The evolution of the Private Rented Sector – Deed of Assurance

The evolution of the Private Rented Sector – Deed of Assurance

0:36 AM, 27th June 2013, About 11 years ago 116

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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.


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 too.

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Mark Alexander - Founder of Property118

13:51 PM, 1st July 2013, About 11 years ago

Hi Ben - I'm far from seriously minted but I use the Deed of Assurance to my advantage. If a really good tenant is in two mind whether to take my property or somebody else's the Deed of Assurance is a deal clincher, especially if they have a genuine desire to stay long term, which is what I want of course 🙂 I perceive the Deed of Assurance as giving me a distinct advantage over amateurs and accidental landlords who are not in a position to offer them due to having no long term business plan for their rental properties.

Rhetorical question as I appreciate I am now preaching to the choir by asking the following of you Ben - however, for the benefit of other landlords ...... if there were two landlords offering identical properties to a tenant wanting to stay in the same place for a considerable period of time and you didn't know which one to go for, would the offer of a Deed of Assurance close the deal for you?

Ben Reeve-Lewis

13:58 PM, 1st July 2013, About 11 years ago

Absolutely I would yeah but there are a huge number of amateurs running their business with their fingers crossed, half a percent mortgage rate rise would likely create chaos and until we have more properties tenants have little choice.

I often speak to landlords in a panic who cant even afford 1 month’s rent arrears without being unable to pay their mortgage. Financial suicide but lots of people do it.

What can people like you do to help out your less experienced (or minted LOL) brethren?

Jonathan Clarke

13:58 PM, 1st July 2013, About 11 years ago

Off piste I know ....
but i was just wondering what the definition of `seriously minted` is these days 🙂

Ben Reeve-Lewis

13:59 PM, 1st July 2013, About 11 years ago

Mark Johnathon haha

Mark Alexander - Founder of Property118

14:11 PM, 1st July 2013, About 11 years ago

Hi Ben

There are solutions out there in the form of RGI but the industry is getting more creative too. Check out this deal which is being launched in August. It's a joint venture with FCC Paragon >>>

In the interests of complete transparency I must point out that the Alexander family are also major backers of this project and that I am a non-exec Director for web-development purposes. I am not on commission though, neither am I a shareholder.

Howard Reuben Cert CII (MP) CeRER

18:09 PM, 1st July 2013, About 11 years ago

"Just like negotiating between warring parties in Northern Island or Palestine a solution can only be reached where reciprocal concessions are given by both sides" - wow Ben, that's an analogy and a half!

In my experience as a landlord (another hat I wear, apart from my BTL and commercial finance Broker hat) I can't say that we've ever had to go to Camp David to negotiate any 'settlements' (ha! pardon the pun!).

However, where a landlord / tenant relationship is based on 'hope' (ie they both hope their financial and personal situations don't change, and wearing yet another one of my 'hats' as an insurance Broker, we know that peoples situations can change and so we also may need to plan for the "what if's" in life too.

The insurance which Mark alluded to is a policy which a Client of ours (and a tenant, introduced to us by a letting agent Introducer Partner Firm) discussed with the potential Landlord and which the LL said that if he had it in place then he would grant the tenancy to him.

ie, the LL wanted assurance that if the Tenant lost his ability to earn an income due ill health, accident, injury, disability, unemployment or illness, that the rental payment would not be affected and the monthly rent would still be made to the landlord as normal.

We have access to insurers who will cover tenants for rental protection in such cases.

This provides the tenant with peace of mind that the roof stays over his family's head and the LL is happy that he retains his regular rental cashflow.

However, you ask specifically " I wonder if the smaller landlords could insure themselves about having to end a tenancy early because their personal circumstances have changed?" - well, yes, they can, against most health and 'loss of earnings' issues.

But how many LL's take out critical illness cover or income protection or ASU cover or private medical insurance or even how many have enough savings put aside for any such emergencies?

Very, very few.

Why? They don't think it's necessary.

Wrong, very wrong - and I could quote such examples where LL's have suffered serious illnesses and the only way they could pay for treatment, ease their cashflow worries, keep their roof over their own heads - is to sell a BTL property. But of course the tenants lose their home and we go back to the vulnerability of the AST and tenants rights etc.

Why not just be a responsible LL and cover yourself too!?

With 20+ years experience in this business, I can say quite categorically, that I have never met anyone for the first time who has EVERYTHING 'adequately' covered - usually down to budget, but more often down to lack of 'proper' face to face financial planning with an Adviser.


Mark Alexander - Founder of Property118

18:28 PM, 1st July 2013, About 11 years ago

Very good points Howard - brings back memories of "Brian's Story" an article I wrote a few years back >>>

1:00 AM, 2nd July 2013, About 11 years ago

It must be a generally accepted state of affairs that most LL and for that matter most homeowners would be in a very tricky position if IR increased by half a percent.
Clearly this is an unsatisfactory state of affairs.
But that is the reality of the PRS; mostly over leveraged and on a cliff edge when it comes to viability.
That is why LL should have some sort of insurance to cover for the eventuality of rent not being paid and build up a fighting fund for such IR increases.
These resolutions are just not achievable because of the position of most tenants and so the PRS is in a very delicate position.
LL are taking a risk and tenants are taking a risk on using those LL.The whole industry is financially in a very precarious position.

Gary Chase

12:42 PM, 2nd July 2013, About 11 years ago

Considering the relative merits of the arguments (including those put forward that are highly legalistic in their content. What in my view is emerging, and at the end of the day is probably due to the growth in the private residential market distinct sub-groups are becoming apparent. For instance in the past landlords generally viewed the market as Housing Benefit and non-Housing Benefit tenants. There clearly is a demand from tenants that for personal reasons (e.g. children at local schools etc) to (subject to being 'good tenants') greater certainty that they will be able to live in a property for longer than the standard AST.

Similarly there will be landlords with smaller portfolios that will need the flexibility of not being tied into long term agreements, however presumably those with larger portfolios and indeed the instutional residential property investors can manage their risks differently and us such may find attractive a tenant having a longer tenancy thus reducing void periods (although clearly low turnover is not necessarily good for the letting agent!).

Therefore rather than x is right and y is wrong perhaps we should give greater consideration to ensuring that tenants end up with landlords that best meet their situation and vice versa for landlords.i.e. landlords have tenants that are appropriate to their commercial interests and risk profile?

Ben Reeve-Lewis

12:52 PM, 2nd July 2013, About 11 years ago

A very pertinent suggestion Gary. When you think about it, much of the PRS is an either or argument, hamstrung by legal intervention. The PRS is in some ways a consumer product but with little variation or choice, which effectively makes it a monopoly.

If landlords and agents were to follow your suggestion and delineate types of landlords with pros and cons for each and tenants learnt to be more savvy about the pitfalls and advantages of their choices then it most certainly would be a new model for renting.

The only argument I can see against this at the moment is that in London there is 8 - 10 tenants chasing each property, which limits consumer choice, but that may well change in the future

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