Initial consideration

1. Do your research. One of the most effective ways of researching for a buy to let property is by speaking to local letting agents. They can tell you amongst other things;

A. What the demand is like in an area for rented properties.

B. Which rental properties are in high demand.

C. What tenants are looking for in a property in a particular area i.e. furnished/unfurnished, freehold or leasehold

D. The likely rent to be achieved for different types of properties.

E. What the void periods are like (when the property is un-let)

2. Location - with the research complete potential buyers can now start looking for properties to buy in their chosen location. At this point it is also wise to choose a solicitor so you can give those details to an estate agent when you have found a property to buy. We are experienced in acting for buyers and sellers of buy to let properties. Please contact us for a breakdown of costs for your transaction or use our online calculator. Buyers should also make initial enquiries with regards to mortgage finance (assuming a mortgage is required)

3. Buyers should consider how they wish to hold the property they intend buying. Namely, whether they will be buying in individual names or a company name. There are various advantages and disadvantages which a buyer should consider at an early stage before committing to a purchase or instructing a lender for mortgage purposes.

Buying the property

1. Do your calculations.

Having found a suitable buy to let property the purchaser needs to look at the buying costs and income potential more carefully before committing to purchase. Search costs and expenses may include the following;

A. Legal fees for purchase.
B. Stamp Duty.
C. Land Registry Fees.
D. Local Search fee.
E. Environmental Search fee.
F. Drainage Search fee.
G. Notice of Transfer fee (where the property is leasehold).
H. Mortgage Broker fees.
I. Survey.
J. Monthly mortgage payments.
K. Accountancy fees.
L. Letting Agents fees.
M. Cost of repairs to bring the property into a lettable condition.
N. Insurance.
O. Management/Service Charge/Ground Rent (leasehold properties only)
P. Gas and electrical safety inspections.
Q. Void periods, gas, electricity, council tax, water and T.V. Licence.
R. Other; travel, postage, stationery, keys, photocopying.

When a buyer has established the initial costs and expenses they then need to compare this with the estimated level of rent in order to calculate the rental yield.

The rental yield is calculated as follows;

Net letting profit (after tax) divided by current property value (less selling costs) x 100.

Yields of between 6 and 10% are acceptable to most landlords.

2. Proceeding with the purchase

When a buyers offer has been accepted they will need to formally instruct their solicitor to proceed with the purchase and arrange their mortgage finance (assuming that this is applicable). We will be happy to provide an estimate for costs and disbursements of buying buy to let properties. When arranging a mortgage the buyer will need to ensure that they are informing the lender that they intend to let the property. If the property is leasehold then the buyer should establish at an early stage whether the landlord allows subletting. We can make these checks on the buyer’s behalf.

Please see our guide to buying and selling for a detailed explanation of the process involved in completing a purchase or sale.

3. Taxation

There are various tax implications that buyers need to consider during their period of ownership and when properties are sold. If a property is owned in individual names then those individual will be liable to pay income tax on any taxable profit made from the letting after deducting allowable expenses. If buying in a company name, then corporation tax will be payable on any taxable gain. When selling capital gains tax will be payable on any taxable gain where the property is owned in individual names. Where the property is owned in a company name corporation tax will be payable on a disposal.

4. Regulations to be aware of

The Gas Safety (Installation and Use) Regulations 1998.

Gas appliances

• All gas appliances and associate pipe-work and flues should be maintained to ensure that they are safe to use. An annual inspection by a qualified registered CORGI Gas Engineer is now a requirement of law.
• A gas safety record must be kept with the dates of inspection and any defects identified. This record must be provided to the tenant upon signing the tenancy agreement.
• A gas appliance with an open flue should not be installed in a bedroom.
• Where the gas meter is installed in a meter box, the owner should supply the tenant with a suitably labelled key to the box.
• After work on any gas appliance, a defined series of safety checks must be performed.
• Instructions for any gas appliance must be left for the tenant.
• Any gas appliance that is suspected or known to be faulty or incorrectly installed must not be used by anyone and should be removed/replaced or repaired immediately.
• Ventilation is needed for gas appliances to work correctly and safely. Care should be taken not block vents or air bricks.

The Electrical Equipment (Safety Regulations) 1994

• Electrical supply and appliances within a property must be safe.
• All electrical appliances must be checked at regular intervals for defects (e.g. frayed wiring, badly fitted plugs etc).
• Any unsafe items should be removed from the property prior to offering it for rent.
• It is strongly recommended that landlords have an annual inspection of electrical appliances including an annual electrical supply safety check by a qualified electrical engineer. Records of these checks conducted at the property should be retained and provided for inspection if required.
• It is recommended that smoke alarms are fitted to all let properties and should be regularly checked to ensure they are in full working order.

The Plugs and Sockets (Safety) Regulations 1994 (Consumer Protection Act 1987)

• Any plug, socket or adaptor supplied which is intended for domestic use must comply with the appropriate current regulations.

