When buying the property with the intention of subletting, the mortgage offer must be a buy to let mortgage. The offer will usually set out the lender’s requirements in terms of a tenancy agreement and whilst each lender is different, most will need the following as a minimum:
- Any tenancy is an Assured Shorthold Tenancy for a term of no more than 6/12 months;
- There is no provision allowing the tenant to stay on beyond the expiry of the term or to perpetually renew it;
- The tenant is not a relative of the borrower.
Some lenders will require a counterpart or certified copy tenancy agreement to be sent to them on completion
Check the Lease
The lease is the overriding document when purchasing to sublet and so must be checked for any subletting conditions. Most leases will allow subletting with the permission of the freeholder and under s.19(1)(a) of the Landlord and Tenant Act 1927 the freeholder cannot unreasonably withhold it. This is reinforced by the fact that even if there is no mention of reasonableness in the covenant it is nevertheless implied by statute. Again, the landlord cannot unreasonably refuse consent making this a qualified covenant.
The freeholder is also under a duty under the Landlord and Tenant Act 1988 to reply to a request to sublet within a reasonable time and if consent is withheld, they should specify the relevant circumstance/reasons within the lease.
The tenant should be advised of this as soon as possible and given the opportunity to negotiate. Any refusal on specified grounds will not be considered unreasonable unless there is any subjective element (based on,or influenced by, personal feelings, taste or opinion).
If the freeholder does not respond within a reasonable time then the leaseholder can claim for any losses that result from the delay.
Some leases are vague on the subject of subletting or make no reference to it at all. Whilst a freeholder can make conditions ahead of granting permission to sublet, those conditions have to be a) enforceable, b) reasonable and c) not affect the legitimate interests of the landlord. Therefore it is the nature of any conditions imposed and the right to impose them that are important.
Whilst a freeholder could impose some (or all) of the conditions listed in a License to Sublet (see below) they would find it virtually impossible to justify certain things such as requiring a large security deposit from the sub-tenant in case they don’t keep to those conditions contained within a Deed of Direct covenant. This is a contract that compels the buyer of the property to provide details as the new leaseholder to the freeholder/managing agent. It is found in many long leases written before 1996 (which applies ot ours) and also means the purchaser agreeing to abide by all the original lease terms before completion and through the duration of ownership. Additionally if a letting is lost or prevented because agreement between the freeholder and the landlord cannot be reached, a claim for damages could be made against the freeholder landlords are entitled to protect their legitimate interests.
Note: It is however very important to note that if a lease requires notification to be sent to the freeholder of a letting within a certain number of days, (usually 28), then conditions cannot be imposed. Having said that it may be important from the buildings insurance perspective to know what flats are rented.
Additionally the imposition of any conditions will turn on what the ‘alienation’ provisions are within the lease such as requiring contact details .These are not necessarily related to the content of the lease so withholding consent on the basis that not having them would impact on the management of the block would perhaps not necessarily be a reason to withhold it. On the other hand the enforcement of the leasehold covenants would be very difficult to carry out without such details. Very tricky!
LICENSE TO SUBLET
If a licence to sublet is stipulated in the lease then the leaseholder has no choice but to comply. Under s.19(1)(a) of the Landlord and Tenant Act 1927, freeholders are allowed to ‘require payment of a reasonable sum in respect of any legal or other expenses incurred in connection with (an underletting) licence or consent’. The key word is ‘reasonable’ because providing a copy of the Licence and paying the fee for the registration with the freeholders’ solicitor can be upward of £500 + VAT.
A Licence to Sublet provides an address for ‘deemed services’, making it a useful tool for service charge collecting because a common response of landlords to paying is “I didn’t know about the service charge demands as the subtenant hasn’t forwarded my mail”.
Landlords requiring a License to Sublet need to comply with the following steps:
- All tenancies must be on an Assured Shorthold Tenancy, the ‘contract between the landlord and his tenant, most of which are usually 12 months;
- A written request to sub-let must be sent to the Managing Agents when the lease has a clause that requires permission to do so;
- Copies of the references in respect of the proposed tenants are sent to the Managing Agents, prior to the tenancies being granted;
- A contact telephone number for the tenants is given to the Managing Agents (for emergencies);
- A copy of each Tenancy Agreement (or a copy of any Memorandum of Extension) should be sent the Managing Agents on completion (responsibility of the landlord);
- The owners’ responsibilities under the terms of the lease must be incorporated into the Tenancy Agreement (landlords responsibility). Ideally a copy of the relevant clauses should be attached and there should be a clause that the tenants will abide by them – landlords responsibility;
- A fee payable to the Managing Agents for each new letting although this can vary from agent to agent;
- The Managing Agents should have details of a forwarding address or the name and address of the Letting/Managing Agents in case of emergencies.
- A deed of covenant that requires the tenant to abide by the conditions contained with the lease.
Whenever the tenant changes, a new Licence needs to be issued.
Consent Via Side Letter
If the lease doesn’t specify that a Licence to Sublet is required then another way of freeholders keeping control of subletting is via a Consent to Underletting, which takes the form of a side letter(s). This is supplemental to the lease, refers to the subletting clause contained within the lease, and is signed by the landlord and the freeholder without the need for a formal licence.