A Deed of Assurance is a legal solution to many problems and trust issues which arise between landlords, letting agents and tenants. Use of a Deed of Assurance can reduce administration, increase goodwill, improve profitability for landlords and letting agents and reduce costs for tenants.
The basic principles are simple, a Deed of Assurance is a legally binding contract between the landlord and tenant which facilitates integrity. The landlord provides a compensation backed promise not to serve notice on the tenant for an agreed period of time providing the tenant complies with all conditions of the tenancy agreement. This serves as an alternative to providing a long term tenancy agreement which may well be in breach of a landlords mortgage conditions.
A Deed of Assurance can also be used as an alternative to renewing a tenancy agreement.
Renewing a tenancy agreement involves re-protecting the tenants deposit. This involves administration and can also involve extra cost if deposit protection is purchased as an alternative to using the custodial Deposit Protection Scheme. Many landlords refuse to renew tenancy agreements due to these costs and also because they feel more able to take possession in the event of a tenant defaulting once the tenancy becomes statutory periodic. This is in conflict to the requirements of tenants and letting agents though. Tenants, want the additional security of knowing they are not going to get a nasty shock of receiving two months notice to find a new home. For letting agents, the tenancy renewal and associated fee income is a vital part of their business model.
Using a Deed of Assurance as an alternative to long term tenancy agreements or tenancy renewals is not only more cost effective for all parties, it also creates good will.
Tenants are likely to be much happier with a Deed of Assurance as they are not tied into a long term contract once their initial tenancy has expired. However, they also have assurance that if they are asked to find a new home at short notice through no fault of their own they will be entitled to compensation.
Landlords, letting agents and tenants are free to negotiate their own terms, the Deed of Assurance template is flexible enough to allow this. The length of the Deed of Assurance period can be any number of months and years and the compensation offered by a landlord for serving notice on a fully compliant tenant can be any multiple of the monthly rent. For example, some landlords may offer a 12 month Deed of Assurance and two months rent as compensation if they do need to take possession of the property back within that period even if a tenant has complied with all condition. Other landlords may negotiate a premium rent in return for providing a much longer term Deed of Assurance and a much higher multiple of rent as compensation. Either way, a reasonable premium can be charged for producing a Deed of Assurance and there is certainly less administration involved than a tenancy renewal and re-protecting a tenants deposit.
A Deed of Assurance provides a landlord with the flexibility to serve notice if he needs to but the terms of the contract clearly demonstrate to a tenant that it is not the landlords intention to serve notice and that compensation will be paid if they are asked to find a new home through no fault of their own.
The Deed of Assurance document also makes it very clear to tenants that if they fail to comply with the terms of their tenancy the landlord can serve notice to evict at any time without the requirement to pay compensation.
The simplicity of the Deed of Assurance is its strength. Chief Ombudsman Lewis Shand Smith confirmed this by saying “The GOOD Landlords Campaign 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”.
Legal Opinion on the Deed of Assurance
Statutory Compliance – the Law of Property (Miscellaneous Provisions) Act 1989
This simply sets out a list of requirements which must be fulfilled by anybody who wishes to create a valid and enforceable contract for a disposition of an interest in land. If you fail to comply with the requirements you just end up with an attempt to create an interest in land which cannot be enforced. The interest in land that we are concerned with is, of course, the term of years granted to the tenant under an AST. Typically an AST is completed by the production of two identical copies of the tenancy agreement, one of which is signed by or on behalf of the landlord and the other of which is signed by or on behalf of the tenant; however, it is equally possible (but less common) for both copies to be signed by or on behalf of both parties.
Whilst it would be technically possible to modify (by addition) the AST so as to include words equivalent to those contained in the deed of assurance, our legal advisers chose not to recommend this for two separate reasons:
(i) the terms of the assurance are not in fact terms of the AST. The AST is one agreement (which creates an interest in land) while the assurance is a separate collateral agreement which does not create any interest in land. The assurance sets out the landlord’s intention as to the extension of the minimum term provided in the AST and in particular provides for certain consequences that will follow in the event that the intention to extend is frustrated or not performed for some reason.
(ii) the AST is complete and whole and enforceable under the statute because it does not refer (and does not need to refer) to any other document for its terms. The deed of assurance on the other hand does refer to the AST and hence (by virtue of section 2(2)) is deemed to incorporate the AST. Thus (for the avoidance of doubt) the AST is, for the purpose of the statute incorporated in the deed of assurance, although the deed of assurance is not incorporated in the AST.