Building Regulations Part P Electrical Safety in Dwellings

From 1st January 2005 all domestic electrical installation work must be carried out by a government approved contractor. In addition electrical contractors would have to verify the work complies with British Standard Safety Requirement. Failure to comply with these regulations is a criminal offence and could result in fines of up to £5,000.00 and imprisonment.

Summary of landlords responsibilities;

• Only use competent approved contractors.
• Ensure that cracks/damaged sockets or plugs and frayed wiring is made good.
• Ensure all appliances are safe to use prior to any let e.g. cooker/kettle/toaster etc. Properties should be inspected and tested at lease every ten years by a competent person.
• All socket outlets which may be used for equipment outdoors e.g. the lawnmower should be protected by a residual current device.
• Retain copies of any certificates of electrical work carried out.

The Furniture and Furnishings (Fire) (Safety) (Amendment) Regulations 1993

• These regulations were amended in 1993 and it is now an offence to install any furniture in let properties which does not comply with the regulations.
• The regulations apply to beds, mattresses and headboards, scatter cushions and pillows, stretch or loose covers for furniture, children’s furniture, garden furniture and any items of similar type fillings of which must carry the appropriate labels of compliance.
• Upholstered furniture must have fire resistant filling material and must pass a cigarette resistant test.
• Permanent covers must pass a match resistance test.
• Furniture in any property which qualifies for the transitional period does not have to comply until the tenant who occupied the property prior to 1st January 1997 vacates the property.

The regulations do not apply to;
A. Antique furniture made before 1st January 1950.
B. Bedclothes, loose covers for mattresses, curtains, carpets, sleeping bags, cushion covers.

Houses in multiple occupations

On 6th April 2006 mandatory HMO Licences came into force across England. Landlords whose property is classed as an HMO would require a Licence. The following may be classified as a HMO ;

• An entire house or flat which is let to three or more tenants who form two or more households and who share a kitchen, bathroom or toilet.
• A house which has been converted entirely into bed-sit or other non self-contained accommodation and which is let to three or more tenants who form two or more household and who share kitchen, bathroom and toilet facilities.
• A converted house which contains one or more flats which are not wholly self-contained (i.e. the flat does not contain within it a kitchen, bathroom and toilet) and which is occupied by three or more tenants who form two or more households.
• A building which is converted entirely into self contained flats if the conversion did not meet the standards of the 1991 Building Regulations and more then one third of the flats are let on short term tenancies.
• In order to be an HMO the property must be used as the tenants only or main residence and it should be used solely or mainly to house tenants. Properties let to students and migrant workers will be treated as their only or main residence and the same will apply to properties which are used as domestic refuges.
• Licensing may vary from local authority to local authority. It is therefore suggested that landlords contact their local authority to establish whether they require licensing.

Tenancy Deposit Scheme (TDS)

Landlords should be aware that a Tenancy Deposit Scheme will be introduced to prevent Landlords wrongly withholding part or all of a tenants deposit and to help resolve disputes.

The Schemes

Under part of the Housing Act 2004 landlords or agents can only take a deposit from a tenant if that deposit is protected by a TDS. The date for the scheme to come into force is yet to be confirmed but it is expected during 2006/7.

The two types of scheme being introduced are:

• A custodial scheme, whereby the deposit is held by the scheme during the tenancy and during in any legal dispute.
• An insurance based scheme where the landlord or agent keeps the deposit but the deposit is insured in case of any dispute and thus protected for the tenant.

Either Scheme must repay all or part of a deposit, within ten days of notification, once a tenancy has ended or a dispute has been resolved.

 

Landlord’s duties

Under the new rules, landlords will have to comply with one of the two schemes and inform a tenant of the details of how the deposit protected within 14 days. Unless these duties are met the landlord will be unable to serve a Notice requiring possession (a Section 21 Notice, although the landlord will still be able to seek possession under any of the grounds in Schedule Two of The Housing Act 1998).

The penalty for landlords that fail to comply with the new rules is an amount equivalent to 3 x the deposit to be paid within ten days. The office of the Deputy Prime Minister gives further details of the scheme.

Problem Tenants

Evicting Tenants

In order to evict tenants landlords must have a ground for eviction and must have served the proper notice on the tenant before proceedings can be commenced.

Grounds for possession are divided into mandatory grounds and discretionary grounds. A judge has no alternative but to grant an order for possession under mandatory grounds so it is advisable to evict tenants using one of these grounds.

The main mandatory grounds used for possession are;

1. The Shorthold Ground.

The landlord is entitled to possession as of right after the fixed term of an assured shorthold tenancy agreement has expired provided a Section 21 Notice has been served.

2. The Owner Occupier Ground

Provided a Notice has been served on a tenant before the tenancy is entered into saying that possession may be granted on this ground, the landlord is entitled to possession by rights provided a Section 8 Notice has been served.

3. Serious Rent Arrears

If at the time of service of a Section 8 Notice and at the time of the court hearing the tenant is in arrears of rent by more then two months the landlord will be entitled to possession as of right.

