Guarantor Agreement

Guarantor (Surety) Agreement

Landlords should ask for a guarantor if there are any doubts about the tenant’s ability to fulfill his or her tenancy obligations but where the landlord still wants to take him/her on as a tenant. This is usually where the tenant does not meet one or more of the following requirements:

1 Has not lived at the present address for more than 6 months
2 Has not worked for present employer for more than 6 months
3 Is a student
4 Is below the age of 21
5 Has a low or non-existent credit score

A guarantor guarantees (underwrites) the tenant’s obligations; to pay rent, to pay for any damage, to pay for cleaning, any outstanding bills or any other tenancy related liabilities and is legally bound to do so by virtue of the guarantor agreement (contract).

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Letting Agent’s Renewal Fees

Rookie Landlords are often caught out by a short clause in their Letting Agent’s terms and conditions. It will look something like this:

“A fee of x % plus VAT will be charged for a tenancy renewal/extension for a second year or further period”

The fee is normally between 60% and 100% of that charged for the original let. The clause is usually tucked away on the last page of the document and many first time Landlords only become aware of it when they receive an invoice from their letting agent following a renewal. Their reaction is normally disbelief that an agent could charge such a large amount for what they see as re-typing a Tenancy Agreement.

Renewal fees are a long standing convention in the industry. Was the Government to pass a new law today making them illegal I suspect that we would see an immediate increase in the initial commission rate charged of between 20% and 30% as without renewal fees agents would need to take all of the commission upfront rather than on a pro-rata basis. The losers in such an arrangement would be those unlucky Landlords whose tenants only stay for one year and then move on.

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Uninhabitable Premises

This being a topical issue at the moment, our hearts go out to all the residents and landlords caught up in the dreadful floods affecting many parts of the UK at this time.

How to deal with tenants in a flooded property is a nightmare situation. This article kindly supplied by leading specialist property solicitors, Pain Smith, gives pertinent and timely advice to those unfortunate enough to need it right now.

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As most agents will be aware a landlord is under general obligation to provide property that in reasonable condition for the tenant to inhabit. However, due to unforeseen circumstances property that was in good condition may become uninhabitable in whole or in part during the tenancy.

Agents should be looking to take actions along the following lines:

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Understanding Business Tenancies - PainSmith Solicitors Legal Advisor

PainSmith Solicitors Legal Advisor 22 June 2007

Many agents and landlords fail to understand the key differences between a commercial or business tenancy and a residential tenancy. This matter is becoming increasingly important as individuals work-life balance changes and more flexible working practices are adopted. Frustratingly, the law has failed to keep pace with such changes in lifestyle and finds itself lagging behind society in this area.

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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

Renting Homes: The Final Report

Since 2001 the Law Commission has been working on a project to simplify housing law. This project, which is being led by Professor Martin Partington CBE, should eventually result in new legislation being brought in on housing tenure which will effectively sweep away more than 100 years of previous housing laws.

Eventually is perhaps the key word here as, not being of the highest priority on the government’s agenda at the moment, it is unlikely to receive enough attention for a speedy passing through the house.

According to the Commission “A third of the population of England and Wales - six million households - rent their homes. The law governing their relationship with their landlords is an irrationally complicated mess. This project seeks to replace it with a modernised, understandable, and just legal structure.�

On 5 May 2006 the Commission published its report - Renting Homes: The Final Report (Law Com No 297).

Volume 1 explains recommendations. There is an illustrative model secure contract and standard periodic contract.

Volume 2 contains the draft Rented Homes Bill.

A summary and press release are also available.

The Commission is recommending a much simplified system of housing law: basically two forms of contract for tenants: secure and standard contracts which would replace the present the present “multiplicity of tenancy and licence types�.

The Commission argues that landlords and occupiers would benefit from:

• Identical contracts for council and housing association tenants
• Improvements to council and housing association tenants’ rights;
• Government approved model contracts to make private renting easier, cheaper and more flexible.
• A clear and practical legal framework for supported housing.

