AST for tenant’s lodger?

See my editors notes and be very careful here you do not create an HMO.

Going to be a hard sell to the tenant this one.

You say that the property is being under utilized but you say that it's this woman with her two children. Depending on the age of each of the children it is not unusual for each of them to have their own room. Sharing a room may be common for young children but once they become teenagers then they will definitely want their own space. Doubly so if they are not of the same sex.

There is also the concern that this mother may not want strangers in her house with her children. If by some chance she were to accept a lodger, it would suggest that it would have to be someone of her choosing.

Strangely I was in a similar situation a few years back, also in Bristol as it turns out. The landlord was happy to allow me to sublet (She owned the entire building outright) to which I got a lodger that paid me more than what the landlord increased their rent by.

So my one final thought, to make it more possible in your tenants mind is that you raise the rent, she takes a lodger but keeps any extra earned from that lodger. This way, you both come out ahead.

I would strongly suggest you float this past your tenant before proceeding further. There maybe implications in respect to any benefits she currently receives. Also, if she has an AST in place I suspect that any clause that mandates she has to have a lodger, will be considered an "unfair term". From what you have written, I would firstly suggest changing your agent. You have written to the tenant advising of a 12% rent increase. You need to stand your ground and if not affordable, encourage her to move on by serving a section 21. Considering the deal she has, she is unlikely to leave of her own free will.

This arrangement sounds contrived. It will be difficult to understand let alone manage. Worse still, it would definitely be a HMO with all the standards you would be obliged to meet. (Not necessarily a licence though.)

There is another risk here as well. A single mother with two children is likely to be reliant on benefits; any income from a lodger would count against those benefits. Any suggestion from you that the income should not be declared against tax etc but instead just handed over you could get both of you into serious trouble.

I think your attempts to keep a good tenant are well intentioned but fraught with danger. It sounds like she has something that she cannot afford (not necessarily through any fault of her own) at your expense. Unless you are happy to carry on subsidising her (perhaps you are a charity!) then the sensible thing is a discussion about her position.

I have been here myself and the usual conclusion is that the tenant leaves. If it's well managed then they generally accept the conclusion and move on. Unfortunately there is little rental available in my area, but if there is no real pressure on time then tenants usually find somewhere to move to.

If you are £7k a year down on rent that's a lot of money. Remember that you will need to pay for any repairs, re-roofing, new boilers, etc.. Not to mention the compliance stuff, safety checks, etc. That's what the rent is for.

The real point is that however nice you are, the tenant is not your problem. Stay away from contrivances and shams to try and help her.

Hi everyone, thanks so much for all your input. The consistent message seems to be that Im not doing myself or the tenant any favours by getting into an overly complicated situation.
To answer a few points,
Yes it is a hard sell.
The tenant and her children occupy a bedroom each.
If there was a lodger I would definately declare the extra income as its way too risky to be caught out by HMRC just for avoiding tax on an extra £500pm rent.
Yes I absolutely need to fire my agent for gross incompetence, thats in the works.
And according to Bristol City Council website a lodger would turn it into an HMO and they do require a license. Though curiously an owner occupier can have two lodgers without needing an HMO license.
Im ok to get an HMO license though as thats what will be needed anyway if I let to 4 young professionals.
But the lodger idea is now moot as she just got back to me to say she wouldnt like to have a stranger in the house and so would find the extra rent to stay. The problem I feel is that in no way can she afford the true market rent which is really about £800pm more than she pays. She did suggest I ditch the agent which would save around £200pm, so that just means another £600pm to find, I doubt she can manage that though.
Ill consider things a bit more but it may be for the best if she leaves, Ill give an update later.

A good tenant is worth a substantial discount in my view. And I also put a bit more effort into maintenance for tenants who keep the property in good order.
Be wary of losing a good tenant to get an increase in rent, as you don't know if the next tenant will be as easy to manage.
12% is a massive rent hike even if there has been no increase in recent years. You may already have upset the apple cart as your tenant will now be wary of doing repairs and maintenance to the house herself in fear of being turfed out if she doesn't acquiesce to some huge increase in the future.
Could you not agree to compromise by way of a 6% increase this year, with further annual increases in line with Consumer Price Index, or some other index, which would slowly improve your rental income, whilst still giving your tenant some surety?
Your plan to impose a lodger would worry me. It is an option that the tenant could consider to help her pay the rent, but not one for you to impose. Remember that you would become liable for the Council Tax, and not the tenants, if you have an HMO, irrespective of whether it needs a licence or not.

Property ownership and becoming a landlord is a long term investment. Unfortunately you selected a managing agent who was substantially below par.

Are you a glass half empty or half full type of personality?

The property 118 article, linked below, suggests your investment has been a brilliant success, a tenant who has been actively maintaing the value of the investment (it sounds as if the managing agent would not have done much had the tenant have had the opposite disposition.

You have had the benefit of a very substantial rise in the value, regular monthly rent, not grief or hassle. No void periods, no bad tenants. And a warm glow in your heart for bringing stability to a single parent and enabled two children to grow up in excellent accommodation.

I’m sure an amicable agreement can be reached with your tenant, she will realise how lucky she has been to have such a good landlord.

https://www.property118.com/property-inflation-three-times-wage-over-last-decade/

She could have an agreement (not an AST) eg an excluded sub-let tenancy or lodgers agreement and hold a deposit from them. She will not need to pay the deposit into a designated account held by the deposit protection scheme administrator under para 1(2) Schedule 10 Housing Act 2004 as not required to as a resident landlord.
Just a thought
She would need to check what her max housing benefit entitlement is re income deductions.