Are Sitting Tenants a Risk or a Benefit for Landlords?
If you are a new landlord or looking to or add to your existing buy-to-let portfolio, you have probably come across the term ‘sitting tenant’. But what exactly is a sitting tenant and should they be viewed as a risk or benefit when assessing a property’s viability.
In this article, we’ll take a closer look at the issue of sitting tenants in terms of what rights they have under current legislation. We’ll also go over what you can do if you’re looking to buy or sell a property with tenants in situ.
Table of Contents
What is a sitting tenant?
A sitting tenant is someone who has an existing rental agreement with a landlord who has decided to sell the property. If the agreement or contract has not been broken and rent is being paid in accordance with it, the sitting tenant has the right to continue living in the property after the sale.
It has been widely reported that demand for rental property has continued to increase in recent years. According to Hometrack’s latest rental market report, demand for rental property in England and Wales was 21% higher in January 2021 than it was in the same month last year.
With rapidly rising demand for rentals, the likelihood of you buying a property with sitting tenants increases. This number could also increase as landlords seek to dispose of assets after recent tax changes or are forced to liquidate due to a change in circumstances.
What rights do sitting tenants have?
When a buyer completes on a property that has sitting tenants, they also inherit any existing tenancy agreements. In the majority of cases, the tenancy will be an Assured Shorthold Tenancy or AST, which means a new landlord has the right to evict any sitting tenants by issuing a Section 21 notice.
Any contract or tenancy agreement that is not an AST is dealt with differently depending on when the renter started residing in the property. If it was before January 1989, they automatically have the right to stay in residence with full security of tenure as set out in the Rent Act 1977.
What about the landlord?
As outlined above, a tenant who took on the tenancy before January 1989 has the right to stay in residence. In actual fact, this is the classic definition of a sitting tenant, also known as ‘tenant in situ’. But what rights do landlords have in this situation?
After buying a property with a sitting tenant , the landlord can review the Fair Rent agreement every two years, or sooner if there have been significant improvements made to the property. However, landlords are not able to undertake this rent review themselves as they have to be conducted by a government-appointed rent officer.
Selling a property with sitting tenants
Although you might think there are more complications involved in buying a property with tenants in situ, it can actually simplify things a great deal. This is particularly true if you have established a healthy relationship with your tenant while they have been renting from you.
Most tenants will appreciate your decision to sell your property, even if it may leave them feeling a little unsettled. The majority of sitting tenants will not obstruct the sale. In fact, conversely they may well actively help you find a buyer by keeping the property in order and allowing viewings.
According to recent data, the average time it takes to sell a property from when it goes to market to completion is around 129 days. If you choose to sell your property vacant, you will have to serve notice to your tenant. Although you may get a better price without sitting tenants, it is always advisable to check the numbers before acting in haste.
In many respects it is the better option to sell a property with sitting tenants. This is mainly because recent months have seen a noticeable increase in demand for tenanted properties in the BTL investment market. This is very likely to be connected to the fact that more people are renting in the UK than ever before and for much longer tenancies.
Buying a property with sitting tenants
If you are considering buying a property that has sitting tenants, there is usually the upside of a significantly reduced purchase price. This is one of the main reasons many landlords set out to identify housing with tenants in situ because it naturally improves their overall profit margins.
The main consideration buyers have when looking at a property with sitting tenants is obtaining a mortgage. Because of the inherent risks involved, many lenders are reluctant to provide mortgages on homes with tenants in situ. However, because of the sharp increase in property transactions involving sitting tenants, lenders are competing with each other more aggressively, so this could very well change.
The benefits of buying a property with sitting tenants include the following:
· There will not be a void period when the sale has been completed, which means you’ll save on agency fees by not having to advertise the rental
· You will inherit a tenant who has an existing interest in the property and a great track record with the previous landlord
· If there is a tenancy agreement in place, you will not need to make any alterations to ensure your tenants remain happy in their home
In the interests of balance you should take the following into consideration:
· You will have to respect the rights of your tenants in situ in that they are entitled to continue living in the property for the duration of the tenancy agreement or contract, without any changes
· You will not be able to increase rents or proceed with eviction until the end of any fixed term agreement in place. This depends on when the tenant started their occupancy as mentioned above.
· You will need to hire a surveyor with commercial experience as there are differences in the sales process when there are sitting tenants involved
· You must ensure the seller provides all the records they have on any tenants, including the tenancy agreement. This will allow you to establish the nature of the tenancy and what your position is according to legislation
· The seller must have complied with all necessary accounting procedures in connection with any tenancies. You will have to check they have registered the original deposit and that it is transferred to your name on completion
· You must ensure the property meets all health and safety regulations, with necessary certificates in place, (gas, electrical and energy)
Here, are some of the most common questions regarding sitting tenants:
Can I evict a sitting tenant?
Sitting tenants meeting the classic definition of having had a long and incident-free tenancy, also have strong residential rights. This is not the case for tenants who have broken the terms of their tenancy agreement or have accrued arrears or damaged the property. However, even in those circumstances there are legal processes to follow if you want to evict them.
Because of the strong legal position of sitting tenants, many landlords end up selling their properties at up to 50% below market, just to avoid the hassle. Therefore it’s always better to try and resolve any issues with tenants amicably rather than taking the matter to the courts.
Should I buy a property with a sitting tenant?
As with all investments, you have to consider the benefits and risks for each opportunity as it stands. When you have a sitting tenant in a property of interest, you can access a great deal of information that will tell you what kind of renter they are.
If they have been in the property for a long time and without incident or issue in paying their rent, it is a positive boon to have a sitting tenant. You must ensure you get tenancy records from the seller so that you can check their credentials yourself.
How easy is it to sell a house with a sitting tenant?
Again, this is something that varies from property to property, tenant to tenant. If you are offering your property at a heavy discount to market value or have tenants who have been exemplary for a long period of time you will naturally find it relatively easy to sell.
This is something you should consider when deciding what price point you will market the property at. Remember that sitting tenants can be a positive benefit for BTL investors and if they’re less than perfect, you can reflect that in a price reduction.
Can I get a mortgage with a sitting tenant?
As mentioned above, many lenders are reluctant to provide mortgages with sitting tenants although this is rapidly changing. Such has been the increase in demand for rental properties that supply has fallen behind.
Many lenders are changing their criteria for BTL mortgages as they compete with each other and it is very likely that more will offer attractive terms if there are sitting tenants involved.