How 12-Month Tenancies can Affect Landlords

Next week’s Autumn Budget is expected to reveal the Government’s plans to incentivise landlords to offer 12-month tenancies, or longer, to tenants that want them.

Andrew Turner, the Chief Executive of Commercial Trust Limited, argues that, on the face of it, this seems a very reasonable action, giving landlords the peace of mind of a longer-term contract from which they’ll receive rent and, in theory, eliminating the risk of their property sitting empty over the coming year.

Similarly, 12-month tenancies will better suit many renters, offering a degree of certainty for the year ahead, without the stress of having to move home again.

However, Turner insists that landlords should plan for the limitations that 12-month tenancies could impose upon them.

He explains: “Contracts which run for longer periods open up a greater probability of the unforeseen occurring, in this instance, I refer to the landlord’s financial situation, specifically those who have a buy-to-let mortgage.

“As we have seen in the past few weeks, the 0.25% increase in the Bank of England base rate had an impact on those landlords who have variable or tracker rate products that follow the base rate, who will have experienced an increase in their monthly repayment amount.”

He continues: “Of course, there are no guarantees over future rate changes, but further increases could see a number of landlords needing to review the amount of rent that tenants pay, in order to cover their monthly mortgage repayments.

“This could prove to be a stumbling block if landlords are locked into a tenancy agreement specifying a certain amount of rent will be payable for the next 12 months or longer. Landlords may face legal difficulties in increasing rent within this period, unless they have made suitable contractual provision for doing so.”

Turner adds: “Over time, if the landlord is facing higher monthly payments but has their hands tied in terms of putting up rent for several months, this could have an impact upon the landlord being able to meet lender affordability criteria, should they wish to remortgage.”

Speaking at the recent Conservative Party conference, Sajid Javid, the Communities Secretary, said that the Government supports longer tenancies and may provide incentives to landlords that offer them, stating: “All landlords should be offering tenancies of at least 12 months for those who want them…. That’s why, at the Autumn Budget, we will bring forward new incentives for landlords who are doing the right thing.”

Doing the “right thing”, however, may mean taking a much more careful approach to contract law and referencing of prospective tenants, believes landlord law expert Tessa Shepperson.

Turner highlights two points that landlords should consider when contemplating 12-month tenancies: “Firstly, to make sure that any fixed term contract contains a valid rent review clause. Note that a clause allowing the landlord to increase the rent as he likes will normally be void under the unfair terms regulations. Increases will need to be referable to something independent, such as the RPI (Retail Price Index).

“Secondly, to make sure that the referencing is very carefully undertaken, as it is very hard to evict a tenant within the term of a 12-month tenancy. Bearing in mind that the no fault Section 21 procedure can only be used to evict tenants after the fixed term has ended, and evictions based on the various grounds for possession under the Housing Act Schedule 2 can be problematic.”

He reminds landlords: “Be aware also that letting agents will normally take their commission for the whole fixed term up front, which may prove expensive for landlords with a long fixed term if the tenants turn out to be unsatisfactory. As always, careful referencing and checking is key.

“Tessa is absolutely right; whilst longevity between positive tenant/landlord relationships is beneficial for all, the risk to landlords is financial exposure if the maths stop adding up. This must be planned for, whilst remaining fair to all parties.”

We will keep you updated with all developments on the Autumn Budget, which will be delivered on Wednesday 22^nd November 2017.