For those reasons neither the deed of assurance nor the AST would be struck down as unenforceable by reason of the provisions of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989.
(B) Why utilise two documents instead of one?
This is where the position of the mortgagee comes in. Although there are countless criticisms that one can validly raise against many of the large buy to let mortgage lenders, nevertheless they are to be regarded as a necessary evil. In very many (albeit not all) cases the ability of the landlord to own the property is entirely dependent upon the mortgagee advancing a large part of the purchase price. Typically such mortgagees are imperious and unyielding and often unreasonable in their attitude to the issue of letting so that they (under their terms and conditions, to which the landlord is forced to subscribe whether he likes it or not) will only permit the creation of ASTs with a short primary term, usually six months and almost never more than 12 months. Their justification for that stance is that they will not sanction any arrangement which might hamper or abstract their ability to obtain possession of the property and sell it with vacant possession in the event that the landlord defaults under the mortgage.
Given that the object of our exercise is to provide maximum comfort to the tenant in terms of the prospect of securing an extension in the effective term of the AST (with compensation available if the extension fails) the arrangement must avoid infringing the landlord’s mortgage covenants and the requirements of the mortgagee while still furnishing an enforceable remedy in the event that the tenant does not enjoy the full benefit of the extended term. Although there is some variation from lender to lender, it is in our experience generally the case that if the terms of the deed of assurance were directly incorporated within the AST itself, then the AST would no longer be acceptable to the mortgagee, resulting in a situation in which either consent would be refused or, alternatively, the landlord would all make breaches in mortgage covenants by entering into the (extended) AST. Obviously, we could never advise a landlord to breach mortgage covenants; apart from anything else it would render him liable to immediate adverse action if he were to do so. The reason why the mortgagees would not consent to the extended AST wording is that, if they were to do so, the tenant would or might have a sound argument against the granting of an order for possession and sale in the event that the landlord were to default under the mortgage.
By keeping the terms of the assurance in a separate deed, the possibility of valid objection by the mortgagee is eliminated. The landlord and tenant enter into a separate arrangement (outside the AST although referring to the AST) and the objectives of every party are achieved.
While we are not exactly “worried about lenders”, we cannot ignore them nor the rights and powers which they enjoy.
The problem is that if a mortgagee approves a document which contains an indication that the tenant will or may enjoy an extended term of tenancy, then, whatever protective wording you may put in, it would always be open to the tenant to argue in court (if faced with the prospect of premature eviction by reason of a landlord’s mortgage default) that he entered into the tenancy agreement specifically in reliance on the expectation of that extension, so that the mortgagee who had approved the wording would be unable to recover possession by reason of the rules of estoppel. That problem does not even arise as long as the mortgagee does not consent to nor approve the document which gives rise to the expectation. In other words, however good your wording might be, the “two separate documents” approach is inherently preferable.
(C) Why utilise a deed (as opposed to a simple agreement) for the assurance?
The decision to proceed by way of deed for the assurance was a “belt and braces” election, based on principles of precaution rather than necessity. When we were setting this up we did consider the possibility of having the assurance contained in a simple agreement, not by way of deed. However, it was perceived that in that case there would possibly be some element of risk or prejudice to the tenant. The problem is that it is arguable that a simple agreement not effected by way of deed might perhaps be unenforceable by the tenant. That is because it is not obvious that the tenant provides any “consideration” for the various promises and obligations undertaken by the landlord which form the core of the assurance. In other words, the landlord undertakes responsibilities that go well beyond his responsibilities under the AST while the tenant does not undertake any recognisable responsibilities or obligations beyond those already contained within the AST. In general under contract law a party can only enforce a promise given by another party if the enforcing party has provided some consideration in return for that promise. That rule does not apply where the promise to be enforced is contained within a deed. That is one of the distinctive features which differentiate between a deed on the one hand and a simple written agreement on the other hand.
The use of a deed might be regarded as overkill and unnecessary but it is safer and better for the tenant to have the assurance terms contained within a deed. There is no downside or disadvantage (apart from the modest requirement that signatures be witnessed) from the point of view of either party by employing a deed as the mechanism for the assurance and so that is what our legal advisers recommended.
UPDATE – 1st July 2013
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