-grant will be effective or do you think all landlords should play safe and evict?

This is day 4 of my 31 days of tips on tenancy agreements series. To see the rest of the series click here

Legal background

In their consultation paper on housing law, the Law Commission identified 13 different tenancy/occupation types, and their recommendation was to cut these down to two. Sadly their recommendations have not as yet been implemented so we are still left with a plethora of different types.

This series (as discussed on Day 1) only covers residential tenancies, and the series is really just about tenancy agreements for the private rented sector.

In this country (England and Wales) we have what is known as the ‘common law’. This is the underlying law which was built up over centuries by the Judges hearing cases. This still happens, but it is often hard for non lawyers to find out about (without buying expensive legal textbooks), as it is set out mostly in the legal case reports, and develops from case to case (although most important cases are are now reported online on BAILII).

However often this underlying common law is changed by an act of Parliament/legislation which imposes a different set of rules, which apply either in all circumstances or sometimes just in some circumstances.

Tenancy types

This is the case with tenancies. There are still ‘common law’ tenancies, but in most cases, a tenancy will be regulated by one or other of the two main ‘statutory codes’ which have been set up by legislation.

Firstly by the Rent Act 1977, for all tenancies created before 15 January 1989, and secondly by the Housing Act 1988 for all tenancies created after that date.  15 January 1989 is therefore an important watershed date in housing law.

• Rent Act tenancies are often known as protected or (after a notice to quit has been served on the tenant) statutory tenancies.
• Housing Act tenancies are generally either assured or assured shorthold tenancies (ASTs).
• So when I say ‘common law tenancies’ I mean tenancies where neither of these apply.

This will be mostly in the following circumstances:

• Where the tenant is a limited company (because the statutory codes were set up to protect individuals, not businesses)

• Where the tenant occupies self contained accommodation in the same building where the landlord lives (provided the landlord has lived there from before the tenancy starts, and provided the building is not a purpose built block of flats where the landlord lives in one flat and the tenant in another)

• Where the rent is either higher or lower than levels set out in the legislation. This is currently under £250 (£1,000 in London) or over £25,000, pa. However this is set to change in October 2010 when the upper limit is to rise to £100,000.

• Where the tenant is a student who is going to study a course provided by his landlord, where the landlord is “a specified educational institution” (which includes most colleges and universities)

• Holiday lets

NB There will also be a common law tenancy where the tenant has lost the protection of the act. This will normally be because they have moved out and sub let it to someone else.

The importance of selecting the right tenancy agreement

It is important to know what sort of tenancy you have, as you need to select the correct type of tenancy agreement.

If, for example, you use a standard AST for a common law tenancy, this will not mean that somehow you have no tenancy at all.

However it will be misleading, as some of the terms will be irrelevant. Also some things, such as eviction and the treatment of tenancy deposits, vary according to the tenancy type, so it is important for everyone to know what tenancy type they are dealing with. It is good practice to make this clear in the tenancy agreement.

For example if a tenant with a resident landlord is served a notice to quit and takes legal advice on it, the tenant may not tell the legal adviser that the landlord lives in the same building. The adviser, not realising that this is a common law tenancy, particularly if the tenancy agreement appears to be for an AST, may then advise the tenant that the notice served is incorrect and tell him to defend the proceedings for possession.

Although the tenant will not succeed in his defence (assuming the landlord has got things right) it will cause delay and additional work for the landlord, and will probably cost him extra in legal fees. However if the tenancy agreement states clearly that the tenancy is not an AST because there is a resident landlord, the adviser will pick up on this and give the correct advice to the tenant.

Note that on my Landlord Law site, I have a >> Which Tenancy agreement ‘trail’ which will guide you by question and answer, to find out which is the most appropriate type of agreement for your situation.

Do you have any comments on this section? Is there anything important I have missed? Do you know of any cases where problems have resulted from the wrong type of agreement being used? Do you think the government should have implemented the Law Commissions reforms?

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Tomorrow we will be looking at shared houses

NB Read about my tenancy agreements service here.