The LandlordZONE Newsletter - Tenancy Deposit Scheme up-date

September 2006 - Issue 11

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We continue here with our series of LandlordZONE Newsletter editions on the topic of the Tenancy Deposit Scheme (TDS) up-date requirements of the Housing Act 2004.

Landlords and Agents are no doubt anxious to know the state-of-play regarding the TDS. They will also be concerned about the likely impact of all this on their businesses when it eventually becomes enacted next April - 6th April 2007.

In this issue we have attempted to bring you an up-date on progress and give some idea of the likely implications of the scheme for landlords and agents.

Perhaps some indication of the complexities involved in the TDS is the fact that the launch date has been put off twice already, from July 2006 to October 2006 now to April 2007.

The DCLG is also perhaps anxious to know what impact the schemes will have and their likely take-up.

There is no doubt the process will add a layer of bureaucracy not previously encountered with lettings and coupled with the other legislation could be quite onerous.

There is considerable scope for landlords avoiding this by simply not taking deposits or other non-deposit measures to provide their security.

These possibilities will become more apparent as we have more detail of the schemes themselves.

Tom Entwistle, Editor

This issue is wholly sponsored by Coverlet - one of the leading providers of insurance for the rental property market.

Landlord’s Insurance from Coverlet

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Rent Rises Hit Survey Record

RICS housing market survey May 2006 - July 2006

Tenant demand and rental levels accelerated in the quarter to July, driven by a strong economy, declining accessibility and immigration from EU accession countries, says RICS (Royal Institution of Chartered Surveyors), in its lettings survey published today (Thursday 31 August 2006).

30 percent more chartered surveyors reported a rise in rental levels, as demand growth exceeded supply growth, up from 20 percent in the last quarter. The rise in rents for the quarter to July was the strongest in the survey’s history, almost four-times the long run average. Surveyors report that immigration from EU accession countries (Government estimates stand at 427,095 since EU expansion) has put further upward pressure on rents in some regions. Surveyors are confident the upward trend will be sustained in the next quarter with 28 percent more surveyors reporting confidence in rental increases compared to 24 percent in the last quarter.

Tenant demand also accelerated in the quarter to July approaching the fastest pace since Q2 2001. 25 percent more Chartered Surveyors reported a rise than a fall compared to 19 percent in the last quarter with an ever strengthening economy and declining accessibility for first time buyers driving tenant demand higher.

Instructions to let property continued to grow, although the pace slowed for the second consecutive quarter, lagging behind demand. Tenant demand in London accelerated at the fastest pace since Q4 2000 with rents rising at the fastest pace in the survey’s history, driven by a strong corporate sector and migrant labour.

New investment in the rental market is subdued as gross yields remain low while ever increasing house prices are cooling interest.

RICS spokesperson Jeremy Leaf commented:

“Economic prosperity and population migration have increased rental demand pushing up rents, making conditions better for property investors. However, first time buyers will find it hard to enter the housing market with higher rents making it difficult to save sufficient sums for a deposit.�

About RICS
RICS (Royal Institution of Chartered Surveyors) is the mark of property professionalism worldwide. It covers all aspects of property, construction and associated environmental issues. RICS has 120,000 members globally and represents, regulates and promotes the work of property professionals throughout 120 countries. RICS is governed by a Royal Charter approved by Parliament which requires it to act in the public interest. It is also a professional regulatory body approved by Government (HM Treasury).

Notes for editors:

RICS housing market survey is the longest running monthly survey of house prices in the country, collecting data since January 1978. The survey is cited by the Bank of England’s monetary policy committee at its monthly interest rate setting meetings:
http://www.bankofengland.co.uk/publications/minutes/mpc/pdf/2006/mpc0607.pdf (page 6, paragraph 21).

Stephen Thornton, RICS Public Affairs
T: 020 7695 1682
E: sthornton@rics.org
M: 07904200214
W: www.rics.org

Risk Expert Warns Parents to Choose Student Accommodation Carefully.

All over the country, parents are anxiously studying the small ads in the hope of finding a suitable flat for their student sons and daughters. While flying the nest is a big adventure for school-leavers, funding their new lifestyle can be an expensive problem for the folks back home.

