Painsmith Landlord and Tenant Blog

A practitioners landlord and tenant law blog from PainSmith Solicitors

Harsh Results in Rent Increases After a Long-Lease Ends

A recent case has exposed a very unfortunate loophole in the law which might have harsh consequences for certain long leaseholders.

Certain long leaseholds are protected under the terms of Part 1 of the Landlord & Tenant Act 1954. The qualification for this protection was that the tenancy was for more than 21 years and the tenant would otherwise have fallen under the protection of the Rent Act 1977 save that the rent was too low too qualify for that protection. At the end of the term of such tenancies the tenant would originally have gained the protection of the Rent Acts. These provisions are being phased out after the introduction of the Local Government and Housing Act 1989 and a wholly new scheme set out in Schedule 10 applies. This scheme provides that the original lease continues until specified notices are served at which stage the tenancy changes into an Assured periodic tenancy under the Housing Act 1988. Part of this process includes a process by which the parties are to agree a new monthly rent and if they cannot agree the Rent assessment Committee has the power to set an appropriate rent. Quite properly, when setting the rent the RAC is required to exclude from its consideration any increase in the rent that would be attributable to improvements the tenant has made to the property. Therefore if the tenant has fitted a new kitchen during the long lease the landlord cannot take advantage of it to seek a higher rent once the tenancy becomes Assured.

Naturally, once the tenancy has become Assured the landlord is entitled to increase the rent to a market level every 12 months using the normal procedure supplied by section 13 of that Act. Bizarrely, although the RAC is required to exclude consideration of tenants improvements on the initial setting of the rent it is not permitted not do so on any subsequent determination of the rent. Therefore although a tenant who fits a new kitchen will not be liable to pay a higher rent for that improvement when he or she first gets the Assured tenancy, the landlord will be able to seek a higher rent due to that improvement 12 month later using the usual section 13 process.

Essentially this is precisely what has occurred in the case of Hughes v Borodex which came before the Court of Appeal a few months ago. The Court of Appeal held, with regret, that it had no power to change the rent assessment of the RAC which had taken into account the tenant’s improvements on setting the rent under a section 13 notice. What makes this case even more unjust is that the RAC determination took the rent over the sum of £25,000 per annum making it possible for the landlord to evict the tenant as the Housing Act 1988 no longer applied to her tenancy.

Regrettably, if all this had occurred just a few months later the tenant would have been protected by the increased rent threshold for Housing Act 1988 tenancies that will be introduced on 1 October 2010.

Filed under: England & Wales, FLW Article, , ,

Is Planning Permission Really Required for an HMO?

A recent article in Planning magazine suggested that landlords did not have to seek planning permission for HMOs.

This was on the basis that a simple change in use class was not a trigger for the making of a planning application. This is true, in a sense, but the reality (of course) is that it is a little more complex than that.

The trigger for the making of a planning application is a “material change of use” in a property. Section 55(3) of the Town and Country Planning Act 1990 makes clear that changing the use of a building from a single dwellinghouse to multiple dwelinghouses is always a material change of use. However, changing use of a property to HMO status does not automatically involve changing the number of dwellinghouses. A property will generally only consist of multiple dwellinghouses if it is being let under a number of different tenancy agreements. Therefore section 55(3) will not capture a change to HMO use which simply involves three or more people sharing in a property.

Of course, use for letting to three or more unrelated sharers does fall into a separate planning class, the new C4 planning class and movement between classes is indicative of a material change of use. It is not, however, conclusive evidence and consideration must be given to whether the actual use has changed.

In March 2010 an interesting planning appeal decision on this issue was made. Here planning consent had been refused for letting a property as an HMO under the old (pre C4) use class system. The appeal officer overturned that refusal asserting that the change to HMO use from use by a single family would not cause significant extra disturbance to surrounding residents.

