Letting agents fees banned by Government

The long awaited restriction on letting agents fees is one step closer with the recent introduction of draft legislation to ban the requirement for tenants to pay fees or other charges on top of rent and payments for services from third parties. The proposals could also limit the amount of tenancy deposits held by a landlord in a relevant scheme.

The level of fees that tenants pay to letting agents has long been an area of concern, due to the lack of regulation in the market. Following a consultation process, the Government has sought to address the concerns with the introduction of the draft Tenant Fees Bill 2017 (TFB 2017).  In addition, the Government is now in consultation about making it mandatory for letting and managing agents who handle client money to be members of financial protection schemes for clients.

The TFB 2017 seeks to prevent landlords and their agents (on the grant, extension and termination of tenancies) from charging fees or other payments on top of the rent, with the exception of a capped refundable security deposit (at no more than six weeks’ rent). It also requires that refundable holdings deposits are capped at no more than one week’s rent. The restrictions will only apply to those tenancies that are completed after the legislation has come into force and it do not seek to control those fees in long leases, social housing tenancies or holiday lets. In addition, the Government proposes to extend the legislation so that there are restrictions on the fees charged by landlords and any payments to third parties.

The legislation will be enforced by already stretched local authorities (Trading Standards). A rogue landlord or letting agent risks a penalty of £5,000, with further penalties of up to £30,000 or criminal liability where there are subsequent breaches within 5 years. Any prohibited payment, plus interest, will be required to be repaid to the tenant where there are deemed breaches.

The TFB 2017 also seeks to amend the Consumer Rights Act 2015 (CRA 2015) so that letting agents must clearly display on property portals any letting fees to the consumer and identify which redress scheme they are a member of, and whether they have client money protection.  This is a welcome move to legislate the online space, to match the requirements of agents’ websites and offices.

A better and fairer market place will exist once all lettings agents are regulated, aligning their practices with the same quality standards as those of other professions, such as solicitors.  This is a long overdue piece of legislation and will not come too soon for those who wish to see a more regulated lettings market.

To find out more, click here to speak to Residential Property Partner Caroline Vernon

Licences for occupation – is your short term licence agreement actually a formal tenancy?

A recent ruling is likely to have significant consequences for guardian property companies (and other landlords) who use licence agreements to place occupiers into properties to protect against squatters and vandalism.  The case of Camelot Property Management Limited and Camelot Guardian Management Limited v Roynon [2017] highlights the importance of carrying through in practice what a document/ licence has set out to achieve.

The matter of whether a licence is really a licence or indeed a lease has long been debated and for some time now it has been widely accepted (following the decision in Street v Mountford [1985]) that the principles of exclusive possession, rent and length of term govern how a ‘licence’ will be regarded by the courts.

The recent Camelot case did not set to change these principles but has offered valuable insight as to what is required in order to prevent ‘exclusive possession’ from arising and turning a ‘licence’ into a lease or formal tenancy.

The ‘licence’ agreement with Mr Roynon for the occupation of two rooms in a former old people’s care home contained the following restrictions:

  • No overnight guests
  • No unsupervised guests
  • No more than 2 guests at a time
  • All guests to be escorted from the property at the end of each visit

The court held that the provisions of the agreement did not accurately reflect what happened in reality. Whilst the licence stated that no exclusive possession would be given, Mr Roynon had in fact been given keys to two rooms to which no other guardians had access and which no one entered without his permission.

Regular inspections of the rooms by Camelot were not held to be sufficient to counter his exclusive possession and Mr Roynon had therefore acquired an assured shorthold tenancy rather than a ‘licence to occupy’.

The case highlights the need to put into practice what a document/ licence has set out to achieve and where no exclusive possession is intended, landlord’s must make sure that the living arrangements are not contrary to the formal agreements put in place.

Anyone using guardians or short term occupiers to prevent buildings remaining empty should carefully balance the risks of allowing people into occupation with the rise of professional squatters and other unwanted occupiers who could look to take advantage of such situations.

Contact Caroline for more information.