The Commission’s recommendations would allow for the abolition of:
• secure tenancies
• assured tenancies
• assured shorthold tenancies
• introductory tenancies
• demoted tenancies
• various varieties of common law tenancies

Only one major existing form of tenancy would not be abolished - Rent Act tenancies, but there would be powers for the Government to do so.

You can still have your say on this important piece of proposed legislation which will no doubt have far reaching implications for landlords.

Solicitor Tessa Shepperson has now produced in association with the Law Commission an online answer form to allow landlords to respond to this easily. The form can be found either by navigating to the Law Reform section of the Landlord-Law site or via the special url www.law-reform.co.uk.

All responses will be forwarded to the Law Commission when the consultation period ends on 11 July 2006, and at that time a summary report of the responses received will be compiled and published on the Landlord-Law site.

Tom Entwistle, Editor, LandlordZONE

Sitting Tenants’ Rights

MENTION SITTING TENANTS AND MOST LANDLORDS would reel in horror!

A friend of mine recently asked me how they should be dealt with. His friend had purchased a property and not realised the consequences of his actions. His solicitor must have been inept. He had bought the property with the promise that it could be vacated, only to learn about protected tenancies the hard way. I’m sure this is not an isolated incident.

In these days of assured shorthold tenancies, it is easy to forget that there are still a lot of tenancies around that are either regulated or statutorily protected.

If you know what you are doing these can make good reversionary investments. With a sitting tenant in place, the property, depending on its condition and the life expectancy of the occupier, is worth a fraction of its vacant possession value. But if you are prepared for a wait - and of course it’s a gamble -these investments can pay off handsomely.

TENANTS’ EXTRA

The story of private residential tenancies throughout much of the 20th century is one
of rental market decline. It’s a perfect example of how well-meaning, socially motivated legislation can have the exact opposite effect of what was intended.

Instead of protecting tenants’ interests it resulted in the virtual destruction of the market. It also detracted from the aim of a flexible, mobile workforce by creating tenants that never move.

It is hard to believe that giving security of tenure for life - and for the lives of spouses and offspring - while controlling rents through the ‘fair rents’ system, at uneconomic levels, could ever have been contemplated. No landlord in his or her right mind would buy and supply property to let under these terms.

Most tenancies before 15 January 1989 are governed by the Rent Act 1977. It is not possible to change them, unless the tenant can be persuaded without duress to move. Grounds for possession or eviction are discretionary and very limited. The protected shorthold tenancy, which kicked off the buy-to-let revival, was first introduced by the Housing Act 1980.

It applies to tenancies that were granted on or after 28 November 1980. These had to be for a fixed term of between one and five years and, before the start of the tenancy, the landlord had to give notice in a specified form that the tenancy was a protected
shorthold - a section 20 notice.

The tenant has fair rent protection as long as it does not break the terms and the landlord has the right to get its property back, provided these conditions are met. Evidence of service of the section 20 notice is critical, otherwise it is a protected tenancy.

The Housing Act 1988 introduced assured tenancies: either ‘full’ assured tenancies or assured shorthold tenancies, thereby giving landlords a choice.

Tenancies starting after 15 January 1989 gave assured tenants security of tenure but with no restriction on how much rent could be charged. Assured shortholds gave no security of tenure after an initial six months, but did provide some rent protection. Again a prescribed notice had to be served, otherwise the tenancy would default to a ‘fully’ assured one with protected status.

The legislation was changed again by the Housing Act 1996, which made the default tenancy the assured shorthold for any tenancy commencing after 28 February 1997.
Most tenancies will now fall into this latter category.

There is therefore little risk to the landlord, even if the tenancy was created without a proper written agreement, although the tenant has a right to one within 28 days.

This article by Tom Entwistle, editor of the rental property website LandlordZONE originally appeared in Property Week 5 May 2006.

See also: Directory - Sitting Tenants