Premium Tenancies

by Mark Alexander

21:52 PM, 7th February 2012
About 8 years ago

Premium Tenancies

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Premium Tenancies

Premium tenancies are something I’ve heard a bit about from a few different landlords in various parts of the Country who don’t know each other. This leads me to believe that these tenancies are more than just an urban myth but I have to admit that they are something I know very little about. However, I’ll share what I think I know and feel free to correct me. I also have some more questions which I hope will develop into a useful discussion for all landlords who hear about Premium Tenancies, search the internet for the answers, and then come across this post.

Premium Tenancies – this is what I think I know

My understanding is that if I take more than 7 weeks rent as a deposit on an AST (Assured Shorthold Tenancy) I will have created a “Premium Tenancy”. As I understand it, the implication of this is that my tenants will be allowed to sublet the property or assign their tenancy without my consent. If that’s true, I might think I’m letting to a lovely couple and subsequently find out that a modern day Ozzy Osbourne is living in my property!

Ever since I first heard this I’ve refused to take more than a months rent up front plus an amount equal to 7 weeks rent as a deposit but even then I’m still nervous about whether I’ve inadvertently created Premium Tenancies.

Can anybody actually confirm that Premium Tenancies do in fact exist and if they do whether my understanding of them is correct please?

I’ve resorted to the internet to find out more as none of my contacts have been able to answer my questions. When I search for the phrase “Premium Tenancy” nothing much comes up. Tessa Shepperson of Landlord Law has written an article about something similar but this doesn’t give me the information I need and the three month deadline Tessa set’s to raise questions via commenting has sadly expired.

If you can answer my questions and throw more light on this seldom discussed topic the chances are that you will become a “legend” as every other landlord or letting agent who searches the internet for more information about “Premium Tenancies” is highly likely to find this article.

Assuming I’m right on the first part of this blog then it is clear to me that landlords should avoid taking more than 7 weeks rent as a deposit like the plague. There are, however, circumstances where landlords might want to take more.

The first example is where 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. If the guarantor pays a bond, does this count as a Premium Tenancy?

What if a tenant wants to pay rent in advance? I’ve heard a few stories over the years about landlords who have had a tenants who are on the verge of being able to claim benefits but their savings are over the threshold. Their answer to this problem has been to agree to a reduced rent for an agreed period on the basis that they pay a larger amount up front. This allows the tenant to reduce their savings to a point where they can claim benefits. Does that scenario create a Premium Tenancy? There is also a question over whether this could be benefit fraud.

I have other questions too. For example, if a tenant pays six months rent up front has a Premium Tenancy been created? Instinctively I suspect it has on the basis that anything more than one months rent in advance could be seen as a deposit. I’ve heard stories of landlords renting to Mr and Mrs Perfect who pay 6 months rent up front. When the landlord visits the property he finds a whole tribe of others living there and no sign of Mr and Mrs Perfect. Save for shopping the tenant to the local council for operating a potentially unlicensed HMO it would seem there is very little the landlord could do other than to serve two months notice on expiry of the tenancy. What state might his property be in though? If his tenant is subletting as an HMO what are the implications for the landlord in respect of licensing, insurance etc.?

I know it’s unlike me to create a blog which asks more questions that it answers but I am really keen to debate this topic and to learn something new.

You may have some questions of your own so please post them here and hopefully somebody in the know will appear and answer all of our questions and point us to the relevant sections of law for verification. That way, we will all learn something and we will have created a useful point of reference for anybody else like me who searches the internet hoping to find out what a Premium Tenancy really is. We may also learn how we can structure our arrangements for maximum protection of our investments and what the best practice is for a variety of circumstances which might create Premium Tenancies and how to avoid potentially unwanted outcomes if we get things wrong.

Please feel free to share this article with anybody who you know who takes more than 7 weeks rent up front or who maybe able to comment, either to ask questions or to provide answers which could help many other UK landlords.

Thanks in advance for your help.



Comments

Ben Reeve-Lewis

7:28 AM, 8th February 2012
About 8 years ago

You are right in one respect Mark, Premium Tenancies are a myth – in name, that’s why they will be hard to find on Google, they don’t exist but the principle does.
 The rule being if a landlord takes 2 months money as a deposit it counts as a ‘Premium’ and sub-letting becomes lawful but as usual with law it isn’t as clear cut as that.  
 Schedule 2 of the Housing Act 1985 defines a Premium as “Any fine or other like sum OR any other pecuniary consideration in addition to rent”. It’s the last bit that is relevant here. This Act relates solely to council tenancies in which they are illegal if found to have exchanged hands, for instance in mutual exchanges but the definition is sound. Premiums are what used to be called ‘Key money’ in the old days.
 It was a bit of an obscure thing for many years until deposit protection came in and many landlords decided to take money and not call it a deposit, running the risk of possibly falling foul of the rule. There was much hoo haw in the lower courts for 3 years before the Tiensia and Gladehurst cases put paid to deposit protection (until April) and in one case that I cant remember the name of off the top of my head, a judge deemed that any monies taken that were more than 1 month as deposit must clearly be seen as something other than deposit.
 This was only one county court judge but he was obviously mindful of the Premium rule and that he felt the landlord was not calling it a deposit in order to avoid having to protect it. But many letting agents in London now commonly charge 6 week’s rent as a deposit, securing the money but keeping it under the Premium limit.
 However Section 115 of the Housing Act 1988 which is where the law on this is talks only of Premiums creating a right to sub-let where there is a ‘Contractual Periodic tenancy’ in place and these are quite rare.
 Some take the view that the Premium idea applies to long leases too but my jury is out on that one.
 My own view is that there is only a tiny chance of being caught up in this. I have never seen a Contractual Periodic Tenancy in 21 years of doing housing law. Also, in 21 years I have never seen a Section 51 notice (needed to raise rent on Protected tenancies) and only a couple of Section 13 notices (Raising rent on statutory periodic tenancies). The fact that something can be done in law doesn’t mean people are falling over themselves to do it, but it also doenst mean that they cant and you do get forgotten or largely unknown pieces of law that suddenly jump up.
 I remember a few years back it became fashionable for lawyers to defend possession proceedings on the basis of Stamp Duty not being paid on rents over a certain amount under the Stamp Act of 1891. Some judges went with it and others poo-poed it.

