The evolution of the Private Rented Sector – Deed of Assurance

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TMW now agree to three year AST's - Stupidly in my opinionWhy 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.

The concept behind 3 year AST’s

three year AST conceptPeople 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.

The problems with three year AST’s

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:-

  1. What if the landlord falls ill and needs to sell to raise cash?
  2. What if the landlord dies?
  3. What if the landlord goes bankrupt?
  4. What if interest rates go up and the landlord can’t afford to pay the mortgage and needs to sell?
  5. What if the landlord desperately needs to move into the property due to an unforseen change in circumstances, e.g. a marriage breakdown?
  6. What if the landlord get’s divorced?

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.

Why would a lender agree to three year AST’s?

Why would a lender agree to three year AST's?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.

Is a three year AST really that attractive to tenants either?

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.

Deed of Assurance could be a far better alternative

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.Deed of Assurance

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.

What do others think?

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”.

What’s the point of offering a Deed of Assurance?

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 to.

To purchase the Deed of Assurance document template please see below. The price is £97 for unlimited personal use. 100% of funds raised are donated to The GOOD Landlords Campaign.

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Comments

  • Interesting points made and definitely worthy of an ‘industry’ discussion.

    In my role as a BTL mortgage adviser – not a legal adviser – whether or not there has been the legal acceptance for tenancies of more than 6 or 12 months, the lenders make their products available based on their specific policy and criteria and the vast majority of lenders simply do not allow AST’s of more than 12 months anyway.

    There are those lenders who do currently allow longer terms, corporate lets, leaseback contracts, holiday lets etc etc., but for TMW to have a standard allowable 3 year maximum AST term is actually very appealing to some landlords. It is also, though, probably a huge concern for others, as Mark alludes to above!

    The various “what if’s” that are listed above are extremely pertinent and I would hope that all landlords would seriously consider them all as part of their personal and financial planning before entering in to a 3 year AST.

    However, for the ‘larger’ landlord, who would not need to rely on the issues raised in points 1, 4 and 5, they may take a view that the security of ‘guaranteed rent’ for a full 3 years is a risk worth taking?

    The Deed of Assurance concept seems really viable too, though, so basically, with so many ”what if’s” and variables and personal parameters to consider, I would simply say, take appropriate legal advice before entering in to a 3 year AST.

    But also, hats off to TMW for being so innovative. Next step, keep their rates low but significantly reduce their fees? 

    Howard


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  • Hi Howard

    I am one example of the type of portfolio landlord you have have referred to.

    Point 1 – I can’t see how illness would affect my set up too much as I have a substantial portfolio which is managed with very little input required from me. I’m also covered by having set up Lasting Powers of Attorney just in case I end up like the little yellow fella pictured in my article or the people at TMW who thought agreeing to accept three year AST’s was a good idea.

    Point 2 is an outright certainty, I am not immortal, I just don’t know how long I’ve got, hopefully I’ll not pop off within the next three years but why take that risk?

    Point 3 is of more relevance to the lender – if the landlord is bankrupt all the problems associated with a three year AST become the lenders.

    Point 4 is a possibility, none us us has a crystal ball and the number of properties we own is of no consequence to the risk.

    Point 5 is highly unlikely in my case but it’s not completely outside the bounds of possibility even for me, never mind landlords with only one or two buy to let properties.

    Point 6 – now obviously being a newly wed and deeply in love with my wife divorce will never happen a second time around for me. However, the scary statistics are that two out of three married landlords reading this will get divorced.

    Thanks for the compliments on the Deed of Assurance but i still think TMW have made a bonkers decision in this case. I wonder whether their members will think it was a good idea? I suppose that will come down to how much PR they throw at it. Shame really as I have always thought TMW were such a sensible bunch.

