News

Goverment plans to license Landlords

The Times reported that ministers are planning to introduce 'light touch' regulation of the private rented sector. Under the terms of the scheme, all private landlords would have to register with a national body, which would also provide a means of redress for tenants' grievances.

Rugg Review

If they fail to maintain their property or intimidate tenants, landlords could be struck off as a last resort. According to a Government commissioned review of the private rented sector by Dr Julie Rugg, senior research fellow at the Centre for Housing Policy at the University of York, half of all privately owned rental property in the UK do not meet the Government's "decent homes" standard. Common problems include failure to meet gas safety, fire and electiricity regulations, damp and leaking roofs.

The Government is expected to outline proposals in a Green Paper within the next 10 days. According to to The Times, Housing Minister Margaret Beckett will also introduce a statutory regulator for letting agents. The Association of Residential Letting Agents (ARLA) launched a voluntary licensing scheme for letting agents today, which is likely to be overtaken by a Government-led compulsory registration scheme.

Scottish landlord licensing

Scotland already requires private landlords to register. Stricter legislation was introduced, including the threat of criminal proceedings for failing to register, after only 15 per cent of Scottish buy to let landlords signed up for the scheme in the first year.

The Government's reforms of the private rented sector are reported to be a response to concerns over the rapidly growing number of new landlords when mortgage lending was readily available and the current rise of "reluctant landlords", people who rent out property for which they have failed to find a buyer due to the lack of mortgage lending.

Extra cost

He wondered what penalties the Government would impose if landlords did not sign up. “Depending on what all this costs landlords, it could put more at risk of financial trouble or repossession as property prices are still falling, rents are stagnant and many landlords are struggling to remortgage because of high interest rates and, in some cases, negative equity," Keshav Thukaram concluded. "It’s possible that some might not be able to bear the extra cost. If landlords are forced out of business, it is hardly going to help with the Government’s objectives."

The Economic backdrop

With bank rates of interest at historic lows, there is a potential resurgence in the desire to invest in property with a view to letting. There are a number of reasons to see a possible silver lining to the economic cloud. The old adage is that as one opportunity closes another re-opens somewhere else. The art is in trying to identify the opportunity. One theory out there, to be explored, rests in the hope that a good yield in rental returns is potentially now better than leaving the money in the bank. Owning property, however, is complex. It is an illiquid asset, meaning that it is relatively hard to get your money out of the investment quickly, when compared to selling bonds or stocks and shares. That is an important consideration. Nevertheless, property ownership is a tangible thing and in times of lower confidence with the financial system, a run to invest in the property market is a distinct possibility. There will be potential investors who may have been caught out by investing at an inopportune moment in the stock market but there are also potential investors out there, who timed the property market well in 2007/2008, who have cash reserves and are just waiting for the right time to spend. That time could be now or in a few months time and each investor will have their own view.

Some pitfalls and sound practice

Landlord and tenant legislation abounds and a property investor must be careful not to fall short of their legal obligations in terms of Health and Safety and good repair and building maintenance - including getting the gas boiler serviced regularly and certificated etc. - and also in terms of the fairness of the clauses imposed in their tenancy agreements, and in their dealings with the tenants and the tenant’s deposit.

Picking "good" tenants and obtaining solid references, as best possible, has never been of more importance, in the hope of trying to reduce the risk of ending up with difficult or impecunious tenants. Albeit no one can necessarily foresee the loss of their employment, a sensible landlord should take references when considering their prospective tenants. After all, a well-presented tenant is perhaps more likely to have regard for the property and any contents of the landlord at the property. A prudent landlord will keep an inventory of contents (with a note of their condition) and have the tenant sign that inventory as part of the tenancy agreement, at the outset. This will avoid disputes later on about what was there at the property and its state and condition. Historically, landlords gained a reputation for unfairly withholding deposits and the only forum for dispute resolution was the County Court. This has changed dramatically since 6th April 2007.

Overview of Tenancy Deposit Scheme Legislation

In an effort to unclog the Courts and encourage private arbitration instead, and better Landlord practices, the Government passed, with effect from 6th April 2007 - Good Friday of that year -, The Housing (Tenancy Deposit Schemes) Order 2007 (SI No. 796), further to the enabling powers granted by the Housing Act 2004, in England & Wales. A similar enabling provision to make regulations for Scotland was made under Housing (Scotland) Act 2006.

