Buying properties to let is a lucrative and popular business, particularly in London. Further, it is not uncommon for private landlords or indeed local authorities to let a property to a private company or sole trader for a period a years in return for a set rent. This company then lets the property to an individual tenant under an assured shorthold tenancy, usually profiting from the difference in the two rental incomes. In some scenarios these tenants are in receipt of housing benefit since it appears to be increasingly difficult to find private landlords who are willing to agree to let to tenants in receipt of housing benefit.
Whether you’re an experienced buy to let landlord, a large local authority, or perhaps an individual who owns one property but who intends to live abroad for a substantial period, there are important factors to consider before entering into such an arrangement.
The obvious benefit to a long term let to a property company is that in theory you avoid the everyday hassle of being a landlord. You don’t need to deal directly with the tenant actually living in the property and the various everyday issues that can arise from the landlord-tenant relationship. You also avoid having to search for the suitable tenant in the first place. Your direct legal relationship is with the company and therefore in theory this makes for a clean arrangement. Of course you are paying for the privilege in that you are no doubt receiving less rent than the tenant in the property is actually paying. But given the extent of a residential landlord’s responsibilities under both legislation and the terms of the tenancy agreement, this might seem like a small price to pay.
However, some less obvious factors to consider are as follows:
- What happens if the tenant stops paying the rent to the company? (for example, as a result of housing benefit changes)
- What happens if the company stops paying rent to you?
- What happens if there is a dispute between the company and the tenant regarding say repairs in the property?
- What happens if the property company has financial difficulties themselves?
The answers to all of these questions would be primarily governed by both the terms of the lease between you and the company, and the tenancy agreement between the company and the tenant. In the light of this, it is essential that you ensure that any lease you enter into contains sufficient terms to deal with any difficulties or disputes that may arise. You should also check the terms of the tenancy agreement the company intends to grant.
One particular issue we have come across in practice is relating to forfeiture of the lease. You need a clause in the lease between you and the company which provides a suitable remedy for you to be able to end your lease in certain circumstances in the form a forfeiture clause. Without a comprehensive forfeiture clause, you could find yourself in the position where you need to take action against the tenant residing in the property but you have no legal grounds to do so. As long as the lease between you and the company is still ongoing, you can only take action against the company not the tenant.
This can be particularly relevant where the middle company goes into administration or liquidation, or there are problems with the tenancy such as damage to the property. It is always advisable to take legal advice before entering a long term lease agreement of this sort to ensure you avoid such pitfalls further down the line.