Airbnb creates legal hazards

If you let property through Airbnb, you could be facing a legal minefield. Its rapid growth which provides an online platform for individuals to rent their homes or spare rooms short-term, has caused a stir across the world. But the law has not kept up with the technology, leading to a range of hazards for those who let through the platform.

It has become such an issue that frequent use of Airbnb can effect private property, according to new-build developers. Their reaction has been to try to restrict such short-term letting when leasing new apartment blocks.

Leasehold risks

Some cities have tried to regulate the Airbnb model. Authorities in New York, Berlin, Barcelona and San Francisco, to name a few, have started requiring permits for such business.

In London, landlords need permission to use a property as temporary sleeping accommodation for fewer than 90 days a year, under the Deregulation Act 2015. Local authorises can fine landlords for breaches, under the Town and Country Planning Act 1990.

In the UK, the risks increase for leasehold property, although there are also local considerations for freehold property. Most leases restrict sub-letting part or all of the property.

They will also usually restrict the property to be used only as a private residence occupied by a single family, and prohibit using the property as a business. It is rare to see a flat lease without these restrictions.

Furthermore, leases will contain covenants regarding any use of the property that causes a nuisance and annoyance, and a covenant to comply with all building insurance policies.

The case of Nemocova v Fairfield Rents Limited 2016 ruled that in granting a series of short-term Airbnb lettings, the leaseholder breached the covenant to use the property as a private residence.

A tenant who breaches the lease terms risks a claim for damages and or forfeiture proceedings, which require them to remedy the breach and pay monetary compensation.

They may also be breaching the insurance policy and their mortgage terms.

Assured tenancy danger zone

Where a tenant has an assured tenancy or an assured shorthold tenancy and seeks to sub-let on Airbnb, they face several legal dangers. They may be breaching the letting terms, and if the property is social housing, they could be criminally liable.

The legal occupation of such short-term rentals are on a licence basis and not as a tenancy agreement so security of tenure is less of an issue. This therefore has the beneficial effect that a licence to rent out the property as a house in multiple occupation is not required under the Housing Act 2004 and the sub-tenants’ right to rent does not need to be considered under the Immigration Act 2014 and due to the licence nature of the tenancy, the deposit protection requirements will not apply under the Housing Act 2004.

However, regulations require that gas safety certificates, smoke and carbon monoxide alarm, and energy performance certificates will need to be obtained.

This area has become a particular minefield and until the law catches up with technology, it will continue to present a range of legal hazards for those involved.

To find out more, please contact Caroline Vernon

Make the right commercial decision when it comes to signing or granting a lease with security of tenure protection

Whether you are the landlord or the tenant, you need to think carefully at the time of signing a new lease about what happens when the lease comes to an end.  A manufacturing company, for example, who has invested in the installation of specialist plant and machinery at a property, will want that lease to continue, to provide it with the comfort it needs to carry on operating its business without fear of having to relocate at the end of its term. Another tenant, providing business services and taking the lease of an office, for example, may not have the same concerns. They may not see the property as critical to their business in the same way as the manufacturing company does.  The landlord on the other hand needs to think about its long-term plans for its property and be aware that unless it opts out of the Landlord and Tenant Act 1954 (the Act), security of tenure is automatically given to the tenants of most new commercial leases.

It can be crucial, therefore, for landlords to consider whether its tenants should have protection under the Act, especially when they might want to take possession of the property at the end of the lease. The tenancy becomes protected unless the parties contract out of the Act.

The protection given to tenants is twofold: First, the tenancy does not come to an end on the term end date of the lease and continues until it is terminated according to the procedures set out in the Act. Second, tenants are given the right to apply to court for a new lease once the fixed term of their current lease has expired. A landlord may only oppose an application on certain statutory grounds.

Security of tenure does not apply across the board to all tenancies however and there are certain tenancies that are excluded from the protection of the Act. Nevertheless, security of tenure applies to most commercial leases with a term over six months unless contracted out.