The cost of living for students is high, but cutting corners by opting for the cheapest accommodation can be both costly and dangerous.

“Although the market can be quite tight in university towns, parents and students should shop around to find a flat that offers a safe environment as well as value for money,� says Mairi Scott, managing director of risk consultants Leaseguard who offer specialist insurance for tenants and landlords in the rental sector.

“Sadly, in the worst cases, we have even seen young people die because of very poor safety standards in their student flat. Others have had money or items like mobile phones or iPods stolen, we’re also seeing an increase in cases of identity theft where flatmates or other people using the property have impersonated the victim to ‘borrow’ money from banks.�

Before signing a lease, she recommends some simple steps to check whether a landlord is complying with the law and with good practice.

If the flat is designed to accommodate more than two students, ask the landlord whether he or she has permission for its use as a Home of Multiple Occupancy (HMO). Rules have been tightened up on HMOs across the UK, and if the landlord doesn’t have the right licence, tenants could be chucked out when the local council gets to hear that the landlord is in breach of the rules.

“If your son or daughter is studying in Scotland, check whether the landlord has registered with the local council under the Scottish Executive’s compulsory Landlord Registration Scheme. This new law aims to ensure that landlords are ‘fit and proper’ persons and that their properties are both safe and of a reasonable quality,� says Mairi Scott.

It is also important to satisfy yourself that gas appliances are inspected annually by a Corgi-registered plumber – and that all portable electrical appliances are checked by an electrician. Professional landlords will have records to prove that they meet these legal requirements. Landlords are also obliged to ensure that all furnishings are fire resistant.

Read the lease carefully, paying particular attention to:

• The rent – is it the same as the one quoted on the telephone?
• The payment date.
• The period of the lease.
• The deposit required (normally equivalent to one month’s rent in advance).

To ensure a record of your rental payments, it is best to pay by standing order or cheque. If paying by cash, ask for receipts. You should receive, and sign for, an inventory of all furniture, appliances, equipment and other items in the flat. If one is not provided, draw up your own and ask the landlord to sign it.

“Bear in mind that many landlords may expect someone to act as a guarantor if rent for the period of tenancy is not paid up-front, which will mean that the person may have to undergo a credit check and have employer references taken up,� says Mairi Scott. “Guarantors should make sure they are aware of their responsibilities, such as paying any outstanding rent, and if the property is shared that they are joint and severally liable for all those named on the lease�.

When your tenancy is over, have your mail redirected to your new address. Uncollected mail is often used as a means of identity theft.

“Parents should check whether their own contents insurance covers their children while living away from home. If not, it’s important to insure your children’s possessions – but make sure you don’t under-insure. Lap-tops, DVD players, game consoles, MP3 players, phones, clothes, bikes and books are costly to replace,� says Mairi Scott.

She lists the things to look out for in a tenant’s insurance policy:

• Is accidental damage included as standard?
• Is tenant’s liability covered?
• Is there a low excess (e.g., £100)?
• Does the policy treat students as a standard risk? Some policies load the premium for students.
• Is the replacement of locks covered following loss of keys?
• Does it cover personal money and credit cards?
• Is there an option to include personal effects away from the premises?

www.leaseguard.co.uk

For further information, contact: Chris Knight, General Manager, Leaseguard Ltd

Direct Tel no. 01698 368899
Mobile: 07980 626504
E-mail: cknight@leaseguard.co.uk

WHEN IS TIME OF THE ESSENCE IN A RENT REVIEW?

The vexed question as to when time is of the essence in a rent review clause is certainly live and well and still troubling lawyers and the courts. It remains a difficult question but one of central importance when advising both landlords and tenants.

Much can turn on whether the tenant is deemed to have accepted the rent proposed by the landlord because time was of the essence in a particular step of the rent review process. It is of course common to find provisions in a lease setting out the mechanism for the rent review process and one of the most common of these provisions is where the lease specifies that if the tenant fails to serve a counter notice within a certain period of time after receipt of the landlord’s initial proposed rent, the tenant shall be deemed to have agreed to pay the rent specified in the rent notice.