The discussion here is of the England and Wales regulations, which require the landlords, or their agent, to advise the tenant of certain details regarding the keeping of the deposit, within 14 days of commencement of the tenancy, which are broadly but non-exhaustively outlined below. The Tenancy deposit schemes are one of several newer aspects of landlord and tenant legislation to be complied with, such as the recent requirement for Energy perfomance certificates for properties that are let. Failure to comply with the Tenancy Deposit Scheme requirement can have rather serious consequences for a landlord, however, and also potential negligence on the part of a managing agent, or other professional intermediary. The legislation must be taken seriously, therefore, and complied with.

A landlord who fails to comply may be barred from obtaining an eviction order, even where the tenant is in arrears, until the formalities of serving upon the tenant the relevant notice involved for participation in one of these two types of scheme has been complied with. It seems that a landlord could even be penalised and required to pay a penalty to the tenant for a sum equivalent to the rent, for non-compliance with the legislation, possibly even where that tenant is in arrears. That may seem unfair, or draconian, but it was deemed by legislators the only way to ensure that the legislation would be taken seriously. So far, test cases are relatively few but some have started.

Types of scheme

There are two types of scheme possible. The first is the insurance-backed scheme, of which there are a number of providers, and the second is the Custodial Scheme, of which there is currently only one national provider.

The schemes are intended to allow tenants to get all or part of their deposit back when they are entitled to it rather than to have to suffer an unwarranted delay by the landlord, to make disputes easier to resolve, and to encourage tenants and landlords to be better about keeping an inventory of contents and their condition at the outset.
Within 14 days of commencement of the tenancy, the landlord or agent must, with either the insurance-backed schemes or the custodial scheme, give to the tenant the contact details of the scheme, the landlord or agent’s details, details of how to apply for the release of the deposit, information explaining the purpose of the deposit (e.g. whether meant as security for rent or damage, or both), and what to do if a dispute arises about the deposit in order to commence arbitration.

With insurance-backed schemes the landlord retains the deposit (and subject to contractual variation can keep the interest earned) but pays a premium to the insurer. This is the key difference from the custodial scheme which is “free” in the sense that the deposit is paid into the scheme and any interest earned is used to fund the scheme.
At the end of the tenancy, with the insurance-backed scheme, if an agreement is reached about how the deposit should be divided, the landlord or agent returns the agreed sum. If there is a dispute, the landlord must hand over the disputed sum to the scheme provider until the dispute is resolved. If the landlord fails to comply, the insurance arrangements are meant to ensure the return of the deposit. At the end of the tenancy, with the custodial scheme, if an agreement is reached about the deposit then the scheme will pay out the agreed sum to landlord and tenant respectively. If there is a dispute then the deposit will continue to be held by the scheme until the arbitration process, or if that fails, the Court, decides what is fair.

Business case for using Solicitors as an alternative to Letting Agents

The majority of letting agents subscribe to the insurance-backed scheme and will pay a premium to participate in that scheme, which makes business sense if there are volumes and it is part of the agency’s core business.

Residential Property Solicitors will often recommend the Custodial Scheme because it is “free” to use because interest earned is used to fund the administration of the scheme itself and, unless a particular solicitor’s practice has sufficient volumes to justify the expense of participating in an insurance-backed scheme, the sporadic instruction received for drafting a tenancy agreement may not justify the expense and the "free" custodial scheme is in those circumstances probably better for solicitor and their landlord client, who will not have to pay the insurance premium of the insurance-backed scheme. Landlords may see the advantages of using the professional skills of a specialist solicitor over the experienced but legally unqualified letting agent and be keen to save on letting agency costs which may demand a percentage from their monthly rental income.
Some letting agents purport to offer an ongoing management service, and some are much better than others at delivering the service standard, but a landlord might instead prefer to manage the property themselves directly, so as to keep a direct rapport with their tenant, and so use their solicitor instead, who, whilst seemingly perhaps expensive in up front costs, in fact, may represent a better saving for the landlord over a longer period of rental.

Direct contact with the tenant

Conversely, some landlords will prefer to distance themselves from contact with the tenant over management matters – they may feel it easier not to have the direct contact, so as to make it easier to take tough decisions about, say eviction for arrears. If you have become personally involved your sense of morality or social conscience for the tenants particularly circumstances could compromise a business investment – but, in the end, the managing agent only passes on the comments and requests of the tenant to the landlord and so the landlord often still has to end up dealing directly to resolve the issues themselves anyway and still faces those moral dilemmas. Consequently, landlords may begin to reassess whether they need a management service, as such, which is simply eating their rental profit.

At any rate, landlords and lettings agencies should regularly check that they have complied fully across the lettings portfolio to ensure that you do not become unstuck should you require an eviction of a tenant in arrears or other breach of covenant. A specialist residential property solicitor could be engaged to consider your portfolio and report to you on your compliance status.