Periodic tenancies require due diligence: Here’s why
With periodic tenancies on the rise and the Renters (Reform) Bill set to make them the norm, landlords and agents are increasingly exposed to difficulties, amplified further by the proposed changes to the evictions process.
What are the different types of tenancies?
Assured Shorthold tenancy (AST)
Currently, the most common form of tenancy is an AST,Most new tenancies are automatically this type. To have an AST, the property must be private, the tenants’ main accommodation, and the landlord does not live at the property.
A fixed-term tenancy lasts for an agreed amount of time, depending on what is set out in the tenancy agreement. Usually, this will be 12 months.
This type of tenancy runs for a certain period of time, most commonly month to month. They can also run on a week-to-week, or quarterly basis, although this is less common.
Unlike fixed-term tenancies, periodic tenancies work as a rolling contract, which can be terminated by the landlord or tenant by giving notice.
Non-assured Shorthold Tenancy
This type of tenancy tends to be only used when an AST can’t be used. For example, if the rent is less than £250 or more than £100,000 per year or if the property is used as a holiday home.
Excluded tenancies apply if tenants lodge with the landlord and share communal areas.
How will the Renters (Reform) Bill change tenancies?
Following the first reading of the Renters (Reform) Bill in May 2023, it is fair to say the outcome is somewhat more radical than many in the industry had anticipated.
Namely, if the current iteration of the bill receives Royal Assent, landlords will only be able to evict tenants under certain circumstances. This can include outstanding rent arrears or anti-social behaviour, or on grounds of possession, such as landlords wanting to move back into a property or to sell it.
Landlords are set to have six months’ notice after the bill becomes law, at which point all new tenancy agreements would be required to be periodic and all current ASTs would be migrated to periodic tenancies.
What are the impacts of periodic tenancies on other areas of the Private Rental Sector (PRS)?
For the student lettings market, the change from ASTs to periodic tenancies may impact the number of Houses in Multiple Occupation (HMOs) available. That’s the opinion of Accommodation for Students, a student-focused search engine.
Currently, there is a good variety of accommodation available to students. This includes university and PRS-provided purpose-built flats, as well as shared housing, or HMOs provided by student landlords.
Plans to ban fixed-term tenancies as part of the Renters Reform Bill and transition all tenancies to a periodic tenancy system would mean that students wouldn’t be required to leave their HMO at the end of their tenancy (usually the end of the academic year).
This would mean that spaces in these properties would not be able to be guaranteed by the landlord for the next lot of students at the start of the next academic year. This could see landlords choosing to leave the market, and thereafter reducing the choice of accommodation options for students.
Accommodation for Students says it has already seen the impact following a similar change in the law in Scotland, with students struggling to find suitable accommodation.
“It is, in my view, vital that the government exempts private student landlords from its proposal to move all tenancies to periodic ones, as it has for institutional landlords who run Purpose Built Student Accommodation (PBSA). Failing to do so will force private landlords out of the market, reducing the mix of affordable options and driving up rents for students who are already on a limited budget.” – Simon Thompson, Director, Accommodation for students.
What is the impact of periodic tenancies on PRS as a whole?
Understandably, periodic tenancies are more likely to attract tenants looking for more transient, shorter leases. Having a high turnover of tenants will not only cost more in terms of referencing and marketing,it also means that landlords must deal with a shorter turnaround time if a tenant decides to vacate unexpectedly. This will likely increase void periods and incur greater costs for the landlord.
If your tenant moves out during a ‘notice to quit’ period, landlords may be liable for paying council tax for the property for that month. This can be avoided by ensuring you have a contractual periodic tenancy agreement in place to ensure this remains the tenant’s responsibility for a given length of time.
What are the difficulties faced by landlords and letting agents with the change to periodic tenancies?
With periodic tenancies opening up the rental market to an expanded pool of people, reports of fraud are on the increase. Fraudsters are becoming better at using the tech readily available to them to fake documents and contracts.
Agents must recognise fraud as an issue and seek to address it quickly. They should also educate their landlords on why thorough checks and due diligence are as important as ever.
Although they come with their own set of challenges, periodic tenancies can be a good idea for all parties. They can offer increased flexibility and reduce the number of administrative tasks required throughout a tenancy.
A number of steps can be taken to mitigate these challenges, such as;
- Always drawing up a contractual periodic tenancy agreement
- Ensuring your property marketing is on point to avoid extended void periods
Using trusted suppliers for tenant referencing and right-to-rent checks is also a good call. This will minimise further the risk of being provided with falsified documents.
The lettings landscape is mid-shift, as a combined result of the pandemic, cost of living crisis, and Renters (Reform) Bill. What this means long-term is yet to be seen. What is certain is that landlords and letting agents must be vigilant and stay ahead of the ball in order to maintain consistency.