Are you looking to buy a property from a landlord with tenants already living there? Perhaps you’re worried about what you might be taking on.
Here are some practical tips and the answers to many of the questions you may have about buying a property subject to an on-going tenancy, sometimes called a “sitting tenant”.
Buying tenanted properties at a glance
- What are the benefits of buying a tenanted property?
- What are the disadvantages of buying a property with tenants
- Due diligence checklist for buying a tenanted property
- Safety checklist for buying tenanted property
- What if the seller’s paperwork is not in order?
- Does the landlord need to tell the tenants that they’re selling?
- How to renegotiate the rent with sitting tenants
- Final thoughts
What are the benefits of buying a tenanted property?
With so many landlords selling up, particularly those who bought before Section 24 came into effect, every property that leaves the private rented sector is one less property available for renters. At a time of a shortage of rental properties, when a landlord sells to another landlord subject to the existing tenancy , the sale is not adding to the rental housing crisis.
There are lots of benefits to landlords when they buy a property with tenants in place. In fact, it may well become the norm after the abolition of Section 21. (Click here for my blog post explaining the likely implications of abolishing Section 21).
Here is a list of the benefits of buying tenanted properties:
- Income. The buyer has income from day one, and the buyer will be able to budget knowing what the income will be.
- Renter history. The renters are a known quantity as the buyer will know the full rental history of the tenants. (The buyer’s solicitor should ask for this during conveyancing).
- Property occupied. Having renters from the start also means the property isn’t empty, which avoids higher costs during a void period. Click here for my blog post on reducing costs during void periods and refurbs.
- Compliance. Theoretically, the property should already comply with landlord obligations such as an up to date Gas Safety Certificate and EICR, any selective or HMO licensing, and Article 4 consent. That said, the buyer should check, as sometimes landlords exiting the industry aren’t fully compliant. One of the properties I bought had an unsatisfactory EICR, despite having tenants. I found this shocking and required the vendor to do the remedial work before completion. Do also check that the boiler has been serviced, as sometimes landlords only get the Gas Safety Certificate.
- Refurbishment. It is possible to phase refurbishment and maintenance, after discussing it with the renters, and checking that anything urgent is done immediately.
- Cheaper purchase price. The price of a property with sitting tenants is usually below the market value of one with vacant possession, particularly if the rent is low.
What are the disadvantages of buying a property with tenants
Buying a property subject to an existing tenancy does have some disadvantages and risks. Here is a list of the disadvantages of buying tenanted properties;
- Lower rents
- Rents of existing tenancies tend to fall behind those for new tenancies, especially during a period of rent inflation like the present. (Click here for the average rent increases across England, Scotland and Wales).
- If the renters have been in place for much more than a year, unless the landlord has kept pace with the market, the rent will be lower than for equivalent properties on new tenancies.
- Unless the seller has kept the rent in line with the market, the buyer may need to go through the rent review process. Click here for a guide on how to increase rents.
- Choice of renter
- The buyer will inherit the sitting tenants, without having done their own checks.
- Buying subject to terms of existing tenancy
- The buyer buys the property subject to the existing tenancy agreement, and is bound by the terms in the same way as the original landlord.
- If the buyer isn’t happy with the terms, they have two options. Either they must get the consent of the renters to change the agreement, or they serve a Section 21 notice and evict the renters.
- When it comes to increasing rent, however, if the parties can’t reach an agreement, the new landlord can serve a Section 13 Notice. As long as the increase isn’t above the market, as the law currently stands, an appeal to a Rent Tribunal is unlikely to be successful. Click here for more information on Section 13.
Due diligence checklist for buying a tenanted property
Here’s a checklist of things a solicitor should check when their client is buying a tenanted property:
- Tenancy agreement and amendments.
- Copies of agreement and amendments, including any rent increases, agreed changes to the rent payment date, agreements to decorate. or otherwise change the property
- Are there any unusual terms or anything the buyer might want to change?
- Full details of breaches, disagreements or complaints.
- Copies of original inventory, and any changes to the inventory
- Deposit registration and prescribed information: copy of the certificate of registration and when the prescribed information was provided
- Maintenance log and details of inspections
- Correspondence with tenants, inc copies. ofwhats app messages, full payment history, right to rent
- Selective licensing or HMO licensing terms
- Planning permission for change of use in Article 4 area (if relevant) – click here for more information on Article 4.
