Author: Adam Baker
Assured Shorthold Tenancies (ASTs) are the most common kind of private residential tenancy in the UK currently, which means that almost any investor or funder in the UK residential property market will deal with them. The past few years have seen new legislation that introduced new and more onerous obligations on landlords of ASTs. This article does not seek to give a comprehensive overview of the rights and obligations attaching to ASTs, but seeks to outline two main changes to landlords’ obligations in the newer legislative framework; to highlight the potential dangers to the unwary investor or funder arising out of these; and suggest methods of mitigating risk.
If an AST is created on or after 1 October 2015, the Deregulation Act 2015 imposes an obligation on the landlord to provide the tenant with certain key documents. If the landlord does not do so, it will be unable to serve notice to regain possession of the property at the end of the term of the AST. Landlords should therefore provide the required documents to the tenant at the start of the tenancy as best practice and ensure that there is evidence of them doing so. A well-drafted AST will contain an acknowledgement by the tenant that it has been provided with the relevant documentation.
Buyers or funders of properties subject to ASTs will want to ensure that they have seen this evidence or, if reviewing all of the documentation is not practical (because of the sheer number of ASTs, for example), that the seller is able to offer a warranty that the information has been provided to all tenants so there is no delay if the buyer or funder wants to regain possession.
The documentation and prescribed information that needs to be provided to tenants is:
Since 1 February 2016, any new ASTs in England have included an obligation on the landlord to have established that the tenant has a right to be in the UK. This is known as the “right to rent”. This obligation may be easy to comply with if the tenant is a UK citizen and can produce a passport as proof of identity, but if a landlord is in an area where demand for housing is high (from foreign students, for example) then checking visas are in order will be a more onerous and time-consuming obligation. Again, best practice is to keep clear records of what documents were examined to establish the right to rent. Again, a well-drafted AST will record for the benefit of both parties how a tenant’s right to rent was established.
But perhaps the most difficult part of the right to rent obligations from a landlord’s perspective is that the obligation is a continuing one. Landlords must carry out follow-up checks prior to the expiry of the tenant’s visa or after 12 months, whichever is sooner. So, not only does the tenant’s right to rent have to have been verified prior to the grant of an AST; if the tenant renews their tenancy and does not enjoy a permanent right to reside in the UK, the landlord is under an obligation to monitor their status on an ongoing basis. If the tenant’s right to rent is found to have expired, the landlord must report this to the Home Office.
Since 1 December 2016, failures to comply with right to rent checks and to remove illegal immigrant tenants have been subject to criminal as well as civil penalties.
Over the previous few years, the Government has increasingly looked to landlords of ASTs to be able to demonstrate that they have kept their tenants provided with key information and have not turned a blind eye to illegal immigration.
For investors and funders, this has thrown up a multitude of new risks, including new civil and criminal penalties and possible restrictions and delays in taking back possession of units. A well-managed portfolio should be able to demonstrate compliance, but across large portfolios particularly the administrative burden is substantial.
Buyers of and lenders on AST portfolios will of course want comfort that their sellers and borrowers have been compliant, though the time and expense involved in carrying out the necessary due diligence may not be commercially attractive. In this situation, parties can look to the seller or borrower to warrant that they have complied with the regulatory requirements. The seller or borrower would be well advised, however, to examine carefully the exact terms of the warranty.
Adam Baker, Associate, Fladgate LLP (email@example.com)