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Many flats are purchased with the aim of subletting and most leases will allow it with  the consent of the freeholder. Importantly, 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.

How Consent is Granted

Whilst a freeholder can make conditions ahead of granting permission to sublet, which is usually granted through the issuing of a Licence to Sublet, those conditions have to be a) enforceable, b) reasonable and c) not affect the legitimate interests of the landlord. So there are two areas that need to be taken consideration:

  1. The nature and imposition of of any conditons; for example requiring a large security deposit from the sub-tenant in case they don’t keep to the conditions contained within a Deed of Direct covenant would be difficult (if not impossible) to justify;
  2. The ‘alienation’ provisions within the lease such as requiring contact details .Whilst not necessarily related to the content of the lease, if consent is refused on the basis that not having these details would impact on the management of the block, this would not necessarily be considered a good 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!

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.

Licence to Sublet

If a licence to sublet is stipulated in the lease then the leaseholder has no choice but to comply. This provides a direct link between the freeholder and the leaseholder/landlord and 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 also provides an address for ‘deemed services’, making it a useful tool for service charge collecting because a common response of Licen to paying is “I didn’t know about the service charge demands as the subtenant hasn’t forwarded my mail”.

License Requirements

Landlords requiring a License to Sublet need to comply with the following steps:

  1. All tenancies must be on an Assured Shorthold Tenancy, which is the ‘contract between the landlord and his tenant, most of which are usually 12 months;
  2. 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;
  3. Copies of the references in respect of the proposed tenants are sent to the Managing Agents, prior to the tenancies being granted;
  4. A contact telephone number for the tenants is given to the Managing Agents (for emergencies);
  5. 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);
  6. 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;
  7. A fee payable to the Managing Agents for each new letting although this can vary from agent to agent;
  8. The Managing Agents should have details of a forwarding address or the name and address of the Letting/Managing Agents in case of emergencies.
  9. 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.

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.

LEASEHOLDER LANDLORDS AND MANAGEMENT OPTIONS

Once consent is granted, leaseholder-landlords are created who are not only bound by the covenants (promises) contained within their leases but also those of the tenancy agreement (which ideally will reflect the terms of the lease).  If their properties are to be rented for 7 years or less then they are required by common law to ensure the safety of their property and its contents so that no injury or damage is caused to the occupants, neighbours or to the public.
This also applies to their letting agents if they use one.

Leaseholder-landlords have three management options they can choose from which are:

1: Lettings Only/Landlord Management

In this option the letting agent will carry out the following:

  1. The marketing of the property;
  2. Providing advice about what rent the landlord should ask for;
  3. The finding of a tenant and subsequent reference checks if required;
  4. Providing the tenancy agreement.

Once the tenancy agreement has been provided the landlord then takes on all the management of the property when the tenancy starts. The agent will usually charge a one-off fee for their work in getting to this point and payment will normally be based on the rent (usually one month). The agent is also likely to charge the tenant an administration fee (for the same reason). Both the landlord and agent must be in agreement about what the amount of the tenancy deposit should be and make sure that tenants receive protection for those deposits .The landlord will then have to give proof to the tenant that the money is in one of the three government-approved deposit protection schemes (2 insurance-based and 1 custodial-based).

2: Tenant Finder/Rent Collection

Self explanatory and again whilst the agent will usually charge a one-off fee they may also add a small monthly percentage for rent collection. The landlord will deal with repairs, and regaining possession at the end of the tenancy if the tenancy is not renewed.

3: Full Agent Management

This covers all aspects of management including repairs that can either be carried out without requiring the permission of the landlord or those which the landlord prefers to deal with. Rent collection, commencement of the tenancy and the first steps of bringing a tenancy to an end such as serving notice (but not proceeding to court action) are also provided.

Once the tenancy agreement has been provided the landlord then takes on all the management of the property when the tenancy starts. The agent will usually charge a one-off fee for their work in getting to this point and payment will normally be based on the rent (usually one month). The agent is also likely to charge the tenant an administration fee (for the same reason). Both the landlord and agent must be in agreement about what the amount of the tenancy deposit should be and make sure that tenants receive protection for those deposits .The landlord will then have to give proof to the tenant that the money is in one of the three government-approved deposit protection schemes (2 insurance-based and 1 custodial-based).

This level of service will naturally be the more expensive option.

Whatever management option is taken, flats must be electrically safe, gas safe and smoke/carbon monoxide safe both before and during a tenancy.

WHEN LEASEHOLD LANDLORDS AND FREEHOLDERS DON’T PLAY BALL

When leaseholder landlords and freeholders don’t abide by the lease covenants (promises) and the tenancy agreement, redress can come through the use of the Housing Act 2004, specifically that of the Housing Health and Safety Ratings System.

Although this legislation is primarily used for assessing the conditions of rented flats, it actually applies to all residential properties. We have used this legislation ourselves for both the common areas (when we had no freeholder) and for individual flats under Part 1, Chapter 1 s4 of the Housing Act 2004 (inspections by local authorities to see whether category 1 or 2 hazards exist). With individua flats leaseholder landlords can be bound under any findings made under it.

So, in essence, whilst there is plenty of legislation surrounding the common areas and flat interiors, they will not be of any help unless there is effective communication between all parties!

 SUMMARY

The PRS has taken over from councils and housing associations as the biggest provider of rented homes in this country but not only has there been a slow down of new landlords entering the market but many established landlords are selling some or all of their portfolios. There are a number of reasons for this:

  1. The introduction of the stamp duty surcharge of 3%:
  2. The scrapping of the 10% tax relief for wear and tear to the property by 2020 (landlords can now only deduct the cost of replacing household items like for like);
  3. Landlords can only offset 75% of their mortgage interest when calculating their tax bill with that reducing to zero by 2020 although they can claim a tax credit of 20% of their mortgage interest;
  4. Landlords who live abroad  are also bound by the same responsibilities and if out of the country for more than 6 months they must pay tax on any income they get from renting out property in the UK. If the landlord is a company or trustee, the rules about their usual place of abode apply.
  5. On 24th January 2019 the Communities Secretary announced that all landlords will be legally required to join an Ombudsman scheme with a 5K fine for non-compliance. The link to this will appear when published.

There is no doubt that renting can work but far too many people are forced to rent because they cannot afford the deposits needed in order to purchase their own homes. It seems strange though that so much legislation has been introduced to the detriment of landlords when the PRS is so heavily relied upon to offset the lack of social housing. Or is it that the rental sector is moving toward build to rent as the norm as some believe it to be? Only time will tell!

 

 

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