Looking at all these factors it becomes clear that for some HMOs planning permission may simply not be required. Of course, for properties where the use was already established prior to 6 April 2010 then there is no change of use by continuing to let as an HMO and these properties do not require consent. However, even if there has been a movement from the C3 to C4 use classes after that date this may not count as a material change of use for planning purposes. A lot will depend on the actual use being made of the property and whether it constitutes an actual change in the use of the property. For example, it could be argued that simply letting a property to a couple and a friend is not a material change of use even if it involves a movement from a C3 to C4 use class.

Equally, a route of appeal against a local authority refusal to grant C4 consent is opened up by the appeal decision described above if it can be shown that the proposed C4 use is little different from prior use under the C3 class and will have a limited impact on the surrounding residents.

Of course, a lot of this discussion may be irrelevant if the new government alters the permitted development orders as they have previously suggested they will. However, it will remain relevant until then and may be an issue in some areas where the local authority intends to opt out of the permitted development changes.

In short therefore, an HMO is only an HMO for planning purposes if it involves a change of use from that which has gone before.

Filed under: England & Wales, FLW Article, ,

After a Section 21 Notice Expires

We are often asked the question of what the situation is once a notice pursuant to section 21 of the Housing Act 1988 expires.

Thanks to the decision of the House of Lords in Knowsley Housing Trust v White it is known that a tenancy agreement for an assured or assured shorthold tenancy does not in fact come to an end until the Court Bailiff has executed an order for possession. Therefore the service of a section 21 notice does not in itself bring a tenancy to an end. This means that the measures of only referring to rent as mesne profits after the service of section 21 notice are not necessarily required (although they may be a good idea so as not to confuse busy District Judges!).

If a tenant wishes to stay after the expiry of a section 21 notice for a short period this can easily be dealt with by simply sending a letter advising the tenant that the landlord will not be enforcing the expired possession order until a specific date. Subscribers to the PainSmith helpline service will be able to obtain a suitable letter from the document vault on their website.

Section 21 notices have no finite lifetime in which they can be used, they oldest reported case involves a section 21 notice which expired 6 years before the possession action began. Therefore agents should not be overly focused on the section 21 notice and tenants staying on after it has expired and more on making sure they have not offered a new tenancy which might override the notice.

Filed under: England & Wales, FLW Article, ,

Universal Estates v Tiensia- Where is it?

The two conjoined appeals of Universal Estates v Tiensia and Honeysuckle Properties v Fletcher were heard by the Court of Appeal on 7 May 2010. These are both appeals relating to the tenancy deposit protection provisions introduced by the Housing Act 2004.

The judgement has been reserved and we are informed that further questions were asked of the various parties involved fairly recently. As the Court of Appeal is now in recess until 1 October there is now unlikely to be a any decision in these key cases until after that date.

UPDATE- The Court of Appeal has now handed down its decision. A full report is available here.

Filed under: England & Wales, ,

The Return of the Discharge Bonus

In the past it has been suggested that one way to avoid tenancy deposit protection would be for a landlord to offer tenants a ‘discharge bonus’. This operates by the landlord charging a rent at the upper end of the market level (although not sufficiently over the market rate as to allow the tenant to make an application to the RAC) and then offering the tenants a sum of money or some other inducement to leave the property in good condition and obey the terms of their tenancy. This is a ‘win or lose’ offer and does not involve the payment of partial sums of money. Therefore the landlord will either have to pay everything to a tenant who has not caused any problems or nothing at all where the tenant has left the property in an unsatisfactory condition.

The use of this has been given some support recently by the Court of Appeal. In the case of UK Housing Alliance (North West) Ltd v Francis the Court considered a sale and leaseback arrangement. Mr Francis had sold his property to UK Housing and then taken a 10 year AST. He was paid a sum of £87,500 initially and would receive the remaining figure of £37,500 at the end of the 10 year term. If he breached the tenancy such that it was terminated by UK Housing then he would receive none of the final sum.

An argument made before the Court of Appeal was that this retained money was a tenancy deposit for the purposes of the Housing Act 2004. The Court rejected this argument on the basis that the relevant provisions of the Housing Act 2004 contain numerous references to payment and repayment and therefore a promise to pay a future sum did not qualify as a tenancy deposit. On the same basis a discharge bonus, which is also a future promise to pay, should be exempt from the rules.

