Premium Tenancies

Premium Tenancies

21:52 PM, 7th February 2012, About 11 years ago 41

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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.

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Mark Alexander - Founder of Property118

13:47 PM, 10th February 2012, About 11 years ago

Your suggestion could be achieved using a solicitors "Escrow Account". I'm interested in the vetting of these tenants. Presumably you weould ask for copy bank statements on top of the normal stuff, copy passport etc.?

16:31 PM, 13th February 2012, About 11 years ago

I've had a property lawyer investigate for me today and it appears their explanation matches what's already been written below and what I already thought the case to be...

I have set out the facts with regard to premium tenancies as I understand them.
As you point out there appears to be a lot of rumours circulating and I
appreciate the importance of cutting through the whispers to get to the bottom
of this topic.

the assured shorthold tenancy is a periodic tenancy, there is an implied term
that the tenant will not assign, underlet or part with possession of any part or
the whole of the property without the landlord's consent (section
15(1), HA 1988). This provision does not apply to a
contractual periodic tenancy if a premium is payable on the grant or renewal of
the tenancy (section 15(3)(b), HA 1988). A deposit that is more than
one-sixth of the annual rent is considered to be a premium (section 15(4),
HA 1988).

So, a
tenant who has paid a deposit of more than two months' rent will be able to
assign, underlet or part with possession of the property and will not be subject
to section 15(1) of the HA 1988. However, if the tenancy agreement prohibits
such alienation, the tenant will still be bound by the tenancy agreement. The
effect of section 15 is therefore quite limited, but it is worth considering
when deciding what level of deposit to require.

hope this answers your query, on what they are and the implications of Section
15 of the HA 1988.

23:15 PM, 13th February 2012, About 11 years ago

So does this mean one may take more than 1/6th of rent as deposit providing it is mentioned in the AST that such alienation is prohibited.
If a tenant pays more than 1 months rent in advance does this count as the same as a deposit more than  1/6th of the rent.

11:48 AM, 14th February 2012, About 11 years ago

that is my understanding for a standard periodic tenancy unless, as stated above, the AST began life as a contractual periodic tenancy. Then the 1/6 rule would apply.

Mark Reynolds

17:29 PM, 14th February 2012, About 11 years ago

I have a question - If you were to take 6 months rent up front and put the money into a client account which is managed as follows...

1. Each month the rent is passed to the landlord as normal.
2. Included in the AST, is a clause that states this is happening.
3. Within that clause, it states that if the tenant leaves before the 6 months are up, the balance of the up front rent paid is returned


£500 per month for 6 months = £3000

Tenants leaves in month 3 so £1500 is returned

....would it make this a premium tenancy?

Mark Alexander - Founder of Property118

18:02 PM, 14th February 2012, About 11 years ago

What you have effectively described here is an 'escrow account', commonly used by solicitors who are bonded to hold client monies as part of their Law Society membership. Some accountants also operate escrow accounts.

Letting Agents would not be operating an escrow account impartially in the circumstances you have outlined as they would be acting for their landlord client and also benefitting from the release of the proceeds. Regardless of whether a letting agent had client money bonding via ARLA or an alternative organisation or not, my opinion is that such activity would not be right and proper. Note this is just my opinion

Mark Reynolds

18:16 PM, 14th February 2012, About 11 years ago

Thanks mark

I am interested to know then how agents who do take rent up front deal with it - do they pass it all to the landlord in one lump or how do they deal with it?

I note your comment earlier about cannabis farms -

As I said below and as you have rightly identified, I would be very uncomfortable taking 6 months up front because no doubt it will be, as this thread has identified from the sheer amount of responses, an area that will be subject to much scrutiny by the legal profession if the matter reared its ugly head.

Would I want to put our landlords property and their tenants at risk? Absolutely not so when asked about taking 6 moths rent up front, we simply say no. Works for us 🙂

Mark Alexander - Founder of Property118

18:24 PM, 14th February 2012, About 11 years ago

Quite a few years ago I did source a tenant though a letting agent who chose to pay six months rent up front. The agent paid it all to me up front, less their deductions.

I'm still no clearer, despite all of the opinions shared here, whether a Premium Tenancy was created or not.

For now I will be sticking to taking up to 7 weeks rent as a deposit, charging £150 letting fee and taking rents a month in advance. "If it ain't broke don't fix it".

Mark Reynolds

18:27 PM, 14th February 2012, About 11 years ago

 @iamalandlord:disqus "If it ain't broke don't fix it" - Quite right, it ain't broke for us so we won't be fixing it

9:09 AM, 1st March 2012, About 11 years ago

I have little knowledge about this but from what I have read, Premium Tenancy is really quite interesting. I still have lots to learn as I am still new in being a landlord...

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