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Buying a rental property with a sitting tenant - what do I need to know?

for sale sign

If you buy a rental property with a tenant in place, a 'sitting tenant'�, there are some important issues you need to address.

When a landlord decides to sell a rental property, they have two options: give notice to the tenant and obtain vacant possession before selling, or sell the property with the tenant in situ.

Both routes are not ideal. If you have a mortgage to pay, gaining vacant possession carries the risk that it will take a long time to sell and you still have the mortgage payments to keep up, with no rent coming in.

Selling with a tenant in place generally means that you don'�t get the vacant possession price.

Unlike with a commercial property where the value of the building in a factor of the covenant strength of the tenant, with residential property, generally speaking, the value is enhanced when the property is vacant.

The other side of this coin is that for a landlord purchasing with a tenant in place there'�s a good chance that by being willing to take a small risk, then a bargain can be had.

Right now, there'�s an opportunity here because landlords have been selling down, either due to their Covid experience or because that don'�t want the hassle of dealing with the plethora of new regulations and tax changes affecting the sector.

Key considerations?

You need to be sure exactly what it is you are taking on in terms of the type of tenancy in place. With a common Assured Shorthold Tenancy (AST), and these will be by far the majority of tenancies currently in place, providing you take simple precautions the risks will be minimal.

However, there are two other instances where great care is required. Older tenancies commencing before January 1989 are more than likely tenancies commonly referred to as regulated, protected or Rent Act tenancies.

These tenancies, as the name implies, give tenants a high degree of protection meaning that they have security of tenure and controlled rents for life. In some cases those protections extend to any relatives living with the tenant.

Secondly, when the Shorhold tenancy was first introduced by the Housing Act 1988 there was a requirement to pre-warn the tenant/s of their reduced rights, and this was via a notice to be served pre-tenancy known as a Section 20 notice.

If there is no evidence that this notice was served, and just as importantly, received, for those tenancies commencing between January 1989 and February 1997, then the tenant would have a standard Assured Tenancy, which again gives tenants enhanced rights, including greater security of tenure and controlled rents.

Taking over from another landlord.

When you take over you inherit all the same rights as the previous landlord, in fact legally you stand in his or her shoes. However, you need to notify the tenant/s that you are now the new landlord and that all future rent payments are due to you.

The tenancy agreement may be in the previous landlord'�s name but that'�s of no real consequence providing you have notified the tenant/s that you have taken over, and there is a formal process you must follow. Under section 3 of the Landlord and Tenant Act 1985 there is provision made by way of a notice informing your new tenants that you are the new landlord '� it is a criminal offence not to serve this notice.

It may be prudent, going forward, providing you are happy to take on the tenant/s for a longer period, to get them to sign a new tenancy in your name for a new tenancy term, though you cannot insist on this.

Relying on a good solicitor

Before exchanging contracts and completing on the purchase your solicitor should ensure that ALL the necessary paperwork is in order ensuring that the necessary pre-tenancy documentary requirements were properly complied with and served on the tenant/s before the start of the tenancy.

Also that any deposit taken is properly protected in a government approved scheme.

There'�s a plethora of pre-tenancy paperwork that must be taken care of if you are to retain your ability to serve notice under the Section 21 eviction process, so it'�s vital that all this is in order before you take over. Your solicitor should be well aware of this, but don'�t assume this is always the case.

Your own due diligence is important as well. A little research about the tenants may be prudent, for example by observing and making enquiries with neighbours, letting agents etc.

Where documents are missing or information is incomplete, or you have any other doubts, you could ask for a statutory declaration given by the previous landlord.

There are some risks when taking over an existing tenancy, but these can be minimised or eliminated altogether by taking the necessary precautions. You may even pick up a bargain and when you inherit a good tenant you avoid all the work involved in finding a new tenant.


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