As an investor, if you have ever been tempted to look at or buy a property which has a sitting tenant – or more properly a property with protected tenancy, then you will have come across the minefield of legalities which it would incur.
Buying A Protected Tenancy Property
These properties will often come up at auction, as they are harder to sell on the open market. Generally, if they do come up, then a cash buyer would be sought because it’s very difficult selling or buying with a protected tenant in situ. That’s why the purchase price always looks very attractive. There would typically be a large discount for these properties. Financing via a mortgage will be a big issue, as the lender would not be able to gain vacant possession if you default on the mortgage payments.
What About The Rent?
Other problems with protected tenancies are the inability to increase rent to an open market level. You can find out via the rent officer if the the rent was registered. If it’s not, then it isn’t legal. Whilst it’s possible to apply to to the Rent Officer for an increase, it’s likely not to be at open market levels. Add to this the fact that you cannot give the tenant notice to quit. You will have to wait till they decide to leave- which is very unlikely, as many tenants have been in situ for over 20 plus years, some for their whole lives! If you were to wait it out until the tenant dies then you need to be aware that anybody living with them can retain the tenancy.
Waiting it out can of course be a gamble, and in some cases these investments can pay off handsomely, particularly where property is in high demand.
If the property has been improved during the tenancy then they can apply for a new fair rent and it is likely an increase would probably be allowed, but it would still probably get the rent up to market levels – that could take years. A breach of the “obligation to pay rent” is one of the few cases that can be brought to court to remove a protected tenant.
Some Rules For Protected Tenancies
- Before 15 January 1989 most tenancies are protected and are governed by the Rent Act 1977. You cannot change them, unless the tenant can be persuaded without duress to move out. However, having said that, the grounds for possession or eviction are discretionary and are very limited.
- After 15 January 1989 tenancies gave assured tenants security of tenure, what changed was the restrictions on how much rent could be charged.
- Just to clarify it further, protected tenancies are statutory tenancies which roll on from month to month. This gives the tenant the right to a fair rent. The key word here is fair– this does not mean a market rent!
Selling A Protected Rights Property
If you own one of these properties and would like to sell, then there are companies that will buy protected tenancy properties.You should expect about 75% of the open market valuation. Remember that most buyers want vacant possession.Many of them will be in very poor condition and require extensive modernisation. Make sure you could get an independent valuation of the it’s worth, both with a sitting tenant, and with vacant possession.