What should you do to avoid the downside of longer tenancy agreements?
Following our analysis of what the Autumn Budget means for buy-to-let landlords, several property investors have asked us about the government’s plans to encourage longer tenancies. At this stage, we have no idea how landlords might be ‘incentivised’ to offer tenancies of at least 12 months. We doubt that Secretary of State for Communities and Local Government Sajid Javid has either. Even so, the concerns voiced by landlords about such plans are real.
In response, we’ve put together this article discussing those concerns, and the strategies that landlords could employ to mitigate the negative effects of longer tenancies.
Why longer tenancies might be a good thing
In theory, longer tenancies could benefit both buy-to-let landlords and tenants. The tenant gets some certainty, while the landlord benefits from a dose of that soothing tonic, peace of mind:
- For the tenant, the risk of being asked to move on soon is gone. That’s a lot less stress. Also, knowing that the rent is set for a year makes budgeting a whole lot easier.
- For the landlord, rent is assured for 12 months, and there won’t be nasty, unexpected, and expensive void periods to ruin finances.
Sounds great, doesn’t it? But the theory is very rarely replicated in practice.
12-month tenancies are balanced towards the tenant
There can be little doubt that 12-month tenancies are weighted balanced towards the tenant. In fact, it could be argued that they get all the benefits, and the landlord’s position is up in the air with legs dangling.
That’s not to say that 12-month tenancies aren’t manageable. And this is the key. You must manage a tenancy (and your tenant) much better when tied to a longer term. Here are five strategies that savvy buy-to-let landlords will employ to make sure that the balance of benefits isn’t all one-way.
1. Understand that a tenancy agreement term is a target for tenants, not a guarantee for landlords
It’s a great idea, that a tenant will sign up for 12 months and be happy to stay and pay if their circumstances change. And circumstances do change. One of the concerns voiced to us is that longer tenancy agreements put more control in the tenant’s hands.
Let’s face it, if a tenant wants to move on 6 months into a 12-month contract, will you force them to stay? As we explained in our article “What should you do if your tenant wants to terminate a tenancy agreement early?”, You would probably be foolish to insist they stay. The tenant could become a pain in the proverbial. A better solution would be to come to an amicable compromise: allow the tenant to leave early with some conditions attached (such as, for example, they pay to advertise the property).
2. Prepare your tenant for rent increases in certain circumstances
A year is a long time. As we’ve said, circumstances change. They could change for the tenant, and they could change for you. If you have invested with a buy-to-let mortgage, unless you have fixed the mortgage rate, then you have no idea what rate of interest you will be paying in 3, 6, 9, or 12 months. There may be maintenance requirements or service charge increases that send your cash flow projections into fantasy land.
A 12-month tenancy agreement could leave you financially exposed to any number and manner of higher costs, while unable to recoup by increasing the rent you charge to your tenants. Shorter-term tenancies allow more flexibility to review the rent.
To get over this negative, you should ensure that your tenancy agreement includes clauses that give you the ability to increase the rent. However, they will need to be specific. If they aren’t, they could be declared void under regulations that dictate the scope of fair and unfair terms. The reviews into an independent event, such as an increase in base rates, the headline RPI, or a change in service charges.
3. Always have an eye for your ability to get a mortgage
The financial question also rears its ugly head when it comes to your ability to get a mortgage. It might be to refinance an existing property portfolio or expand your buy-to-let empire. If you can’t raise your rents but have higher costs, this could impact your ability to get finance to buy another property.
Mortgage rules are constantly changing. They vary from company to company and are also dictated by PRA guidelines. It pays to stay onside with a good mortgage broker. They could keep you informed of changed rules and regulations, and know the best lenders to approach for all needs.
4. Plan to avoid the need to evict – because you will have to wait longer
If you wish to evict a tenant under a Section 21 Notice – a 2-month no-fault eviction – you can’t do so until the end of the tenancy period. The most common reason for issuing a Section 21 is that the tenant has fallen into rent arrears. If this happens within, say, the first 6 months of a tenancy, you could be short of rent for another 6 months or longer, with the tenant legally entitled to stay. The only action open to you may be to try to evict under the Housing Act 1988 Schedule 2 – not the easiest thing to do.
If you offer longer tenancies, the best strategy to reduce the risk of getting a tenant from hell is to ensure that you carry out comprehensive tenant vetting. Don’t skimp on this. Also, avoid free tenant search sites – they are where tenants from hell and professional scammers hang out.
5. Allow for higher agent fees
Usually, agents take fees from landlords upfront. The fees for a longer tenancy may be higher. If your tenant turns out to be not up to scratch, this could prove expensive.
Again, tenant vetting is key to success here.
We won’t know exactly the issues that buy-to-let landlords will face because of new rules on longer tenancies until the government concludes its consultations and produces the law or guidelines.
However, our experience as one of the UK’s largest national investment property managers gives our clients a head start on many other landlords. Contact one of the Ezytrac team today on +44 01522 503 717, and learn why we’re also one of the fastest-growing property managers in the country.
Yours in effortless property management,