High-value lettings risk to residential landlords

Some high value residential lettings will change status shortly, and an unwary landlord could find themselves with a shock bill. Iain Robinson explains.

A change in the legal status of residential tenancies where the rent is more than £25,000 per year means that some private landlords could find they are holding deposits illegally, which could land them with an expensive trip to court.

At present, residential tenancies where the rent is higher than £25,000 per annum are not classed as assured shorthold tenancies (ASTs). As of 1 October 2010, this threshold will be £100,000. This means that a number of tenants paying £2084 a month or more will gain extra rights and their deposits will have to be held differently. Whilst few individual tenants pay this much, many large shared houses would fall within the definition.

A landlord who finds their tenancy has become an AST has to comply with a great number of safety regulations. They are also limited to certain statutory routes if they wish to terminate the tenancy. This can lead to frustrating delays in some cases. The landlord’s more immediate concern is what to do if he holds a deposit. AST deposits have to be kept in one of the government-approved tenancy deposit schemes. A Landlord who has not put the deposit in one of the schemes is unable to use some of the statutory termination procedures, making an unruly tenant difficult to remove. Worse for the landlord is that, should the tenant apply to court, the court can order the deposit to be returned to the tenant or put into the scheme. Worst of all, the court will also order the landlord to pay the tenant three times the deposit (on top of returning the deposit!)

As a caveat, the legislation is written retrospectively, but it is not written very well. It is not absolutely clear whether a deposit taken already would have to go into the scheme. Certainly that is the government’s interpretation, but interpretation is a job for the courts. Assuming the government’s view is correct, here is a case study:

Lon owns a big house in Barnstaple and rents it out on a single tenancy to nine sharers. They only pay £250 per month each, which comes to £27,000 per year. Lon has taken £250 deposit from each of them in the usual way, which he keeps in his own account. After 1 October, the rent is not paid and, on visiting, Lon sees that windows are broken and the carpets are burned. He fires out the usual notices to end the tenancy. Nobody leaves and, another month’s rent unpaid, the matter goes to court. The judge tells him the tenancy is an AST now and he needs the section 8 proceedings. Lon fires out section 8 notices. Another rentless month and they are in court again. The tenants tell the court the deposit is not in the scheme. Not only does the judge say that section 8 is not available to Lon because the deposits are not in the scheme, he orders the deposits be put in the scheme and that he pays the tenants £750 each. Added to three months’ lost rent, Lon is now about £13000 down and still has a house full of non-paying students.

If you let out a high-value property caught by the change in legislation, do take advice as to your new responsibilities, the control of deposit money and the tenancy termination process. Slee Blackwell advise a number of clients with residential and commercial property portfolios.