How valuable a discharge bonus actually is will probably depend on each case. Landlords with multiple properties may well find it more workable than those with just one. It will also be necessary to set the amount of bonus with care to keep it attractive while not leaving the landlord out of pocket. Finally, landlords will need to have a well drafted set of conditions for payment and retention in order to avoid wasteful arguments about whether or not it should be paid.

Filed under: England & Wales, FLW Article

Housing Amendment Act Comes into force in Northern Ireland

We have previously posted on the small(ish) changes being made by the Housing (Amendment) Act (Northern Ireland) 2010. This Act makes a small change to the definition of HMO in the Housing (Northern Ireland) Order 1992. The change widens the definition of a household under the 1992 Order to include uncles, aunts, nephews and nieces.

This change was brought into force by the Housing (Amendment) (2010 Act) (Commencement) Order (Northern Ireland) 2010 and became law as of 31 July 2010.

Filed under: FLW Article, Northern Ireland

Agents Issuing Proceedings

It is an offence for any unqualified person who draws or prepares any legal proceedings to do so for a fee, gain or reward pursuant to section 22 of the Solicitors Act 1974.

The said unqualified person shall be guilty of an offence and liable on summary conviction to a fine not exceeding £50.00. Any fee they have charged can also be recovered by the paying party.

We are often asked by agents whether they can sign a claim form on behalf of their clients, the landlords. The answer to this is strictly yes, but not for a fee. It is also something that we would not advise as it makes the Court process unduly complex. Some agents within their full management package offer the service of completing and filing claim forms for possession. The problem with this is that the fee for the service is included in the full management price and therefore it appears as though a fee is charged for the service in breach of the 1974 Act above.

The solution that we recommend for this is that the service is not provided within the full management package and not advertised. Agents should agree to complete and file these forms for clients on an individual basis for those clients that need this assistance. This should be done without charge as a discretionary courtesy to particular clients only.

Where agents have fallen foul of the 1974 Act we advise that any fees charged should be refunded, as the landlord is entitled to claim these back anyway, and a letter is obtained from the landlord confirming that the proceedings were signed by the agent on the landlord’s behalf and that no fee has been charged for the completing and filing of the proceedings.

Whilst it is recognised that the fine is minimal, agents are warned about the stigma of a criminal conviction.

Filed under: England & Wales, FLW Article

What’s in a Signature?

There is some ongoing uncertainty as to the value of a signature. This is particularly true in regard to signatures which have been supplied in an electronic format.

Many agents believe that they need an actual original signature (known as a ‘wet ink’ signature) before a lease can be valid. Some Courts encourage this view by demanding to see ‘originals’ at possession hearings.

This, to some extent, misses the point as to what is going on. A written tenancy agreement is nothing more than evidence as to what the parties agreed between themselves. It can be undermined by evidence if it does not represent the actual agreement between the parties although the Courts are normally extremely reluctant to accept such evidence unless it is very compelling. Equally, a signature is nothing more than evidence that a particular party intended to be bound by a particular document. It is not necessarily the only piece of evidence nor is it conclusive in itself. In other words a ‘wet ink’ signature is not absolute proof that someone intended to be bound by a document. That person’s signature might have been forged, they might not have had sufficient mental capacity to understand the document they were signing, or they might have been placed under duress. All these circumstances can significantly undermine a so-called original signature.

By the same token the absence of a signature is not evidence of an intent not to be bound. An exchange of emails, faxes, or letters in which someone acknowledges that they have read an agreement and intend to be bound by it is as good as any signature. So too would be a verbal acknowledgement made before reliable witnesses. In fact, people who are physically disabled enter into contracts in this manner all the time.

Therefore, when considering whether to accept a signature that has been sent by facsimile or scanned and emailed or when considering setting a firm policy the issue to be considered is not what is ‘legal’ but rather what level of risk is acceptable. If a lease is of a relatively low value then a facsimile signature is probably acceptable. If it is for a lot of money then it would be wise to ask that all signatures are witnessed. The different forms can be combined so that, for example, a firm could set a policy that a lease being signed remotely must have signature’s witnessed while one where an original signature is to be provided or where the lease is being signed in the office is not treated so stringently.

