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Legislation, Tenancy Agreements and Useful Information

LEGISLATION

In entering the residential property letting sector you will be subjected to an ever-increasing amount of legislation, non-compliance could lead to invalidating insurances and severe financial penalties and/or imprisonment.

In summary, the legislation is designed to ensure you comply with taxation requirements, your tenancy agreements are valid and actionable, and that are properties are safe, inhabitable … and include: -

  • Law of Property Act 1925, 1989
  • Land Registration Act 1925
  • Accommodation Agencies Act 1953
  • Taxes Management Act 1970
  • Defective Premises Act 1972
  • Sex Discrimination Act 1975
  • Race Relations Act 1976
  • Protection from Eviction Act 1977
  • Landlord & Tenant Act s 1985 & 1987
  • The Fire & Furnishings (Fire) (Safety) Regulations 1988
  • Electrical Equipment (Safety) Regulations 1994
  • The General Product Safety Regulations 1994
  • Disability Discrimination Act 1995
  • Finance Act 1995
  • Social Security Administration (Fraud) Act 1996
  • Housing Benefit Regulations 1997 & Amendments
  • Protection from Noise Act 1997
  • Gas Safety (Installation and Use) Regulations 1998
  • Unfair Terms in Consumer Contract Regulations 1999
  • Housing Acts 1980, 1985, 1988, 1996 & 2004
  • The Regulatory Reform (Fire Safety) Order 2005

Of the above, you must be particularly conscious of safety legislation:-

Electrical Equipment (Safety) Regulations 1994

These Regulations came into force on January 9 1995 and apply to all electrical equipment. The Regulations state that all equipment “shall be safe” which means it complies with the definition within the Consumer Protection Act 1987 but extended to comply with the Regulations to mean that at “risk” includes risk of : -

  • Death or injury to domestic animals and
  • Damage to property, as well as the risk of
  • Death or injury to a human.

A landlord must comply with the Regulations as they clearly state that electrical equipment being “hired out” comes within the jurisdiction. How do you comply with these Regulations?

  • Ensure that you have instructions for use for all electrical equipment in the property – written instructions if the booklet is not available.
  • It is advisable to have a safety check carried out by a qualified electrician, either annually or every time a new person takes a tenancy of the property
  • Note the safety check in the inventory, together with instruction booklets
  • Provide your Agent with proof of the safety check before the tenancy commences. If not available, then instruct your Agent to undertake the necessary checks carried out on your behalf and provide instruction booklets.

If the electrical equipment does not comply with the Regulations and accident occurs, the penalty is:

  • Three months and/or £5000 fine if there is risk of fire and/or an animal is injured
  • Six months and/or £5000 fine if a human is injured or killed.
  • The above penalty could be increased to 12 months imprisonment.

Gas Safety (Installation and Use) Regulations 1998

The above Regulations consolidate the 1994 & 1996 Regulations, which state a landlord must ensure that all gas appliances; pipes, valves, regulators, meters and flues are checked annually to ensure that they are safe.

A member of the “Gas Safe” scheme Installers must conduct testing and accurate records must be kept of those safety inspections and any work carried out. If a fault is reported remedial action must be taken immediately. If the appliance is dangerous the engineer should disconnect the appliance and attach a sticker to show it has been condemned.

A copy of the Safety Certificate must be given to the tenant prior to a new tenancy commencing and at the time of the annual inspection renewal.

Failure to comply with the regulations may jeopardise the life of your tenant and, as with the Electrical Regulations, may lead to prosecution with penalties of imprisonment or fines up to £5,000.

The Furniture and Furnishings (Fire) (Safety) Regulations 1988

Since 1 March 1993 any person who lets a residential property must ensure that all upholstered furniture complies with these Safety Regulations. Lives have been lost due to the toxic fumes given off by fillings used in the manufacture of modern upholstered furniture, so the furniture must pass the ‘ignitability test’, that is they must be resistant to ignitability if a lighted match or cigarette is placed on the item. If the furniture was manufactured before 1950 it falls outside the Regulations, as toxic substances were not used at that time.