Mark Reynolds

8:56 AM, 8th February 2012
About 8 years ago

Hi Mark

I wrote an article relating to the issue of taking rent up front last year and can be found here http://www.pierceandco.co.uk/Press-Room/Entry/everything-else/2011/10/20/6-months-up-front-yes-please.html - You be interested in that

Mark Alexander

9:33 AM, 8th February 2012
About 8 years ago

That's a great article and you have both Mary Latham and Madelena Penny commenting on them too, both of whom I have a great deal of respect for.

I saw the article a while ago and re-visited it as part of my research for this article.

I know there is something in this "Premium Tenancy" thing, otherwise people like Mary and Madelena wouldn't be talking about it. However, as Ben Reeve-Lewis has pointed out, in law, the phrase "Premium Tenancy" does not appear to exist. It is a phrase which seems to have been invented by landlords to label or describe an issue or set of circumstances which they have been affected by. What I am attempting to achieve with this article is to create a reference point where landlords can discuss the issues cased by inadvertently creating Premium Tenancies. Ideally we will get examples which have been tested in law and where case law can be specifically cited. That way, this article could become a reference piece for many.

It's less than 12 hours since I published the article and Google has already picked it up and placed it number 3 in page one of their search results for the phrase "Premium tenancies". Once we get lots of traffic flowing to this article when it appears in our Newsletter and people start linking to it as a reference document I have no doubt that with the SEO we've embedded it will rank ~1 page 1 in search engines for phrases such as "Premium Tenancy", "Premium Tenancies" etc.

You have a great website and I really enjoy reading your blogs by the way. I also comment on them from time to time as you know 🙂

Mark Reynolds

9:41 AM, 8th February 2012
About 8 years ago

@iamalandlord:disqus  -  You have a great website and I really enjoy reading your blogs by the
way. I also comment on them from time to time as you know 🙂

Ditto 🙂

Mark Reynolds

9:51 AM, 8th February 2012
About 8 years ago

As Ben has said the term "premium tenancy" does not exist in law  (I stand to be corrected on that of course) but neither does the offence of "being mugged". This is a slang term for robbery, a bit like having your house robbed, you can't have your house robbed but you can have it burgled - in law.

My point is that I think the term premium tenancy is a "layman's term" to describe a situation where the tenant suddenly has some more rights or obligations by acts or omissions carried out by the landlord. I would be interested to hear what @Tessashepperton:disqus  has to say on the subject, given I have an enormous amount of respect for her given her contributions in the world of landlord/tenant law 🙂

Tessa, you about young lady?

Tessa Shepperson

10:19 AM, 8th February 2012
About 8 years ago

This is the post I wrote a year or so ago on the quesiton of premiums and deposits http://www.landlordlawblog.co.uk/2010/06/28/why-can%E2%80%99t-tenancy-deposits-be-for-more-than-two-months-rent/

As I say in the article, there is not a lot of information about.  Mark, if you want to send me a set of say five, specific questions I will take it as a challenge and do a Landlord Law blog post trying to answer them (although I can't promise definitive answers).

Mark Alexander

10:22 AM, 8th February 2012
About 8 years ago

Thank you Tessa, a great starting place would be the examples I've provided in this article.

Tessa Shepperson

10:24 AM, 8th February 2012
About 8 years ago

If you could put them in the form of a list please. Five questions.Either on here or email them to me.

Mark Alexander

17:30 PM, 8th February 2012
About 8 years ago

Hi Tessa, Mark from Pierce and Co. is compiling a set of questions and hopes to post them here later this evening. Please post summary answers here to facilitate discussion and I will then link back to your blog as the discussion progresses.

Tessa Shepperson

8:33 AM, 9th February 2012
About 8 years ago

Here are the questions which I was emailed by Mark on this topic, and which I have now answered in fuller detail on my blog:Q1: What is a premium tenancy?
A: It is not a proper legal term, but in this context can be taken to be a tenancy where the tenant has obtained extra rights regarding assignment (per s15 of the Housing Act 1988) because a premium or 'fine' has been taken by the landlord.
I go into quite a lot of detail in my blog post here http://www.landlordlawblog.co.uk/2012/02/09/five-premium-tenancy-questions-answered/
Q2: If a tenant pays six months’ rent up front has a Premium Tenancy been created?
A: Probably not.  Unless rent paid in advance is deemed to be a deposit.  I don't think it will.

Q3: 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?
A: If the sum paid is more than 1/6 of the annual rent (when it will count as a premium) then yes.  The fact that it has been paid by someone other than the tenant will not change this.

Q4: What if a tenant wants to pay rent in advance?
Thats fine.  Rent is not a premium (subject to Q2).
Q5: If a landlord takes a deposit that equates to over 7 weeks rent does this make a premium tenancy?
A: It depends.  It will only be a problem if the amount of the deposit is over 1/6 of the rent, when it will count as a premium.  

Generally - if you make sure that your deposits are NEVER over 8 weeks worth of rent or ALWAYS under two months, and do not take any other payments apart from rent, then you will not normally be at risk of creating an accidental premium tenancy.

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