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AST or Licence? What You Should Know about Renting a Property

What Is the Difference Between a Licence and a Tenancy?

In a tenancy, a tenant theoretically owns the rights to your property or land for a specified length of time. It is, of course, not complete freehold ownership, as the tenant has no other rights over it apart from residing in it or making use of the land. However, as a landlord, you do not have the right to enter any property you own and rent when you wish. You need to ask for permission from your tenant first or send a landlord access request letter to give notice to your tenants that you wish to access the property. When you demand rent, you exchange the right to have access to your property for the cash payment the tenant pays to use it. This situation lasts for the length of the tenancy. You can reclaim your property only when the tenancy has come to an end.

Licences are Not Permissible Substitutes for Tenancies

The majority of legislation that is applicable to occupiers does not relate to licence holding. A tenancy arrangement has specific features which include a fixed-term tenancy, payment of rent and sole possession. It is not permissible for you as a landlord to form any agreement with a tenant that does not adhere to the Rent Act. This means that you cannot legally demand a potential tenant to sign any agreement which has ‘licence agreement’ as its header.

Why Is it Necessary to Worry about the Type of Tenancy When Renting Out a Property?

Buying a property to rent has become more popular in recent years with low interest rates and a hike in demand for accommodation. Also, the financial crash of 2008 was in part due to over-lending to borrowers who did not have the means to repay loans. This released more properties on to the market as people defaulted on mortgage repayments, leading to banks seizing and selling property to recoup debts. This, in turn, led to a surge in rentals after a period of steady increase in home ownership.

Government policies deterred property owners from renting out property due to caps on rent and the difficulty in evicting tenants. This is where the assured shorthold tenancy (AST) agreement comes into the picture, as it has become the most common type of arrangement that involves a private residential landlord and his or her tenants.

The AST arrangement has improved the contractual relationship that takes place between the tenant and landlord, making it much clearer. It allows landlords to repossess their property fairly easily if a tenant fails to keep to their obligations while in the property, such as paying rent.

However, this process may still require going through the courts to obtain a possession order. Often, tenants who have defaulted on rent repayments will not leave a rental property voluntarily because they may not be eligible to be rehoused. They may then wait until they are evicted by court bailiffs.

If you are a landlord, or are looking to be one, it is important that you understand the types of tenancies that exist. Sometimes the rights and obligations of both the landlord and the tenant, particularly in the procedure for possession, will depend on the type of tenancy involved.

Assured Shorthold Tenancies

Most tenancies these days are governed by assured tenancies that come under the statutory code as laid down in the Housing Act 1988, as well as an amendment to this Act that took place in 1996. The most common is called the assured shorthold tenancy. There are some differences between assured shorthold tenancies and assured tenancies. As the assured shorthold tenancy is the normal type, most tenancies fit into this category automatically.

There are no restrictions on the term of the tenancy, but most tenancies last for six months. As a landlord, the main way you benefit from assured shorthold tenancies is that you can, by right, take possession of your property as long as the expiry date of a fixed term has been reached. The main proviso is that you have served the proper notice to your tenant, which has been correctly drafted and allows the tenant at least two months to vacate.

There is a specific name given to these notices, a Section 21 notice, as outlined in the Housing Act 1988. Under an assured shorthold tenancy, the amount of rent can be challenged in the first six months after the commencement of the tenancy by the tenant through a review by the Rent Assessment Committee. However, this does not commonly take place.

Assured tenancies differ from assured shorthold tenancies in that they offer tenants security of tenure in the long term, and tenants have the right to remain in the property until they decide to leave, or until a possession order forces them to vacate. Taking possession, as laid down in Section 21 under ‘no fault’, is not permissible in the case of assured tenancies. As a landlord, the right to evict can only occur under the Housing Act 1988, Schedule 2, which outlines the conditions for eviction. Prior to 24th February, 1997, the normal tenancy agreement was the assured tenancy because landlords did not understand what the procedure was for initiating an assured shorthold tenancy.

Assured Tenancies

Most landlords will choose to rent their property using an assured shorthold tenancy agreement, and generally, when the property that is to be rented has been purchased with a mortgage, the lender will insist on an assured shorthold tenancy. Sometimes, a landlord does select an assured tenancy if recovering possession is unlikely to take place in the foreseeable future and the tenant is a family member or ex-employee. However, serious thought has to go in to forming this type of tenancy agreement as you may never be able to recover possession of the property in your lifetime as an assured tenancy can be inherited by a spouse of the tenant.