As with all office policies it is important that the system adopted is clear, transparent and has a degree of reasonable flexibility built into it.

Filed under: England & Wales, FLW Article, Northern Ireland

Some More Tenancy Deposit Cases

Looking through the latest edition of Legal Action there are two cases on tenancy deposits. These are County Court cases and so not binding but they are of interest.

In O’Brien v Jones, Northampton County Court, 12 February 2010 it was claimed by the tenant that teh landlord had failed to provide the full information prescribed by the Housing (Tenancy Deposits) (Prescribed Information) Order 2007. Specifically, the landlord had not provided her address and telephone number. However, the agent’s address and telephone number were provided on other documents. DJ Watson found that this was sufficient and that, in any event, the situation had been remedied prior to the hearing. This does address one remaining area of uncertainty as there has been no clear decision on whether the prescribed information does actually require the provision of the landlord’s address and telephone number or whether providing the agent’s details is enough. Understandably many landlords who are spending money on a managing agent are reluctant to give their personal details to the tenant on the basis that they do not want to deal with them. It seems that DJ Watson agrees that the agent’s details are sufficient.

In Baafi v Mapp, Central London County Court, 24 June 2010 the landlord had registered the deposit with MyDeposits. He had failed to properly appreciate that the MyDeposits scheme does not and cannot provide all the information required by the Prescribed information Order. In particular, MyDeposits makes clear on its certificate that it does not tell the tenant what to do at the end of the tenancy if the landlord or agent cannot be contacted and also does not explain what things the landlord will retain the tenancy deposit against. MyDeposits expects these items to be dealt with in the tenancy agreement. It should be noted here that DPS does much the same thing. The landlord was using a tenancy agreement which the Court described as ‘archaic’ which did not clear up these areas. On appeal the tenant was awarded the usual three times the deposit penalty and the landlord’s claim for possession based on a section 21 notice was dismissed as the notice could not be relied on until all the proper information had been given to the tenant.

 

Filed under: England & Wales, FLW Article,

Additional HMO Licensing

As has already been reported elsewhere Oxford City Council has become the first local authority in England to take advantage of the previous government’s blanket consent for additional HMO licensing schemes. They have passed a scheme through executive council to licence all HMOs in Oxford.

We have been passed and reviewed the report of the Environmental Health department which the Council have relied on in making the decision. A copy of this report is available here. A number of aspects are questionable.

For example, the proposed scheme is one which involves annual licensing so landlords will have to reapply, and pay for, a new licence every year. The primary rationale is that the current 5-yearly licensing system has meant that the Council has already spent all the license fee money they derived when the scheme came into force and so have no money to staff the scheme going forward. This sounds a little like saying that the rationale for annual licensing is that the Council cannot manage a budget over the course of 5 years.

Another surprising rationale for the scheme is the belief that it will encourage landlords to deal with anti-social behaviour. Given that private landlords have no legal liability for the behaviour of their tenants and almost no powers to do anything about such behaviour it is hard to see what the council expects to achieve in this area.

We believe that this scheme has the potential to be challenged. However, the time line for such a challenge is tight as it must be started in Court within three months of the decision being made, ie. by late October.

Having spoken to counsel we are prepared to discuss the possibility of taking such a challenge forward on a no win, no fee basis if a group of interested landlords wished to come forward.

Filed under: England & Wales, England only, FLW Article, ,

Tenancy Deposit Protection Heads North of the Border

The Scottish Executive has published a consultation, including draft regulations, for the operation of tenancy deposit protection schemes in Scotland.

