Will longer tenancies restrict rent rises?

The forthcoming Autumn Budget is set to unveil the government’s plans to encourage landlords to offer longer tenancies of at least 12 months to those renting who want them, according to Andrew Turner, chief executive at Commercial Trust Limited.

He argues that on the face of it, this seems a very reasonable action, giving landlords the peace of mind of a longer-term contract from which they can derive rent, and in theory, eliminating the risk of the property remaining empty during the course of the coming 12-months.

Similarly, a 12-month tenancy agreement will better suit many tenants, offering a degree of certainty for the year ahead, without the turmoil of having to move home again.

However, Turner argues that landlords should plan for the limitations that a 12-month contract might impose upon them.

He commented: “Contracts which run for longer periods open up a greater probability of the unforeseen occurring, in this instance I refer to the landlords’ financial situation, specifically those who have a buy to let mortgage.

“As we have seen in the past few weeks, the 0.25% increase in the Bank of England base rate had an impact on those landlords who have variable or tracker rate products that follow the base rate, who will have experienced an increase in their monthly repayment amount.

“Of course there are no guarantees over future rate changes, but further increases could see a number of landlords needing to review the amount of rent that tenants pay, in order to cover their monthly mortgage repayments.

“This could prove to be a stumbling block, if landlords are locked into a tenancy agreement specifying a certain amount of rent will be payable for the next 12 months or longer.

“Landlords may face legal difficulties in increasing rent within this period, unless they have made suitable contractual provision for doing so.

“Over time, if the landlord is facing higher monthly payments but has their hands tied in terms of putting up rent for several months, this could have an impact upon the landlord being able to meet lender affordability criteria, should they wish to remortgage.” 

Communities Secretary Sajid Javid announced at the Conservative Party in September, that the government was all for longer tenancies and may provide incentives to landlords that offer them, stating: “All landlords should be offering tenancies of at least 12 months for those who want them…. That’s why, at the autumn Budget, we will bring forward new incentives for landlords who are doing the right thing.”

Doing the “right thing” however, might mean taking a much more careful approach to contract law and referencing would-be tenants, according to Tessa Shepperson from www.landlordlaw.co.uk.

Turner believes that there are two points that landlords should consider when contemplating 12-month tenancies.

He explained: “Firstly, to make sure that any fixed term contract contains a valid rent review clause.  Note that a clause allowing the landlord to increase the rent as he likes will normally be void under the unfair terms regulations.  Increases will need to be referable to something independent such as the RPI (Retail Price Index).

“Secondly, to make sure that the referencing is very carefully undertaken, as it is very hard to evict a tenant within the term of a 12-month tenancy.  Bearing in mind that the 'no fault' section 21 procedure can only be used to evict tenants after the fixed term has ended and evictions based on the various grounds for possession under the Housing Act Schedule 2 can be problematic.

“Be aware also that letting agents will normally take their commission for the whole fixed term up front which may prove expensive for landlords with a long fixed term if the tenants turn out to be unsatisfactory.  As always careful referencing and checking is key.”

Turner added: “Tessa is absolutely right. Whilst longevity between positive tenant/landlord relationships is beneficial for all, the risk to landlords is financial exposure if the maths stop adding up. This must be planned for, whilst remaining fair to all parties.”

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