For a landlord to regain possession of the property at the end of a term, it must serve a statutory notice to terminate the tenancy. Such a notice must be served not less than six months, nor more than twelve months, before the date of termination specified in the notice itself. The date of termination cannot be before the term end date in the lease. The landlord must be able to demonstrate one or more of the following statutory grounds:

  • The tenant has failed to comply with its repair and maintenance obligations
  • The tenant is persistently late with rent
  • The tenant is in substantial breach of their obligations
  • The landlord has offered and is willing to provide or secure the provision of suitable alternative accommodation for the tenant’s requirements
  • The tenant is a sub tenant of part of the landlord’s building and the landlord could get more rent by leasing the whole of the building rather than part
  • The landlord intends to demolish or reconstruct the whole or any part and could not reasonably do so without obtaining possession of the property and/or
  • The landlord intends to occupy the property.

If a landlord envisages that it will want possession of its property at the end of a lease term, then contracting out of the Act is crucial. In practice, the landlord will serve a warning notice before the lease or agreement for lease is completed and the tenant will reply with a statutory declaration. The warning notice must be in a prescribed form and the lease must contain reference to the exclusion agreement, the notice and the declaration.

The Act is highly technical and legal advice should always be sought in relation to any specific matter. The Sherrards property team are able to advise landlords (as well as tenants) on key considerations in relation to security of tenure.

To find out more, please speak to Caroline Vernon

SDLT update

Stamp Duty Land Tax (SDLT) has now become a highly complex area and requires careful consideration to ensure the rates and exclusions applied are correct. At first glance, it may appear that relief is available but on closer inspection of the scenario this may not be the case.  For example, where a property is over £500,000 and the property is not a first purchase for the buyers collectively,  they will not be eligible for first time buyer relief.

There have been some highly colourful interpretations of ‘the mixed-use’ category where rates are significantly reduced. For example, an artist’s studio in a garden, an office in a mews house and selling apples for pressing commercially have all been suggested as being commercial use under the SDLT legislation.  The revenue is investigating such designation more frequently to claw back SDLT.

It is also important to consider the floor plan, where more than one property is contained within the demise, in case ‘averaging relief’ can be claimed. However, the revenue does have a clawback provision where the number of dwellings is reduced within 3 years.

An area causing much debate is the additional 3% charge for companies (charged on every purchase where an exemption to 15% rate is applied) and individuals who own residential property worldwide. In this case, the exemption applies where a main residence is being replaced. However, the guidance requires that it is the intention of the buyer at the time of purchase to live primarily in that residence and the replacement of such and not a matter of allowing the purchaser to choose which property is to be the main residence. Married couples are treated as a single person when applying the test so where a property is owned by one spouse this will be relevant for both when replacing the main residence and calculating whether the higher rates are available. The ownership of inherited property is ignored where an interest does not exceed 50%. However, if one spouse who does not own any property purchases in their individual name they are affected where the other spouse owns a property portfolio or even one other property and the purchasing spouse will pay the higher surcharged rate.

The higher rate of 15% is charged when non-natural persons purchase the property i.e. a company or a partnership. However, the rate can be reduced to the surcharged additional 3% where the company is a property developer or rents properties as a business (with no connected person in occupation). In any event this rate only kicks in over £500,000 so although the 15% rate may not be charged, the additional property 3% rate will be.  The revenue’s calculator does not make provision for an SDLT calculation for non-natural persons, so on initial calculation, this can be misleading.

Higher rates of SDLT may be also payable where there is a linked transaction, for example, where either two properties are being purchased or a building contract for works has been entered into separately.

A further area requiring consideration is where clients are divorcing and the couple transfers the property to one of the co-owners. SDLT is usually payable on the equity or mortgage being taken by the purchasing party. However, an exemption applies where there is a court order or deed of separation in place or where the separation is likely to be permanent.

A number of tenancy agreements in central London will exceed the £125,000 threshold meaning that SDLT is due on the signing of a tenancy agreement by the buyer. The amount is cumulative and therefore any renewals will also be caught.

The revenue also plan to reduce the filing period from 30 days to 14 days, although this is still to be confirmed. It is imperative that specialist advice is obtained on the SDLT liability levels, as it has become a complex area.