Unlike in England & Wales the protection scheme in Scotland is intended to apply to all residential tenancies, not just Short Assured Tenancies under the Housing (Scotland) Act 1988.  This means that the protection regime will also include lettings to companies.  However, the scheme only applies to monetary deposits so where a company offers (and the landlord will accept) a guarantee the scheme will not apply.  There is no maximum rent threshold under the Housing (Scotland) Act 1988 so there will be no exception for high value tenancies either.  Holiday lettings will fall outside the legislation and there may be a raft of further litigation as to what constitutes a holiday for this purpose.

The proposals look to have benefited from experience in England & Wales.  The draft regulations are detailed and consideration has clearly been given to closing loopholes. One issue remains somewhat unclear however. The consultation and the draft scheme rules both make reference to the deposit being lodged within 30 days. However, the regulations as drafted appear to allow the tenant to begin Court action immediately. This is probably something that needs to be addressed.

Implementation will occur 6 months after the regulations come into force and all new tenancies created after that point or tenancies which are renewed (either explicitly or by way of tacit relocation) will have to comply with the new procedures.

Penalties for non-compliance are similar. On application the Court can order the deposit to be protected or returned. The Court is also empowered to award a sum not exceeding three times the sum of the deposit to be paid to the tenant. This means that the Court has a discretion in relation to the actual size of the award which will negate the charge unfairness which has been laid against the mandatory penalty south of the border.

The regulations appear to envisage the existence of both custodial and insured schemes. This is a bit of a problem as we are not aware of any party who is interested in running a deposit scheme in Scotland. None of the three organisation operating in England & Wales have been especially keen to expand their operations up north. In addition the size of the private rental sector in Scotland is far smaller and it is debatable whether it is large enough to support more than one scheme, particularly if that scheme is only operating in Scotland. There appears to be a recognition of this issue implicit in the regulations as they state that they cannot come into force until a scheme has been approved by the Scottish Executive. This may be a recognition of the difficulty that the Executive may have in persuading an organisation to operate such a scheme.

The consultation contains a series of questions and is open for comments until 3 October 2010.

Filed under: FLW Article, Scotland,

Understanding ‘Subject to Contract’

We are often asked whether or not an agreement for a tenancy has come into effect when only one of the parties has signed it or some other variation on this theme has occurred. It is commonly thought that if only one party has signed then the party that has not signed is not bound by the agreement. If the parties have clearly agreed to a tenancy and that has been reduced to writing then the fact of a signature is irrelevant. The verbal agreement is sufficient to create a tenancy.

To avoid this occurring it is common to use a phrase such as “Subject to contract” or “Subject to lease”. This also means that any other discussions or offers made are subject to their incorporation in the final lease agreement. However, there some other consequences of the use of this phrase which are not so favourable and it may not always be the best course of action.

First it is worth examining precisely what the Courts understand the situation to be when the “Subject to Contract” formula is used. The Courts construe the formula in accordance with the conveyancers understanding of the phrase. This is that a negotiation for a conveyance of land which is expressed to be ‘subject to contract’ is not complete until there is an exchange of contracts. There is an entire set of procedures for such exchange which are set out and agreed between solicitors. It is this position that allows for such situations as ‘gazumping’ where the seller suddenly pulls out of a deal because they have had a higher offer. In the case of Salomon v Akiens, the Court of Appeal had to consider whether this formulation should also be applied to a lease agreement. The Court was clear that there was practically no circumstances in which a negotiation for a lease should be seen as any different from that for a sale and therefore the ‘subject to contract’ formula should apply equally to both.

Practical Consequences
What does this mean in practice? In the case of Longman v Viscount Chelsea the Court made clear that this means that the “relationship does not become binding … until there is an exchange of lease and counterpart, before which either party can withdraw”. In other words, until both the landlord and tenant have signed the agreement, the agreement has been executed, and the signed agreement has been passed to the other side then either party is free to withdraw without any penalty whatsoever.

Ending the Formula
Of course, there are other ways in which the ‘subject to contract’ formula can be dealt with. The parties could agree that the formula should no longer apply which is a common device in commercial or high-value leases where the parties will enter into an agreement to make an agreement. Alternatively, the parties can perform an action which sets the formula to one side. The most obvious of these is provision of the keys and the acceptance of rent and deposit payments. The formula comes into force once either party expresses an offer or acceptance of an offer as being ‘subject to contract’ and will remain in force even if following correspondence does not bear the same formulation until it is specifically brought to an end as described above.