It is then common to find a further provision specifying that time is to be deemed to be of the essence in the rent review process. At first blush it would therefore appear to be a straightforward matter to determine whether time was of the essence, but that presupposes clarity in the lease and as is so often the case, leases can be open to interpretation, thereby casting doubt on whether the parties actually intended time to be of the essence.

The historic position
The historic position was that unless there were contra indications time was not to be of the essence in rent review time table. In United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904, Lord Diplock stated: “I would hold that in the absence of any contra-indications in the express words of the lease or in the interrelation of the rent review clause itself and other clauses or in the surrounding circumstances the presumption is that the time-table specified in a rent review clause for completion of the various steps for determining the rent payable in respect of the period following the review date is not of the essence of the contract�. Further guidance came from the Court of Appeal in Bickenhall Engineering Co Ltd v Grand Met Restaurants Ltd [1995] 1 EGLR 110. The court held that there is a rebuttable presumption that time is not of the essence in a rent review time table.

This presumption may be rebutted by:
• Any contra indications in the express words of the lease;
• Any contra indications in the inter relation of the rent review clause and other clauses in the lease; or
• The surrounding circumstances.

In that case Neill LJ said that in the light of the previous guidance from the House of Lords the contra indications must be “clear and explicit� in order for time to be held to be of the essence in a rent review clause. Bickenhall was referred to extensively in Starmark Enterprises Limited v CPL Distribution Limited [2001] EWCA Civ 1252, where the Court of Appeal held that the normal presumption that time is not of the essence in rent review cases was displaced by a clear provision deeming that the lessees shall have accepted the increased rent if they fail to serve a counter notice within a specified period. Arden LJ added that “where there is a deeming provision in this type of case and nothing more, the time for service of the counter-notice should normally be taken to be the final one�.

It was hoped that Starmark would provide much needed clarity and parties would be left in no doubt where they stood when there were clear deeming provisions in the lease. That, however, has not proved true, particularly in situations where the rent review provisions have been poorly drafted, as exemplified in two recent cases.

Lancecrest
The Court of Appeal in Lancecrest Limited v Dr Ganiyu Aiwaju [2005] EWCA Civ 117, had to examine the issue as to whether a trigger notice served by a landlord implementing a rent review was valid, notwithstanding the fact that it was served late. The landlord was to give a “review notice� to the tenant no more than 12 months before the review date (which was the end of every fourth year of the lease period).

Lancecrest acquired the reversion to the lease in August 2001 some six months after the first review date. No trigger notice had been served and one was only served in February 2002. It was proposed to raise the rent from £6,500 to £30,000. The tenant claimed that the trigger notice was invalid as it was not served before the review date of 5th February 2001. The Court of Appeal placed great reliance upon the House of Lords’ decision in United Scientific and held that despite being over a year late the trigger notice was valid because time was not of the essence.

The court considered that there was nothing express in the lease making time of the essence in the service of the trigger notice. This was also contrasted against the fact that time was expressed to be of the essence in respect of the service of the counter notice. In order for the tenant to have benefited from the provision ensuring that the landlord shall give notice no more than 12 months before the review date, the tenant must have served a notice making time of the essence before the review date.

That is something the vast majority of tenants would not consider doing. It is therefore clear that in order for a party to seek to make time of the essence in a step of the rent review process; clear contra indications must be present. Such an approach was also adopted by the Court of Appeal in Wilderbrook.

Wilderbrook Wilderbrook Ltd v Oluwu [2005] EWCA Civ 1361 concerned a badly drafted lease particularly the provisions concerning rent review. After service of a trigger notice the tenant had one month after receipt of this notice in order to serve on the landlord a counter notice. The lease said that if the tenant shall not serve a counter notice within the specified period then he was deemed to have accepted the rent proposed by the landlord. The lease went on to state: “As respects all periods of time referred to in this Schedule time shall be deemed to be of the essence of the contract PROVIDED ALWAYS that the Landlord or the Tenant may notwithstanding anything in this Schedule require the appointment of the Surveyor to determine the question of new rent payable…and any delay by the Landlord or Tenant in this respect shall not deprive the Landlord or the Tenant of their respective right to have a New Rent determined by the Surveyor�.

