News & events
01/06/2012 - 2012 Olympics and paralympics - Going for gold with your home
With the attention of the world focused on London 2012 this summer, many with properties near to the Olympic and Paralympic venues may be tempted to cash in on the tourism boom by letting out their properties. For home owners, in particular, who are likely to be concerned about the inevitable hike in interest rates and ebbing confidence levels in the property market, the prospect of receiving a quick return could go some way towards countering these worries. However, just as Olympic glory will largely rest upon an athlete’s preparation, success in the letting arena will largely hinge upon a home owner’s preparation too and ensuring that the many risks associated with letting out your most valuable possession have been adequately addressed.
This bulletin highlights some of the practical pitfalls that may be encountered when letting residential property and how they can be overcome.
The Status of the Occupier and the Agreement
Irrespective of whether you are letting out a room or the entire property, the basis upon which the person is allowed to occupy your property and, therefore, the remedies available to you if things go wrong (including how quickly you can get the property back), will depend on the nature of the arrangement that you enter into. This is a complex area but, in summary, the occupier may be either a tenant or a licensee.
If you give a person exclusive occupation of your property in return for rent then you are likely to create a tenancy. If that happens you will not be entitled to go in to the property as and when you please. If the tenancy is of a separate unit which the tenant is not obliged to share (which could be the whole property or just a room) it will be an assured shorthold tenancy unless certain limited circumstances apply. If an assured shorthold tenancy is created and the tenant does not leave when you expect him to do so, you will not be able to force him to go without giving him at least two months’ notice and obtaining a court order. In addition, the order cannot take effect before six months have elapsed from the date the tenancy was granted. One of the important exceptions to this rule provides that a tenancy of a dwelling will not be assured if it is let for the purposes of a holiday. It is important, therefore, in the case of property let for a holiday only to state that expressly in the agreement. Although this will not necessarily be conclusive as to the purpose of the let it will be very good evidence of the intention of the parties. Once the holiday let has ended, the landlord is entitled to an order for possession and the court cannot postpone that order for more than 14 days, or six weeks in cases of exceptional hardship.
If a licence is created, rather than a tenancy, the occupier will have much more limited rights in relation to the property. The label attached to the agreement, i.e. whether it is labelled a licence or a tenancy, is irrelevant. If there is a dispute, a court will assess how it, in fact, operates and whether, on its true construction, it is a tenancy. It is not sufficient, therefore, simply to call an agreement a licence. An occupier is likely to be a licensee if he does not have exclusive occupation of the property, if he shares accommodation with you and if you provide attendance or services which require you to have unrestricted access to and use the property. A licence may be terminated in accordance with the terms of the agreement or upon giving reasonable notice. In order to avoid disputes, it is important to set out clearly the basis upon which the agreement can be terminated and to avoid any assertion that the property owner is not entitled to revoke the licence. If a licence is not for a fixed term but runs from week to week or month to month, it is a periodic licence and the Protection from Eviction Act 1977 will apply which will mean that at least four weeks notice must be given before possession can be obtained.
In summary, it is essential to consider what status you want the occupier to have and to ensure that is achieved. It is important to avoid creating an assured shorthold tenancy, or, indeed, any tenancy, unless you are entirely happy with the consequences. It is also vital to give proper consideration to what rights and obligations you and the occupier will have as regards use of the property and to ensure that they are properly recorded in the agreement.
Finding a suitable occupier
As the countdown to the Games starts in earnest, there will be no shortage of agencies offering to find you a suitable tenant or guest and possibly manage the property for you during the let in return for a fee. It is important to deal with a reputable organisation. You should check that the agency you are proposing to use is a member of a recognised professional body, for example, the Association of Residential Letting Agents (ARLA) or the UK Association of Letting Agents (UKALA) which each have a Code of Practice governing the conduct of the agent. The extent of the Code of Practice and the sanctions that may be imposed for non-compliance differ between the various professional bodies and you should ensure, therefore, that you are happy with these before the agent is instructed. It is important to check the small print to ensure that you are happy with the agent’s terms and that there are no hidden charges. You should also make sure that you are comfortable with the references the agent obtains for the proposed occupier and that you have enough information about them to pursue them if there is a problem including, of course, their permanent address.