Safety checklist for buying tenanted property
It’s really important for the buyer to make sure that they comply with the landlord responsibilities from the date of completion, or as soon as possible afterwards.
As with any new tenancy, the landlord or their agent should check that the property has the following items (click here for further information):
As well as the above items, the landlord or their agent should check the smoke alarms and the carbon monoxide alarm to make sure they’re working.
It’s also sensible to carry out a detailed inspection of the property, to see whether there are any maintenance issues. Anything that is potentially hazardous or harmful should be a matter of urgency for repair. Take a look at this blog post which sets out the duties of landlords regarding repairs, including what’s hazardous.
What if the seller’s paperwork is not in order?
Unfortunately the seller might not have complied with their landlord obligations. However, if the irregularities aren’t fixed, the new landlord will be responsible. Potentially this also means not being able to use a Section 21 Notice to terminate the tenancy agreement.
Here’s what to do to make sure you comply with your landlord responsibilities after the sale goes through:
- Unsatisfactory EICR. Require the seller to carry out the remediations listed in the unsatisfactory EICR. Once this is done and a satisfactory EICR issued, make sure the tenant has a copy. If not, provide them with a copy as soon as possible after completion.
- No gas safety certificate. Ask the landlord to do this before completion.
- No How to Rent Checklist.
- If in any doubt, provide a copy of the latest version to the tenants after completion.
- The new owner will not be able to give a valid Section 21 Notice unless the tenant receives the up to date version when there is a new tenancy or a renewal. If the previous landlord did not do this, the new landlord can rectify it at any time before serving a Section 21 Notice
- Deposit formalities not complied with.
- Landlords can’t issue a Section 21 notice unless the deposit has been lodged with a Tenancy Deposit Scheme. Also, the tenant must have been given the prescribed information within 30 days.
- Usually the seller will transfer the deposit to the buyer. It’s essential that the landlord lodges the deposit in a Tenancy Deposit Scheme and provides the prescribed information within 30 days.
The Court of Appeal held in Trecarrell v Rouncefield in 2020 that a landlord can still serve a valid Section 21 Notice, so long as they provide valid up-to-date documents to the tenant before or with the Section 21 Notice. In other words, landlords can rectify most procedural errors. See para 37 of the judgment for more details.
Does the landlord need to tell the tenants that they’re selling?
Technically speaking, the seller does not need to tell the tenants that they’re planning to sell the property. However, as part of being a good landlord, it’s important to be open and transparent. Not only is being up front the right way to treat the people that live in the rental property, if they know what’s happening, they’re more likely to be cooperative.
Section 3 Notice
After the sale goes through, the buyer becomes the landlord, and Section 3 Landlord and Tenant Act 1985 states that the buyer must provide the tenant with their name and address. The deadline for this is no later than the next day on which rent is payable. There are exceptions if the rent is payable more than two months later. In practice, landlords will write the tenants fairly promptly so that the tenants will know they need to pay the rent to someone else.
Until this is done, the seller remains liable for any breach of the tenancy agreement. The old landlord has the right to provide the tenant with their new landlord’s name and address. It is an offence for the new landlord to fail “without reasonable excuse” to provide the notice and they can be fined by up to £2,500.
Section 48 Notice
The buyer must also give a similar notice under Section 48 Landlord and Tenant Act 1987 where they must provide the tenant with ‘an address in England and Wales at which notices (including notices in proceedings) may be served on him by the tenant’.
Usually these two notices are combine in the same document.
How to renegotiate the rent with sitting tenants
Increasing the rent is one of my least favourite jobs as a landlord. However, in periods of high inflation like the present, not increasing the rent is effectively decreasing it.
Given the sharp increase in market rents for new tenancies in 2022 and 2023 (see the latest Rightmove data), it’s likely that the rent being paid will have fallen behind the market. Assuming there’s an assured shorthold tenancy or periodic tenancy in place, it’s legally straightforward to increase rents in England. However, it’s important to follow the correct process, which differs according to whether there is a rental review clause.
It’s important as a good landlord t be reasonable about rent increases, and phase them in. As a rule of thumb I try not to increase the rent to existing tenants by more than average wage inflation. Here is a guide on how to increase the rent in England.
Yes, it can be tricky, inheriting renters that you didn’t choose. However, buying a property with tenants means there’s one less set of renters looking for somewhere to live.
Given the shortage of rental properties in 2023, it’s a good thing to buy a property subject to an existing tenancy, if at all possible.