A rent review notice was sent to the tenant on 15th April 2003. The tenant’s surveyor responded on 22nd May 2003 - over one month after service of the trigger notice. The landlord alleged that as this counter notice was out of time the tenant was deemed to have accepted the proposed rent.

The Court held that if the above clause had been present but without the proviso the claim that the tenant was deemed to have accepted the proposed rent would be unanswerable. In that situation there would be a deeming provision and a clear contra indication that time was to be of the essence in this step of the review. The Court placed great emphasis on the “clear and explicit� test and held that the proviso as set out above would apply to the whole rent review process. It would therefore include the part of the process concerning the service of the counter notice by the tenant. In this case the contra indications were not sufficiently “clear and explicit� as the proviso appears to limit the deeming provisions.

Conclusion
It is useful to remember when drafting rent review provisions in a lease that, if time is to be made of the essence in a step of the process it should say so. The greater the clarity in drafting, the less likely it is that there will be problems later on. This is particularly important given high amounts at stake in many rent reviews and with parties continuing to fail to adhere to the express time limits. When advising after a problem has arisen it is certainly worth bearing in mind the need to find “clear and explicit� contra indications, which could make time of the essence. Lancecrest and Wilderbrook are just two recent cases which show how difficult that can be.

GARY BLAKER Selborne Chambers

Landlord’s Continuing Liabilities on Assigned Leases

HISTORIC VICTORY FOR LANDLORDS IN HOUSE OF LORDS

Introduction On 1 December 2005 the House of Lords reversed the decision of the Court of Appeal in London Diocesan Fund v Avonridge Property Company Limited. (Full report at [2005] 1 WLR 3956.) As a result of the House of Lords ruling it is now clear that landlords, when granting new leases of premises, may exclude all liability to their tenants once they have parted with their interest in those premises. This ruling applies to all leases, whether the premises are commercial, residential or of any other nature.

Summary of the case: Until 1st January 1996 whenever a lease was granted the original landlord and the original tenant remained liable pursuant to their covenants in the lease for the duration of that lease unless they excluded or limited that liability. This continuing liability arose because of the “privity of contract� principle. This principle could result in the original parties to a lease being sued for liabilities affecting premises with which they had ceased to have any connection many years earlier. The privity of contract principle was widely acknowledged as imposing unfair burdens on the original parties to leases, particularly tenants.

The Law Commission investigated the matter and reported in 1988. The Commission proposed the total abolition of the privity of contract principle in the case of tenants. However, in the case of landlords, it proposed that they could only be released from their liability if they went through a “notice� procedure. It took some years for Parliament to find time to pass legislation embodying the Commissions’ recommendations.

The legislation took the form of the Landlord & Tenant (Covenants) Act 1995. In the aftermath of the passing of the Act, a question debated by property practitioners was whether the notice procedure contained within the Act was a comprehensive code applying to all leases, or whether the use of that procedure could be avoided by words inserted in the lease, limiting the landlord’s liability.

This is the issue that fell to be debated in the case of London Diocesan Fund v Avonridge Property Company Limited. The facts of the Avonridge case were marked by a lack of factual merit on the part of Avonridge. This had the practical result that Avonridge’s legal submissions initially encountered substantial judicial resistance. In February 2002 Avonridge purchased a lease (“the Headlease�) of seven small shop units in Headstone Drive, Wealdstone, Middlesex. The Headlease was for a term of 99 years, with a rent of £16,700 per annum, subject to rent review. In the space of six weeks Avonridge granted new subleases to six of the shopkeepers. In return for a substantial payment, on average £75,000, each shopkeeper obtained a 99 year sublease at a peppercorn rent. After granting its six new subleases, and having made a substantial profit, Avonridge then assigned its Headlease to a Mr Phithwa.