To find out more, click here to speak to Caroline Vernon

Post Grenfell – Lawyers must help identify cladding dangers

The catastrophic fire that led to the loss of many lives at Grenfell Tower has raised awareness of the dangers of building cladding. Buyers and tenants should, with the help of their lawyers, understand these dangers and know what to do if any cladding exists in the building they want to live in.

According to estimates, around 600 private buildings still have the covering used on the Grenfell Tower, known as aluminium composite material (ACM) cladding.

Before the tragedy, most people were unaware of the hazards lying in this aesthetic aspect of many UK tower blocks. But the subsequent inquest has exposed the fire safety dangers associated with these materials and raised questions about the regulations around the use of cladding.

Some flats in Greenwich saw their values decrease after such cladding was found to exist in the building.

There is also concern that landlords of private tower blocks are trying to hide the presence of such cladding because it might cost them a lot to replace it. For example, the original developer of a Croydon high-rise building paid £2 million to replace cladding after failing to reach an agreement with the property manager, residents and the government.

Important questions

In this context, it is important for property lawyers to make enquiries about cladding on behalf of flat buyers and tenants. During a purchasing process, we should be asking the management company or freeholder to confirm what type of cladding exists in the building as part of our standard enquiries.

If cladding work is undertaken, we should also check with the local authority that such works comply with building regulations and building controls. A survey will determine if there is cladding, so we should also ask the surveyor about this before committing to a purchase.

The management company or freeholder will also reply to leaseholder enquiries and provide information on fire risk assessments that have taken place. So we should also ask about these assessments and the recommendations made. These reports will also have details of any works undertaken in the last three years and details of any proposed future works.

The terrible events of Grenfell have made sure that building fire safety regulations are now firmly under review and on the government’s agenda. The clear message to buyers and tenants is to make sure they are aware and informed about the structure and safety regulations of the property before committing themselves.

To find out more, please contact Asha Ngai

Keeping connected

Being connected to the internet is something we almost take for granted these days. Tenants looking to move into new premises are likely to assume that adequate connections will already be available or reasonably straightforward to set up.  This isn’t necessarily the case and before you find yourself unable to get your business up and running in your new premises, check out the position as you may need to enter into a wayleave agreement.  It is worthwhile doing this and getting the landlord involved as soon as you can.

While modern buildings should have fibre optic cabling installed, older buildings may not. Having connection at a level and speed required for business purposes may mean entering into a telecom agreement (a wayleave agreement) with the service provider for the installation, or upgrading, of cabling within the building.  This can take time and involve multiple parties.

While tenants should have rights to connect into existing service media in the building in their lease, this may not extend to new cabling.  This may mean seeking the consent of the landlord to run cabling through common parts of the building. The telecoms provider will also want to know they can access and maintain their kit once installed and connected.

A wayleave agreement or telecoms lease will usually need to be entered into between the tenant, the service provider and the landlord. The landlord will want to be involved in the process to protect their position as far as possible to ensure that the service provider only has the rights they are entitled to and the landlord can control as best they can removal of the kit from their building when required.

Landlords should be aware that telecommunications providers have statutory rights which are heavily weighted in their favour. It can take over 18 months to secure the removal of telecommunications apparatus from premises with the landlord needing to prove grounds to do so.  Operators are also allowed to assign their rights, upgrade the equipment or share with other providers without the landlord’s consent.

Before refurbishing or redeveloping a property in the medium to long term, a landlord will need to factor in the rights of telecoms providers within the building if their equipment is to be removed. There need to be adequate ‘lift and shift’ provisions in place in any wayleave or telecommunications lease to require providers to move the equipment to allow the landlord to refurbish the premises. Contact Isabel for more information.

Testing times: Practical tips commercial landlords should consider when granting a lease

Sterling is weak and Brexit is lingering. Business uncertainty, particularly the risk of tenant insolvency, is undoubtedly one of the biggest concerns for UK commercial landlords in the current climate. 2018 has seen increasing indicators of stress and change in the retail and restaurant sectors in particular, with tenants entering into CVA’s (company voluntary arrangements), administration & negotiating store closures.

