The Assured Shorthold Tenancy
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The assured shorthold tenancy (AST), introduced in 1988 found immediate popularity with landlords. Previous types of tenancy burdened landlords with sitting tenants and fair rents under the Rent Act. Yet, in practice, the new Housing Act 1988 tenancies have only achieved limited success. Many parties believe that the sector is, in parts, still burdened with a rather dowdy and negative image. For further expansion to occur in the PRS, it is important to make letting a more appealing proposition to all types of households.Short term lettings
During the passage of the Housing Act 1988 through Parliament, it was envisaged that both ordinary assured and assured shorthold tenancies would be used equally according to the requirements of the landlord and tenant for a particular letting. Yet, the outcome is that the AST is now adopted for over 90% of private sector lettings, and of these, a six-month term is invariably the term offered by many landlords (although there is evidence of increasing use of twelve month tenancies now being granted). For many households who might otherwise consider renting, such short lettings do not provide sufficient security to act as a viable form of tenure. Landlords also shunned the ordinary assured tenancy which would have offered tenants more security.European rental patterns are noticeably different. In France, one year is generally accepted as the minimum length of term for rental property. In Germany, tenants will remain on average between three to five years in each letting.
Rent increases
Furthermore, the AST provides little rent protection for the tenant. Whilst a tenant holds the tenancy on such short terms, landlords have great power in demanding rent increases. If the tenant does not agree to the rent increase, the landlord can simply serve notice and terminate the tenancy. The threat that landlords can exercise this option is more than many households are prepared to risk; in this respect, owner occupation offers a more certain path. In Germany, there are sensible, government-directed limits to such rent increases.Tenant default
The difficulty and delays in evicting defaulting tenants provides another indirect but contributory factor in perpetuating the system of short lettings. Whilst the possession route remains so protracted (it can typically take four to five months to evict defaulting tenants through the court), landlords will continue to be wary of offering longer terms to tenants.Improvements
A further difficulty encountered by most private sector tenants is that most residential tenancy agreements do not allow a tenant to redecorate or otherwise improve the property.
The desire to add personal touches to one's living environment comes naturally to most people, and tenants are no exception. Combine this situation with the sad fact that historically, many residential lettings have been maintained to a low standard, both in overall decor and in terms of the quality of fittings and equipment and it is easy to see why lettings are a 'no go' area for many households. A new generation of forward-thinking investment landlords has helped reverse this trend by bringing to the market an increasing number of properties fitted out to a high overall standard.Contrast this UK pattern with countries such as France and Germany where landlords adopt a more hands-off approach. Properties are typically presented in a tidy but relatively unfurnished and sparsely decorated state. Tenants are free to redecorate provided the property is returned in an acceptable state afterwards. In Germany, where about 40% of householders rent their home, it is common for tenants to install their own kitchen units and fittings - landlords are not expected to provide them for most lettings.
Revenge evictions
Another phenomenon occasionally cited in the press is the prevalence of 'revenge evictions'. This is where the landlord simply terminates the tenant's tenancy (if periodic) or asks for possession at the end of the term despite the tenant having honoured the terms of the tenancy and wishing to remain.Tenants' rights groups are concerned about this issue because some landlords are simply invoking section 21 as a bargaining tool even where a tenant has a bona fide grievance. For example, tenants theoretically have strong rights to force a landlord to carry out repair work. Yet, under an AST, many tenants are afraid to complain to their landlord about genuine disrepair for fear of being given notice and evicted. A similar principle applies to rent increases - see section above. In practice, tenancy agreements are rarely stamped, (and the main duty is normally considered to be payable by the tenant) unless they are needed to be produced as evidence in court. Since the duty is charged on the rent payable over the term, this amount can be significant for a longer letting. However, a solution is available; the landlord may simply apply to have the counterpart stamped (provided it is signed only by the tenant) for a charge of 50p.
Break clauses
Break clauses also provide a way in which the tenancy agreement can be tailored to an individual tenant's requirements. A break clause provides a mechanism whereby either party (or generally both) may give notice to bring the tenancy to an end. There are many different ways that the break clause can be drafted depending on the effect required. For example, it is possible to construct the break clause so that it only operates after a certain fixed term has elapsed (e.g. after a minimum term of six months) or so that it is only exerciseable at certain times throughout the tenancy.One common route is to allow either landlord or tenant to exercise the break clause upon either giving two months' written notice after a minimum period of say six months. There is, however, no reason why a landlord should not insert a unilateral break clause - that is a break clause that can only be invoked by the tenant. This allows the tenant to remain in occupation of the property (provided that s/he continues to pay the rent and abides by the other terms of the tenancy agreement) for the duration of the term (which can now be much longer) at his/her convenience.
From the tenant's point of view, this vastly improves the security for the tenant and should a new job require relocation, then there is the immediate flexibility (not available to the owner-occupier) to terminate the tenancy. From the landlord's point of view, the slight loss of control will be compensated in many cases by the increased levels of occupancy provided by long term tenants. Clearly, such tenancies will not always appeal to landlords letting their own homes who plan to return.
Options to renew
Alternatively, landlords can opt to grant a tenant the option to renew the tenancy. In this case, the tenant is given the right to decide whether s/he wishes to extend the tenancy at the end of the term - a right that is generally made conditional on the tenant having complied with the terms of the tenancy agreement.If granting an option to renew within a tenancy agreement, there are two important precautions to be taken:
Perpetual tenancies. Care must be taken not to inadvertently grant the tenant a perpetual tenancy - poor drafting means that the option can apply to all successive tenancies. A solution is to grant the option for only a single extension of the term.
Rent Increase. Include provision within the tenancy agreement for rent increase (see below).
Rent increases
In these low inflationary times, it is rarely necessary to include provision for rent increase within the average shorthold agreement. However, landlords granting longer term tenancies, or including renewal options will need to give more thought to this issue. If no rent increase mechanism is incorporated, the agreed rent will be contractually binding for the duration of the tenancy (however long).A common solution is to provide for an annual rent increase linked to the retail price index (RPI). Since there are in fact several variations of the retail price index, it will be important to clearly specify which will apply. The 'RPI All Index' is probably the most useful for landlords since it monitors the full basket of costs including housing and mortgage costs.
The rates are widely published as an annualised figure each month in the financial pages, on Ceefax, and on the internet.
Using ordinary assured tenancies
In practice most landlords are not prepared to use ordinary assured tenancies (which provide greater security of tenure) due to problems of getting possession from defaulting tenants.Assured Longhold Tenancies
Proposals have been aired around the industry in recent years for the introduction of a new form of tenancy - the so-called 'Assured Longhold Tenancy'.As a result, an industry task force was formed with support from DETR (Dept. of Transport and the Regions) to formulate some solutions in this area. Some interesting ideas were proposed but unfortunately no further progress has yet resulted.
A new tenancy model
The principle of the proposed assured longhold tenancy or ALT is that tenants will be offered significantly greater security by granting a tenancy for a minimum term of three years. In order to overcome a tenant's reluctance to make a long contractual commitment, the tenant can be offered a break clause which can be invoked after the first year of the tenancy.The key terms of the proposed tenancy are:
It is envisaged that the longhold tenancy could be drafted under the current AST rules thus requiring no new legislation. Indeed, there is nothing to prevent landlords from adopting the model now if there is sufficient demand from tenants.
Incentives
In all likelihood, many landlords will be looking for positive incentives before granting their tenants increased rights.
According to the RICS, who who are members of the taskforce, the initiative has backing from the DETR, and there is a small chance of a fiscal incentive from the Government if the new tenancy is seen to be successful.