On 1 October 2010 the Assured Tenancies (Amendment) (England) Order 2010 comes into force. It is a very short Order and states quite simply that the maximum rent threshold for an Assured Shorthold Tenancy (AST) will increase from £25,000 to £100,000.
The reasoning behind the increase is fairly easy to follow. The intention of setting a financial threshold for ASTs was to exclude what were then high value properties whose tenants did not need statutory protection. A rent limit was set following the abolition of domestic rateable values with effect from 1 April 1990 and has not been increased. As a result, an increasing number of properties fall outside the scope of the Assured Shorthold Scheme and the protection it affords to both parties.
Concurrently with the statutory instrument, the government published a 22-page explanatory memorandum partly to deal with the knock-on effects that were clearly contemplated as a result of the Statutory Instrument, but in a non-legislative way which is less than satisfactory. This is particularly true of the deposit safeguarding provisions of the Tenancy Deposit Protection Scheme and the adverse impact that the draconian penalties a defaulting Landlord faces if he does not place the deposit within one of the appropriate deposit schemes and comply with the notification requirements of those schemes to the Tenant.
Although saying in the explanatory memorandum that the order is intended to be prospective rather than retrospective, the previous government assumed that any Landlord in such a position would place any deposit that he held within the scope of one of the Tenancy Deposit Schemes because the common law tenancy existing on 30th September 2010 would become an AST on 1 October. However, the precise wording of the relevant legislation does not necessarily support these assumptions.
The new order simply raises the maximum rent threshold above which an AST cannot exist. It does not say that any tenancy in force on 1 October with a rent between the old and new threshold figures will automatically become an AST. When ASTs were created, the 1988 Housing Act specifically excluded pre existing tenancies from the new rules. Unfortunately, by changing the threshold but not the effective date, it seems that a tenancy created after 1st April 1990 at a rent under £100,000 will now be an AST.
The deposit legislation is in the Housing Act 2004 and Section 213 specifies that “any tenancy deposit paid… in connection with a shorthold tenancy must, as from the time when it is received, be dealt with in accordance with an authorised scheme”. For tenancies which will convert overnight into ASTs on 1 October, deposits previously paid to the Landlord will not have been paid in connection with an AST and the Landlord may have already held them for a significant period.
There are other problems for landlords. An AST must be for a minimum of six months’. If an AST is created overnight on 1 October, does it have to run for a minimum of 6 months from that date regardless of the termination date of the original contract?
• What is the position of a short term letting of say three months which runs over the 1 October and gets converted to an AST?
• How does a Landlord deal with any non-compliant notice provisions which may well exist in a tenancy contract that was not intended to be an AST but, with the advent of the new threshold, immediately becomes one?
• How does a Landlord bring one of these newly created ASTs to an end especially if the tenancy contains different requirements to those required for an AST?
• What is the position of a Landlord who wants to sell his reversion in a property that suddenly has an Assured Shorthold Tenant?
So what advice that can be given to Landlords faced with these uncertainties? Most Landlords will want clear answers and will not want to hazard themselves on litigation just to find out what the law is. Unfortunately the position at present is far from clear. Until such time as some of these issues have been before the courts, it is impossible to give a definitive answer as to what the new rules are and one can only speculate with a degree of common sense as to what one hopes the answer might be.
On the question of deposits paid prior to 1 October in respect of Tenancies that become ASTs on that date, the advice of prudence must be to tell the Landlord to register it with one of the Tenancy Deposit Protection Schemes or else to refund it immediately. If the Deposit Protection Service Custodial Scheme is used then there are no charges involved for a Landlord unlike the insurance-based schemes which have fees. It may be possible to argue that the deposits paid in respect of Tenancies falling into this category are not caught by Section 213 of the Housing Act, but the answer will depend on whether the client wants a safe solution or whether he is prepared to contest the matter in court and risk failing to recover his property and being charged with a penalty of three times the amount of the deposit.
Is the effect of the statutory instrument to create a whole series of new ASTs commencing on 1 October? The answer is uncertain but the advice of prudence must be to let existing tenancies run and do not attempt to terminate them until 1 April 2011 by which time the six month interval will have run its course and the Tenancy can be terminated on the statutory notice procedure. If the agreement has a stipulation for a longer notice in it, then the course of prudence is to adopt the longer notice period rather than the statutory period.
As far as a short term let is concerned, there is an argument to the effect that these regulations have been in the melting pot for some considerable period and it was imprudent of the Landlord to grant such a tenancy in the first place! However, from the point of view of parties wishing to deal in the short term, it was equally reasonable to assume that the new rules might be brought in to take effect on all tenancies granted after the 1 October. Again, the course of prudence is to advise the Landlord to allow the tenancy to run for a further six months if this option is available. As far as non-compliant provisions within the existing tenancy agreement are concerned, one has to assume that one takes the more beneficial set of rules to the tenant from the statute and the terms of the contract and applies that. If the contract has provisions which have ceased to be lawful with the creation of the AST, the Landlord would clearly be facing an uphill struggle to enforce them.
With regard to the sale of the reversionary interest, this may be one area in which the Landlord has a slightly improved situation. High value properties outside the AST regulations were subject to statutory notice to be given to the Tenant before a Landlord could sell, giving the tenant a right of pre-emption on the property. The Tenant presumably now loses those rights by virtue of becoming an AST tenant, to which the Housing Act right of pre-emption does not apply.
The Landlord will have to make appropriate provisions at the time of sale to cover the transfer of any deposit that is held, assuming the requirements of the deposit protection schemes have been met.
Any Landlord contemplating granting a high value tenancy should make sure that the document has been geared to comply with the new rules even if granted before 1 October in order to facilitate an easy transfer. Any Landlord renewing a tenancy after 1 October, even if he has not complied with Tenancy Deposit rules previously, will have to do so once the new tenancy is granted if the deposit is to be retained.
Roger Smith is a Partner at Barlow Robbins LLP