    I would have much preferred for them to come out with more scheme for ex-pat investors and foreign national personally. Much lower risks if the LTV’s are low enough and the interest cover is high enough. That’s providing this client group don’t all offer their tenants three year AST’s though of course LOL


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  • PS – I would add that if legal advice is sought on the use of three year AST’s, only accept that advice if the lawyer has a practical knowledge of being a landlord, i.e. they own a decent property portfolio of their own. Otherwise you will just end up with an expensive theoretical analysis which could cost a small fortune and still conclude that it’s your decision at the end of the day.


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  • Roger Buston says:

    …well whether or not this is “stupid ” remains to be seen…..

    …..nonetheless for all practical and pragmatic purposes as both a solicitor engaged in property matters including Landlord and Tenant, as well as as a Landlord with a few BTL properties , my advice to Lessors and Landlords would be to continue to have annual ASTs granted simply as this does give you the opportunity : indeed it reminds you, to review the terms of the Contract with your Tenant….which may or may not include the rent….as well as the state and condition of the property.

    My advice to Mortgagees would be a different matter, and it is important for practitioners to draw the necessary distinctions between the requirements of the two, lest there be a conflict…..which more often than not there should not be.

    Nonetheless the one position should not be or become the driver for the other. The circumstances and issues surrounding each are quite singularly separate.


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  • I like your PS post – so true!

    Surely isn’t this just a ploy by TMW to offer something that no other mortgage provider offers (ability to offer 3 year AST’s) but it is up the landlord to check on the legalities of this type of AST. As I understand it from the mass media, this is what the government want landlords to offer, yet the response has been that we cannot do it due to our mortgage conditions. So I imagine TMW are just responding to that – whether there is a demand for it or not I am unsure. It’s great that your article focuses attention to the haphazard landlord that a 3 year AST has implications beyond a simple timescale. I see this as a fad, a gimic that may be pulled once a number of landlords have hit problems using it.


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  • Fred Jones says:

    All you negatives are ‘What if the Landlord’. But what if none of these are an issue and the Landlord wants someone solid; a long term AST would be great for some.
    Long term tenancies could be a way of assuring commitment for both sides.
    As an agency we are committed to delivering the best service to our Landlords, whilst offering our tenants a comfortable and affordable home.


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  • Julian Blackmore says:

    Personally I don’t see any problem; TMW may now allow these, but landlords are under no obligation to offer them.


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  • @Fred – I can only assume that you have not read the entire article.
    Mark Alexander recently posted…Lights! Camera! Landlord Associations!My Profile


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  • Michael5 says:

    Good points well made, Mark. However, your assumption is that there’s no way this reassurance could be written into an AST. What is wrong with offering longer term tenancies with ‘break clauses’ that offer the same compensation for tenants? These could be specific to cover likely events or as generic as ‘need to sell’. Provided a lender in possession is included in the ‘need to sell’ there will no longer be a need for lenders to be interfering with landlords’ business through lending policies.

    Your suggested Deed of Assurance is a very laudable step towards this, but how much would it cost a tenant to seek to enforce? I may be wrong, but suggest they would have to take to court with all the hassle and cost that would involve; with no certainty it would be enforced.

    The answer to tenants’ concern (as represented by Shelter) is surely to change tenancy agreements to achieve a balance that is acceptable to landlords, tenants and lenders. Individuals can then choose whether to offer (& accept) long or short-term tenancies and the market will equalise itself around the various options.

    Afterall, ASTs have been unchanged since their inception in 1996, despite exponential growth in the private rental sector.

    Finally, I don’t think TMW decision is much more than tinkering. I’m sure people will keep coming back to the same subject time and again. As I said, its a structural issue with ASTs that requires work. Once that is achieved, lenders will feel comfortable to let Landlords manage their businesses to suit the market they want to serve.


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  • Hi Roger – I think we both concur that there are three distinct sets of requirement; 1) landlord, 2) tenant, 3) mortgage lender. I struggle to see how a three year AST suits any of their requirements, hence this rather long article outlining my perspective from each parties point of view.
    Mark Alexander recently posted…Lights! Camera! Landlord Associations!My Profile


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