Should I inform my mortgage lender and insurer?
You should read the small print of the terms and conditions of your mortgage lender and insurer extremely carefully, as there are likely to be restrictions on subletting the property. Your insurers may require payment of an additional premium or they may not be prepared to cover it at all during that period. Specialist policies are available for property that is let. Proceeding without suitable insurance cover would be high risk as it would leave a landlord very exposed in the event of damage to the property or injury to the occupants.
What about Council Tax and other utilities?
An all-inclusive rent, covering Council Tax and all utilities, save for the telephone, would be easier to manage for a short-term let than a rent exclusive of utilities. Suitable provision will need to be made in the agreement for payment of the bills not included and you will need to consider the practicalities. For example, it may be prudent to remove all telephones from the property and arrange for your phone bill to be paid for the period immediately up to the beginning of the let, with an invoice to be issued to the occupier immediately upon the expiry of the occupancy.
What if the term of an existing tenancy is likely to cover the Olympic period?
You may find the prospect of seeking to "break” an existing tenancy prior to the Games attractive. The starting point would be to identify whether your existing tenancy agreement allows you to break. Break notices can be difficult to get right and there are other notice requirements in relation to residential tenancies. Obtaining possession can be time-consuming. You may need professional guidance and you should ensure that you leave enough time to complete the process.
The risk of your tenant sub-letting
If you have an existing tenant, you may be worried, in particular, about the risk of that tenant sub-letting. Where you are granting a tenancy for a term of 12 months any time after 13 August 2011 or for a term of 6 months at any time after 13 February 2012, in an Olympic hot spot, then this presents a real risk. Most well drafted tenancy agreements will prohibit sub-letting or parting with possession. It is particularly important to ensure that this is the case at this time, when the temptation to sublet will be great. You could consider including additional sanctions in the agreement, for example, a provision requiring all proceeds of subletting to be paid to you. Of course, if you are not able to monitor what is actually happening at the property, such a restriction may be difficult to police and if you are considering legal action to enforce any covenant against subletting, you will first need to obtain evidence that an unlawful sub-letting has happened.
More adventurous landlords may be tempted to invite their tenants to vacate over the Olympic period. A landlord is very unlikely to be able to compel a tenant to do this but a landlord could incentivise a tenant, by offering a rent holiday and a share of the proceeds. However, this strategy has numerous pitfalls and any arrangement would need to be considered carefully and recorded properly.
The Olympic legacy for landlords
In the Olympic hot spots, immediately following the Games, there is likely to be an oversupply of rental properties. Landlords whose properties are coming on to the market at that time will need to be prepared for a void period and, ultimately, a landlord needs to weigh up whether this is a price worth paying in return for a short period of premium rent.
What of the tax consequences?
You should consult your tax advisor/accountant before proceeding. Unless your property qualifies for tax purposes as a furnished holiday letting, however, you will be subject to Income Tax under the residential property letting rules set out by HMRC.
What happens if things go wrong?
The most obvious causes of disputes relate to unpaid rent or bills, damage to the property or occupiers refusing to leave at the agreed time. Much can be done to limit the potential for dispute by ensuring that:
- You obtain suitable advice and that you are happy with the status being conferred upon the occupier and the consequences of that.
- The agreement is properly and comprehensively drafted to avoid uncertainty.
- As much as possible is paid for in advance and by taking a suitable deposit to use in the event of unpaid sums or damage. It is important to record the basis upon which the deposit is being paid, when you can use it and when it must be returned. You must also bear in mind that if the agreement is an assured shorthold tenancy, the deposit must be protected in one of three recognised schemes. If you do not protect the deposit in this way you may be prevented from obtaining possession of your property and, in addition, a court can order you to repay to the tenant the deposit plus a further sum equivalent to three times the deposit.
If, despite careful planning, things still go wrong you should seek suitable advice on your options, particularly if the occupier will not vacate. Residential occupiers have a great deal of protection and if a landlord takes matters into his own hands and simply enters the property and/or ejects the tenant he can be liable to pay considerable damages to the tenant and, in some circumstances, he may be committing a criminal offence.
Letting out your property over the Olympic period could put you in contention for a winning income opportunity. However, you do need to tread carefully, ensure that you obtain appropriate advice and manage the risks effectively.