All is not doom and gloom – indeed some report that we are seeing an evolution of the “store” and the high street which may present its own opportunities. Whatever the weather, projecting ahead to what are likely to be testing times, commercial landlords might want to consider how better to safeguard their position on grant of leases, going forward.

Here are our top tips:

1. Heads of Terms

Negotiating and agreeing heads of terms is a critical time in any transaction. Getting lawyers involved at this stage can put the landlord in good stead for covering key matters relating to the specific circumstances of the parties, the property and the transaction. Getting it right at this stage often avoids the need for renegotiation later down the line which can carry the risk of a ‘no deal’ and wasted costs.

  1. Rent Deposit

Quite routinely, a landlord will collect a lump sum as security from the tenant on the grant of a lease which is held for the duration of the term. It can be used by the landlord to cover any unpaid rent or damage to the property caused by the tenant. There are various ways to hold a rent deposit but a landlord faced with the increased risk of tenant insolvency will want to consider a requirement for the rent deposit to be held using a charge structure. Using a charge structure means the landlord will be a secured creditor (of the rent deposit sum) in the event the tenant becomes insolvent (such as falling into administration, liquidation, or entering into a CVA).

If a charge structure is not used, there can be greater restrictions on whether and how commercial landlords can draw down and use the rent deposit sum, where valid, if the tenant becomes insolvent.

Of course, the other consideration to factor in is the amount of deposit that will be taken. Depending on the financial strength of the tenant and the term of the lease, a landlord will want to negotiate an amount which is an adequate security buffer – and preferably hold that under a charge structure.

  1. Guarantors

Landlords will often, as additional security, require a guarantee from (1) a personal guarantor or (2) a parent company so that there is a further party to pursue if the tenant breaches the lease. A tenant who is in financial difficulty might fail to pay rent or fail to comply with its repair obligations, leaving a dilapidations liability. In this situation a landlord can often be left with an immediate cashflow problem. Furthermore, long term, if the property is significantly damaged or dilapidated, the landlord could be left out of pocket. Having other parties of financial worth to pursue is essential.

To a commercial landlords dismay, some insolvency procedures can affect enforceability against a guarantor. CVA’s have been criticised for “guarantee stripping” as case law has left some uncertainty as to whether these can operate to release guarantors of their liability owed to landlords (based on terms agreed in a CVA between an insolvent tenant and its creditors which can bind the landlord).

For the avoidance of doubt, landlords should be mindful to ensure that any guarantees taken are on the basis that they will expressly apply in the event that a CVA or any other voluntary arrangement is agreed by the tenant with its creditors.

Whilst there is no guarantee that this will be airtight – as the point in case law remains somewhat uncertain – having clarity of what the parties intend in an agreement is essential and is more likely to help protect the landlord. Generally speaking, it is important that the guarantees the commercial landlord takes are drafted to maximise strength.

  1. Contracting-Out of Renewal Rights

A tenant who has a lease for a term of at least 6 months (or a tenancy without any fixed term) in occupation and operating its business at the property has a statutory right to apply for a renewal of its lease on similar terms. A landlord can only refuse to grant a lease renewal on certain statutory grounds.

If a tenant is financially strapped when it comes to the end of the fixed term, rather than allow a renewal of the lease and have problems trying to evict the tenant, a landlord will understandably want a clear right to regain possession of the property so that it can be re-let on the open market again.

This can be achieved by the tenant agreeing to contract-out of its statutory right of renewal. The procedure for contracting-out is specific and must be followed properly before the grant of a lease to be effective. The reward of getting this right can often avoid unnecessary hassle and costs at the end of the term.

5.Existing Leases & Throughout the Term

There might be some tell-tale signs to look out for during the course of a landlord-tenant relationship which can indicate the tenant is in difficulty. A landlord who sees these signs may well need to start proactively thinking of alternative plans.

The obvious one – late payment of rents – is not the only one to look out for. A tenant might make applications for consent to assign, sub-let or change permitted use. A landlord might simply agree to an assignment or subletting if this means rent is coming in from a more financially reliable tenant or undertenant. Alternatively, a landlord might want to consider agreeing a surrender of the lease with the tenant, at a premium. This can allow both parties to cleanly move on.