Recovery of Expenses
The use of the formula also has implications for the recovery of costs and expenses. Where a party expends monies on the basis of an agreement which is subject to the formula it will be very hard to recover any monies expended on the basis of that agreement. As the High Court made clear in Regalian Properties v
London Dockland Development Corpn
each party must accept that any monies spent are a calculated risk and there will be no recompense if no contract results. This is not to say that agents cannot take steps to ameliorate this risk and a well- drawn up holding deposit agreement is a great help in this regard. Despite the fact that costs cannot be recovered in respect of actions taken under a belief that a contract that is subject to the formula was to be entered into there is no reason why a separate agreement taking a holding deposit from an applicant cannot be enforced. Such an agreement would typically cover the costs of referencing, preparing the agreement and would therefore protect the landlord from incurring agents costs with no prospect of recovering them. Such an agreement has the added benefit of ensuring that the agent will be paid for their time as well!

Other Formulas
There are other, more limited, formulas of a similar nature which may also be of value. The most commonly seen of these is probably ‘subject to references’ or some such phrase. This will have an effect similar to the ‘subject to contract’ formula but will be more limited and will effectively expire once satisfactory references have been received or the parties make clear that they have moved beyond that stage. By choosing to ignore them and agreeing a finalised contract, for example. The exact point at which these more limited formulas cease to be effective is not as certain due to the lack of Court decisions on the topic. In each case it will have to be decided at what point it was intended that the formula should come to an end and whether actions were taken to make it clear that it should no longer be effective.

Overuse
Some agents use the ‘subject to contract’ formula everywhere. This is bad practice and quite dangerous. In Shirlcar Properties Ltd v Heinitz the landlord sought to give notice to trigger a rent review contained in a tenancy agreement but used the phrase ‘subject to contract’ in the letter giving the notice. The review notice was held to be invalid because the tenant could not know if the landlord was bound to accept the higher rent proposed in the notice. Therefore the use of this formula where it throws doubt on the contents of the communication is very dangerous.

Practice Points
Agents should consider in every case what is best for their client. In higher value properties where the landlord is unlikely to wish to pull out of the deal unexpectedly it may be best to avoid use of the ‘subject to contract’ formula to ensure that the tenant is tied into the contract as early as possible. In other circumstances, where the landlord is uncertain of the tenant or may want to pull out of the deal it may be wise to use the formula in order to preserve the landlord’s position. Alternatively, it might be best to start negotiations ‘subject to contract’ but then agree at a later stage that the deal is finalised and that the formula should no longer apply, although this may be difficult where a deal is moving fast. As always, agents should take great care in the representations they make and how they are made to avoid invoking or rescinding the formula unintentionally. Equally, agents should not use the formula across the board by including it in all emails or letters by default.

Points to note

  • Once the Subject to Contract formula has been invoked it will stay in force until it is specifically rescinded or the lease or tenancy has been signed and exchanged.
  • Either party can withdraw from the contract without penalty while the formula is in force.
  • Agents holding deposit agreements are not affected and therefore recovery can be made from this for expenses such as referencing etc.
  • The formula should not be used automatically in every case and should be tailored to the specific requirements of each letting.
  • Make sure you have a solid holding deposit agreement setting out what charges the tenant is liable to pay.
  • Don’t use the formula where it is not appropriate

Scotland

The position regarding the use of ‘subject to contract’ in Scotland is rather different. Scots law tends to allow contracts to be created rather more easily than is the norm south of the border. It is also rather less enamoured of the ‘subject to contract’ formulation. In Erskine v Glendinning it was held that an acceptance of a deal which was qualified “subject to lease drawn out in due form” was entered into notwithstanding this phrase. Therefore, the use of ‘subject to contract’ remains a phenomenon which applies south of the border only.

Filed under: England & Wales, FLW Article, Scotland,

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