Mr Phithwa was described by The House of Lords as a “man of straw�. Mr Phithwa paid no rent pursuant to the Headlease and the freeholders of the shops, the London Diocesan Fund, forfeit the Headlease. This meant that all the new subleases were automatically forfeit. To avoid losing their shops the subtenants had to agree new leases. This obliged them to agree to pay rent and also to incur substantial costs. The shopkeepers sought to pass on their financial burden to Avonridge. They alleged that Avonridge was liable for damages due to non-payment of rent under the Headlease. It was common ground that Avonridge had not adopted the notice procedure in the Act. Avonridge’s answer was that it did not need to use this procedure because it had limited its liability under the subleases to the time when it owned the Headlease.

Avonridge argued that due to its limitation of liability it was not responsible for the non-payment of rent. The sympathies of the trial judge and the Court of Appeal rested with the small shopkeepers and Avonridge’s arguments in those courts were rejected. The House of Lords agreed that Avonridge’s position lacked factual merit. Indeed Lord Nicholls, delivering the leading judgment, said that: “On their face the transactions have the appearance of a scam�.

Despite this, however, Lord Nicholls, together with three of the other four law lords, (viz. Lords Hoffmann and Scott and Baroness Hale) accepted that Avonridge’s argument was legally sound. Lord Nicholls pointed out that the statutory provisions: “are intended to operate to relieve tenants and landlords from a liability which would otherwise exist. They are not intended to impose a liability which otherwise would be absent. They are not intended to enlarge the liability either of a tenant or a landlord�.

Conclusion The House of Lords’ decision has given landlords a very valuable drafting tool. Any well-advised landlord when granting a lease should now limit its liability to the period when it is the landlord. This should ensure that it has no liability after parting with its interest in the premises. Suitable words will avoid the need for using the notice procedure in the Act. Moreover those landlords who since 1996 have granted leases that limited their liability to the period when they owned premises can breath easily. They now know that the limitation of liability in their leases will be effective.

MARK WARWICK Selborne Chambers

City Solicitors Expand With “Buy-to-Let Blues�

Letting property seems a great investment idea (it is if you get it right) and lots of new landlords have recently jumped on the band wagon very much encouraged by all those TV programmes and sometimes by investment advisors who know little more about letting property than the investment clients they are advising.

Successful landlording requires a certain kind of enlightened, cautious approach which avoids the big expensive mistakes: making sure you do you homework and selecting tenants VERY carefully. If you don’t do it right you pay a big price - you learn the hard way, and usually very quickly, but sometimes with disastrous consequences. It’s all about going up the learning curve as quickly as you can - reading the content of a website like LandlordZONE will certainly help.

Here is a note of warning: an article by Midlands solicitors, Young & Lee:

West Midland people looking at property as an alternative to traditional investments are getting their fingers burnt.

Birmingham and Black Country solicitors Young & Lee are expanding its litigation team to deal with an increasing caseload from clients. The company has doubled its commercial and property team with more new appointments planned in the autumn.

“With traditional investments performing poorly in recent years and all the problems with pensions an increasing number of people in the Midlands are looking at property and “buy to let� as an alternative way of securing their future,� said Victoria Grundon, a property expert in the commercial litigation team with Young & Lee.

“There are an increasing number of private landlords and “buy to let� has really taken off but people need to understand that it is no easy option with many pitfalls.

“I deal with some horror stories where people have tenants damaging property, running up huge rent arrears but finding it impossible to recover the money or get rid of the bad tenants. People have got into real financial problems because they have invested in a buy to let property and need that money to pay the mortgage but find themselves with tenants who will not pay.

“It takes at least three months to get a tenant out. Many people let on a ‘nod and a wink’ but it is essential that a proper legal agreement is drawn up. When things start to go wrong they often leave it too late before taking the proper steps. Tenants, including bad tenants, have rights and a property owner cannot just ask them to leave and change the locks – it is a process that involves going to court and getting a possession order and instructing bailiffs. If the owner does not do it right they can themselves get into serious trouble�

Victoria Grundon said that “buy to let� can offer good returns although like any investment property can go down as well as up: “It is vital to select tenants with care The priority of letting is too often just to get someone in as quickly as possible. Remember the ultimate responsibility is with the owner not the agent.�

Young & Lee are a commercial and family law practice employing 70 people in Birmingham City Centre and Kingswinford in the Black Country.

Young & Lee.

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