The landlord should keep a record of the date and time of service of Notices. It is advisable to hand deliver Notices through a tenants letters box rather then simply posting or sending by recorded delivery.

Issuing proceedings

There are two types of possession proceedings that can be pursued.

1. Accelerated Proceedings

These proceedings can only be used on the shorthold grounds. They cannot be used to claim rent arrears. With such a hearing evidence is given by written statement and there is no court hearing.

2. Normal Proceedings

With such proceedings they will usually involve a court hearing where a landlord and their representative will have to attend and present their case. It is possible to claim rent arrears and costs. It is advisable to seek advice from another solicitor before issuing proceedings. For individuals wishing to take proceedings themselves they can access information at www.courtservice.gov.uk

For full details of current legislation to comply with please visit http://www.odpm.gov.uk

5. Starting a tenancy

Different rules apply for different tenancies. For the purpose of this guide rules and regulations relating to assured shorthold tenancies will be considered i.e. tenancies for a fixed term.

Initial considerations

The landlord should be aware that there are regulations which affect what can and cannot be incorporated into tenancy agreements. It is therefore important for landlords to ensure that they have an appropriate drafted tenancy agreement that complies with the relevant contract and consumer regulations referred to in the unfair terms in Consumer Contracts Regulations 1999 Act and also the Office of Fair Trading Guidelines on unfair tenancy terms. In respect of the OFT Guidelines to comply, tenancy agreements;

• Must be written without ambiguity and in plain language that tenants are able to understand.
• Must not force unreasonable obligations on the tenants.
• Must not force unreasonable prohibitions on the tenant.
• Should not assume tenants comprehension of what is written.
• Must not exclude the tenant from assigning or subletting.

Individual terms needed in a tenancy agreement.

Essential terms

Certain information must be provided by the landlord to the tenant regardless of whether or not there is a written tenancy agreement or not. It is a criminal offence for a landlord to fail to provide this information within 28 days of a request. The required terms are;

1. The tenancy’s commencement date.

The commencement date of the tenancy is important for working what day in the week or month the rent runs from.

2. The term

It is wise when letting to new tenants not to make the term too long. Tenants are not always as satisfactory as they seem when landlords or their agents initially interview them. If the initial term is a six month assured shorthold tenancy then a landlord can simply serve a notice requiring possession on him at the expiry of the end of the six month period and then if they fail to move out they can be evicted. However, if tenants are granted a twelve month tenancy the landlord will have to wait until the end of the twelve months to evict them. If tenants prove to be satisfactory they can stay on at the end of the term under a new fixed term agreement or under a periodic tenancy.

3. The Rent

To avoid any disputes it is important that the rent is stated clearly in the agreement together with the period of payment. It should also be stated in the agreement that rent is payable in advance otherwise the law will imply that it is payable in arrears. It can also be set out in the agreement the method of the payment of the rent i.e. by direct payment into the landlord’s bank account.

4. Other terms to be incorporated into the agreement

Payments other then rent

1. The agreement should make it clear which payments a tenant will be responsible for i.e. Council Tax, Water Charges and Utilities.

2. The deposit.

Landlords should always take a deposit from the tenant and it is suggested that this is either six weeks rent or a months rent. This should be specified in the contract. The reader’s attention is drawn to the tenancy deposit schemes previously highlighted in this guide. The rent should not be more then two months rent otherwise it will be held to be a premium. The agreement should set out what the landlord can use a deposit for e.g. damage to the premises, unpaid rent and services etc.

3. Repairs and redecoration.

Most landlords have statutory repairing obligations which they cannot contract out of but the agreement should state who is responsible for non structural repairs and redecoration. Most landlords would prefer to be in control of such redecoration and it is therefore advisable to incorporate a clause to this effect in any agreement. Such a clause should prohibit the tenant from redecorating the property themselves without the landlord’s written consent.

4. Use

It is advisable to include a clause in an agreement restricting use of the property to that of a single private residential dwelling. In respect of leasehold properties it is also worth making reference in the agreement the fact that the terms of the landlord’s head lease apply to the tenancy agreement.

5. Access

The tenancy agreement should specify that the landlord or his agent should be permitted to enter and inspect the property upon giving reasonable notice in writing to the tenant.

6. Insurance

The landlord usually arranges buildings insurance cover. The tenant should insure contents.

7. Tenant property left behind

The landlord can face a claim from the tenant for damages if they remove items from the property that the tenants left behind. It is therefore worthwhile incorporating a clause in the agreement allowing the landlord to dispose of any items left at the property after the tenant has vacated.

8. Address for Service under Section 48 of the Landlord and Tenant Act 1987

No rent is due from the tenant unless and until the landlord has given the tenant notice in writing of an address in England and Wales at which Notices can be served on him.

9. Forfeiture

This Clause will allow a landlord to evict the tenant during the fixed term under certain circumstances