The key is to achieve a solution before the tenant falls into an insolvency situation as otherwise the landlord can be at risk of little or no return of monies owed, once insolvency rules kick in. Contact Caroline for more information.

Landlords Versus Tenants!

The government is on a mission to ban private landlords from evicting tenants at short notice without good reason.  Section 21 notices in their current form allow landlords to evict tenants without reason after their fixed-term period ends but according to the Housing Secretary such evictions are one of the biggest causes of homelessness.  Under the government’s new mission, landlords will have to provide concrete and evidenced reasons already specified in law in order to bring tenancies to an end with the aim of preventing unfair evictions. (Click here for Zoopla’s top tips for landlords.)

Without stating the obvious, this new proposed change will not go down well with current landlords and may well put off potential would be landlords too.  It is of course important to explore both sides of the coin.

A survey by Citizens Advice suggests that tenants who made a formal complaint had a 46% chance of being evicted within the next 6 months. The resulting fear of eviction discourages raising complaints relating to disrepair or poor living conditions .

Landlords will argue that they are forced to take the Section 21 route because they have no confidence in the courts to settle possession claims (for example in the case of non-payment of rent) and feel that the system is loaded towards tenants.  As it stands, tenants can be given as little as 8 weeks’ notice after a fixed-term contract comes to an end.  Landlords will no doubt feel that the proposed changes would create a new system of indefinite tenancies and the government should focus on improving the court process instead.

Time will tell whether this proposed change will affect the buy to let market but at a time when the market is somewhat nervous with the “B” word still floating around, it is certainly not helping confidence levels.

To find out more, please contact Asha Ngai 

Your Place or Mine?

Thankfully, the question of proving possession of property does not often arise.  When it does, it is always interesting to see the approach taken by the courts on adverse possession.

Adverse possession arises where a person who is not the legal owner to a  property or piece of land can make a valid claim to it by simply taking possession for a specific period of time.

A recent example is the case of Thorpe v Frank (2019) which involved a claim for adverse possession of a paved forecourt.

Mrs Thorpe, having bought the semi-detached property in 1984, adjusted the level of a forecourt in front of the house and repaved it in 1986.  She stated that the area in front of her house was paved with concrete slabbing by the previous owner, in a rectangular shape, believing the land to be hers.  When the property was sold to Mrs Thorpe, she claimed no mention was made to her of any other access across the land, nor was she informed that the land belonged to the neighbours Mr and Mrs Franks.  No objections were raised by Mr and Mrs Frank until Mrs Thorpe decided to enclose the paved area with a fence in 2013.    The paved area was previously used as an accessway to the Frank’s property while Mrs Thorpe maintained it and used it for parking.  The Court of Appeal had to decide whether Mrs Thorpe acquired the paved area by way of adverse possession nearly 30 years ago.

The Court of Appeal decided that adverse possession could be claimed since the paving was a permanent character which Mrs Thorpe paved of her own accord and so her actions were consistent with that of an occupying owner and she had taken exclusive possession over the forecourt.  The fact that the fence did not go up until 2013, it appears, is not relevant to establishing possession.  Fencing off land is an obvious means of showing possession but in this case making physical changes to the surface of the land was a material factor.  Some may argue that it was somewhat surprising of the Franks to claim possession since they were quite happy for Mrs Thorpe to spend money on the paving and allowed her to maintain it for over  three decades!

The relevant act of possession arose in 1986 and so 12 years’ possession had been established by the time the law in this area changed, in October 2003.  It is now much more cumbersome to prove adverse possession due to the changes made by the Land Registration Act 2002.

The case is relevant for developers when purchasing open areas of land where the signs of encroachment are not always evident.  Equally, it is important for land and property owners to protect themselves by making sure that their contact details are correct at the Land Registry and that they register for their alert system.  Please refer to our helpful guide on registering with the land registry alert system . 

To find out more, please contact Asha Ngai