A tenancy that is neither an assured shorthold tenancy nor assured tenancy is:

  • a tenancy that started prior to 15th January, 1989;
  • an agricultural tenancy;
  • a tenancy where the rent exceeds £25,000 annually;
  • a rent-free tenancy or one that brings in less than £250 annually;
  • a property that is let to a company;
  • a student tenancy that is provided by a college or university;
  • a vacation let;
  • a letting where the landlord shares the property’s facilities, such as the bathroom and kitchen, in what is called an excluded licence; and
  • a letting through a resident landlord in a building that has been converted and the landlord shares just the entrance and staircase. One example of this situation is when a single house has been converted into a number of flats that are self-contained and the landlord occupies one of them and shares an entrance with the other tenants. This is called a resident landlord let and an assured shorthold tenancy is disallowed in this situation.

A tenancy can be assured, but cannot be an assured shorthold tenancy when:

  • a tenant has an assured tenancy;
  • an assured tenancy comes under rules of succession when a tenant has taken over after the previous tenant has died;
  • an assured tenancy proceeds a secure tenancy due to the transferring of a tenancy from a landlord in the public sector to a landlord in the private sector; or
  • an assured tenancy takes place automatically after the expiration of a tenancy on long leasehold.

Fixed-Term, Contractual Periodic, and Statutory Periodic Tenancies

Assured or assured shorthold tenancies can be fixed-term tenancies, which can last for a fixed period. This could be a week, several months or even years. The term has to be stated in the tenancy agreement.

Assured and assured shorthold tenancies that have no fixed terms and just run on rental periods are referred to as contractual periodic tenancies. This sort of tenancy is quite acceptable. The contractual periodic tenancy matches the rental period, meaning that if any rent is paid on a monthly basis then the tenancy periods will cover a month at a time as well.

Once fixed-term tenancies end, whether assured or assured shorthold tenancies, what is called a statutory periodic tenancy occurs automatically once the tenant has remained in the property after the fixed term. These statutory periodic tenancies run in ‘periods’, and it is acceptable to allow tenancies to carry on like this. There are a great number of tenancies that have kept going for many years in this way.

Initial Period for an Assured Shorthold Tenancy

Assured shorthold tenancies do not need a fixed term initially, but the term can be agreed upon. This can be a term of six months or less with agreement from the tenant, or a periodic tenancy may be set up to begin with. However, tenants on an assured shorthold tenancy do have the right to reside in the property for at least six months. A judge will not grant in the first six months of a tenancy any order to take over possession, even if an agreement is reached for a fixed term of six months or less. Likewise, if a periodic tenancy has been agreed on to begin with, it does not mean that the landlord will have any right to possession unless the first six months have been reached.

Possession of or recovering a rental property can take place in the initial period or throughout a fixed term based on Schedule 2 of the Housing Act 1988. These statutory grounds for possession include rent non-payments.

Regulated Tenancies

Most private landlord lettings that commenced prior to 15th January, 1989 are subject to the Rent Act’s regulated tenancies unless both the landlord and the tenant share. Tenants have more security and are subjected to rent control. It is just about impossible for any regulated tenant to be evicted unless they have not paid any rent for a long time or the landlord makes available alternative accommodation that fits the tenant’s needs.

Discrimination Is Something You Should Know about as a Landlord

As a landlord, you cannot use direct discrimination when choosing a suitable tenant. This means that whether you are a landlord in the private or public sector, you should act in a reasonable way when it comes to the gender, race or disability status of a potential tenant. This is all defined in legislation included in the Race Relations Act of 1976, the Sex Discrimination Act of 1975 and the Disability Discrimination Act of 1995.

If you treat any potential tenant less favourably because of their gender, race or disability and the matter is discovered, then you are breaking the law. Direct discrimination is generally easily noticeable by the recipient and action can be taken against an offending landlord. An obvious example would be stating in an advertisement that women are not welcome or there are no facilities for children.

Sometimes, landlords who prefer not to let their property to a certain group of people try to make it difficult for that group to be eligible simply by imposing conditions like being in full-time employment. In a particular location, this may make it difficult for certain potential tenants to be able to match that criterion.

The Commission for Racial Equality (CRE) recently announced to the public an updated code of practice in relation to racial equality with reference to residential rental accommodation. This new code is a statutory code, which means it has parliamentary approval and the courts can therefore take action if the code is breached.