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Landlord needs ‘must be considered’ in three-year tenancy agreements

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  • 04/07/2018
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Landlord needs ‘must be considered’ in three-year tenancy agreements
Tenancy agreements will be a minimum of three years under government plans, but the changes could throw up issues for both lenders and landlords, critics have said.

 

Secretary of state for housing, James Brokenshire, minister of housing, said government changes are aimed at making renting more secure.

A six-month break clause has been proposed to allow tenants and landlords to exit the agreement early.

Brokenshire said: “Everyone deserves a decent, affordable and secure place to call home. It’s the most fundamental of human needs.

“But for too many people, that need has become an increasing struggle – as house prices and rents go through the roof.”

Housing charity and campaigners welcomed the proposals.

Polly Neate, chief executive of Shelter, said: “This is an important step forward.

“Losing a tenancy is the main driver of homelessness and also causes huge instability for renting families so everyone who rents will be very pleased to see a move towards longer tenancies.”

 

No regulatory barriers

There are currently no rules to stop lenders or landlords offering longer term tenancies than the typical one-year agreements.

But the demand from tenants isn’t there for a three-year agreement, according to Carla Sateriale, manager, mortgages at UK Finance.

In a blog post she said: “Some have questioned whether tenants would be better off if they could lock themselves in for a longer lease from the start.

“You may be surprised to find that there are no regulatory restrictions which prevent a long-term lease from being agreed.

“The main reason long-term leases are uncommon is because tenants don’t tend to want them.”

 

Lenders will need to change

Lenders typically require landlords to have an Assured Shorthold Tenancy (AST) agreement in place, which usually lasts a year.

As a result, many providers will have to adapt and change their criteria.

Andrew Montlake director at broker Coreco said: “In my experience there are many landlords who would love to have longer tenancy lengths for their good tenants but have been tied by the requirements of the mortgage lenders who traditionally did not like more than a years’ AST.

“There is more choice on the market now, but if this were to become law there would be a fair few lenders who would have to review their lending requirements to accept three-year AST’s.

“I have always supported the idea that longer term tenancies should be more readily available, especially for those trying to set down roots or whose children are at a particular school who do not want to be forced to move, but with any market there has to be a degree of choice rather than being told what to do.”

One of the main reasons lenders are thought to prefer one-year tenancies is because landlords can review and raise rents at the end of each year.

However, there are some lenders including Paragon, Keystone and Landbay that already allow tenancies up to three years.

BM Solutions currently also allows for a three-year AST.

Phil Rickards, head of BM Solutions, said the lender will continue to review its offering as appropriate.

He added: “It’s important to consider that there are two parties to the tenancy, and the needs of both the landlord and the tenant should be considered.

“Longer leases can offer greater security for tenants where it better suits their circumstances, while shorter tenancy terms can provide flexibility.

“Consideration also needs to be given to the landlord in circumstances where tenants do not comply with the terms of the tenancy agreement.”

A spokeswoman for Accord said: “The government has identified in its consultation that the end of assured shorthold tenancies is the leading cause of homelessness.

“These proposals therefore represent a step in the right direction for giving tenants more certainty and retaining flexibility.

“We will review the consultation as it progresses but welcome initiatives that aim to fix the housing market.”

 

Landlords must not be penalised

One of the benefits of a one-year tenancy is that landlords can react to change in financial circumstances or undesirable tenants relatively quickly.

David Whittaker, chief executive of Mortgages for Business told Mortgage Solutions: “A landlord would not necessarily be averse to a three-year contract.”

And he said the proposals appear to be an “opportunity to come up with something pragmatic and sensible for all parties”.

But Whittaker warned there would need to be consideration under what circumstances landlord can serve notice and suggested there would need to be a clause written in that increases rent each year in line with inflation.

He also said that the changes “mustn’t further disincentive landlords” or it could result in another group of investors exiting the market.

As part of the government’s consultation, it’s been suggested there could be financial incentives for landlords that offer longer term arrangements.

David Smith, policy director for the Residential Landlords Association, said: “With landlords having faced a barrage of tax increases we believe that smart taxation, such as that being proposed, would provide the longer term homes to rent many families and older people want.

“We would warn against making it a statutory requirement to introduce three-year tenancies.

“Many tenants simply do not want to be tied to a property long term.”

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