I am challenged on premium tenancies:
It all started with a post on Property 118 by Mark Alexander. Mark had questions about premium tenancies and he wanted answers.
I agreed to answer five questions, and do a post about it here on this blog. The questions were then sent over by Mark Reynolds of Pearce and Co.
And so the challenge started. Armed only with my Macbook, a few landlord and tenant text books and access to the internet, and with one handicap (a headcold) I set out looking for truth.
Mark had only sent over four questions (which we will come to) saying that he had not been able to think of a fifth. However I had a question of my own. A fundamental one.
1. What is a premium tenancy?
A premium is a payment for a tenancy. They are most commonly used for long leases. You will all be familiar with this. You pay £100,000 for a 99 year lease of a flat. There is rent but just a modest ‘ground rent’.
Short residential lets such as assured shorthold tenancies are different. There is normally no premium and the rent is a ‘proper’ market rent. Say £1,000 pcm.
A bit of history
In the early part of the last century, premiums were often charged on short lets – they were known as ‘key money’ and were used by landlords at that time as a way around the rent regulation. For this reason legislation was passed making them illegal, and this legislation was subsequently incorporated into the Rent Act 1977.
The Rent Act is not relevant for tenancies created today, and we now look to the Housing Act 1988 where they are no longer illegal. What does the act say about premiums?
The Housing Act 1988 s15
S15 (4) describes a premium saying that it includes
(a) any fine or other like sum;
(b) any other pecuniary consideration in addition to rent; and
(c) any sum paid by way of deposit, other than one which does not exceed one-sixth of the annual rent payable under the tenancy immediately after the grant or renewal in question.
So presumably a premium tenancy is one where one or more of these apply.
Generally the only one of these people pick up on is (c) – a sum paid by way of deposit which is more than 1/6 of the rent, ie over two months. Although so far as the the definition is concerned, a premium is not limited to this. So if you take any other payments apart from rent and the deposit, this too could be deemed to be a premium.
The point of s15, by the way, is that it allows a landlord who does not take a premium to withhold consent to assignments, without being challenged as to reasonableness. So if you DO take a premium, then this will limit your ability to prevent your tenant assigning the tenancy.
To remind you, an assignment is a deed which transfers ownership of a tenancy or lease to another person. Landlords who have carefully credit checked and referenced their tenants before allowing them in will NOT want this to happen. So a premium tenancy will be a Bad Thing.
I should add here that my landlord and tenant law books do not refer anywhere to a ‘premium tenancy’ as such. A quick flick through the indexes brings up nothing more than (in one of them) a reference to the prohibition on premiums in the Rent Act 1977.
Two final points
There are two other points which should be mentioned, which I also looked at in my previous post on premiums here. These are:
- That under s115 of the Housing Act 1988 you may not be able to end a tenancy within 20 years if a premium is taken and
- That where a premium is taken, the tenancy needs to be created by a deed.
The first is the most worrying, and (if the worrying interpretation is correct) is another compelling reason not to take a premium. However I suspect it may not apply as the section is specifically stated to be about long leases, which presumably will not incude a 6 month AST.
So with that background knowledge, let us proceed to the other four questions.
2. If a tenant pays six months’ rent up front, has a Premium Tenancy been created?
Here I would say no. The money is paid as rent, not as a deposit. Neither is it a ‘fine’ (s15(4)(a)) or a payment other than rent. It is rent.
I looked at this in a previous post where someone suggested that 6 months rent in advance could be a deposit. My view is that it is not. The definition of a deposit in s212 of the Housing Act 2004 is as follows:
“tenancy deposit”, in relation to a shorthold tenancy, means any money intended to be held (by the landlord or otherwise) as security for—
(a) the performance of any obligations of the tenant, or
(b) the discharge of any liability of his,
arising under or in connection with the tenancy.
I don’t think this includes money taken as rent. I could be wrong but if I am, I think we would have had a case on it by now.
3. What if a guarantor is prepared to pay a larger deposit to encourage a landlord to provide a home to a prospective tenant whom they would otherwise decline?
Well if the deposit sum was more than two months rent, then yes, this would count as a premium. The fact that it is paid by someone other than the tenant would not prevent this.
4. What if a tenant wants to pay rent in advance?
Again, so long as it is rent and not held as a deposit, you should be fine.
5. If a landlord takes a deposit that equates to over 7 weeks rent does this make a premium tenancy?
It depends on how much over. Anything up to two months rent worth should be OK.
So if the rent is £150 pw then you need to work out the monthly rent (£150 x 52 = £7,800 / 12 = £650) so two months would be £1,300. So (assuming my maths is OK) you need to be careful not to take more than £1,300 as deposit.
To sum up therefore
So long as you make sure that your deposits are NEVER over 8 weeks worth of rent or ALWAYS under two months, then you will not normally be at risk of creating an accidental premium tenancy. However s115 worries me. Any lawyers with any feedback on this – I would welcome your comments.
So there we are. The challenge is complete. If you have any questions or comments please put them here or over on the Property 118 post where I have put an abbreviated version of my answers.