Furniture coming under the Regulations is all padded or filled items, including: -

  • Upholstered lounge settees and armchairs, including scatter cushions
  • Conservatory and garden furniture cushions that may be used inside
  • Beds, divans sofa beds and mattresses, including cots
  • Highchairs and other child’s furniture
  • Padded headboards
  • Quilts and pillows

To comply, all items must have a permanent label clearly stating it passes the ignitability test. Beds and mattresses do not require these labels but are fire resistant if they comply with the Standard BS7177 as shown on the bed and mattress label. If furniture or mattresses do not have a label they should be removed from the property, as they may be illegal. If furniture was purchased after 1990 it should comply with the Regulations: If no labels are attached a purchase invoice may provide the proof, but should be checked with the manufacturer.

  • Failure to comply with the Regulations is a criminal offence. The penalty is six months imprisonment and/or a fine of up to £5000. Both the landlord and agent will be liable.

Housing Act 2004 – Licensing of Houses of Multiple Occupation (‘HMOs’)

“The Housing Act contains wide-ranging measures of reform that will help those most vulnerable while creating a fairer housing market for all those who own, rent or let residential property” ODPM 2004.

The Government perceive the private rented sector makes a valuable contribution to the housing stock and although there have been some improvements in the quality of the sector it is still often perceived as being associated with poor conditions and anti-social behaviour for what are often the most vulnerable tenants.

Most landlords are good and responsible and few tenants cause any problems. However, some landlords lack the skills and knowledge to manage their properties in a professional manner and some even engage in criminal behaviour themselves or condone tenants’ criminal or anti-social behaviour.

The Government, through the Housing Act 2004, therefore intended to improve the quality and status of the sector overall by dealing with those bad landlords and poor tenants: This is to be achieved by implementing a licensing system which will embrace some HMOs.

HMO Definition

An HMO that requires a mandatory licence is defined as a building, or part of a building (e.g. a flat), which is of three storeys or more, occupied by five or more persons who comprise two or more households, however, the HMO definition also embraces buildings:

  • Occupied by more than one household and in which more than one household shares an amenity such as a bathroom, toilet or cooking facilities; or
  • Occupied by more than one household and which is a converted building, which does not entirely comprise self-contained flats; or
  • Comprised entirely of converted self-contained flats and the standard does not meet as a minimum that required by the 1991 Building Regulation and more than one third of the flats are occupied under short tenancies

And is ‘occupied’ by more than one household as:

  • Their only or main residence
  • A refuge by persons escaping domestic violence
  • Student accommodation during term time

And the households comprise:

  • Families and current domestic employees,
  • Single persons
  • Co-habiting couples (whether or not of the opposite sex)

Licensing of HMOs

Local Authorities will be required to take reasonable steps to ensure mandatory licence applications are made and may extend the requirements for licencing, whilst landlords of properties liable to licensing will need to apply for a licence for each house. Licensing will ensure: -

  • Landlords are fit and proper persons or employ agents who are;
  • Standards of Tenant and Property Management are adequate,
  • Authorities have measures available to ensure landlords cooperate with licensing
  • Where landlords are unwilling to meet the required criteria, authorities can step in to manage properties,
  • Vulnerable tenants can be protected.

Sanctions

If a landlord of a property that is liable to be licensed does not have a licence or allows an HMO to be occupied by more than the specified number of people in the licence, the landlord commits a criminal offence for which the penalties will be: -

  • Criminal Offence: Fine of up to £20,000
  • Breach of Licensing Conditions: Fine of up to £5,000
  • Penalty for operating without a License: Rent Repayment Order of up to 12 months rent.
  • Rights of automatic possession under S21 of the Housing Act 1988 for ASTs removed.

Summary

If you already own an HMO or are considering investing in the sector you must be prepared for stringent conditions to be applied. Local Authorities are always amending their own guidelines and disciplines for licensing so we recommend you check the website for your local authority. Full implementation commenced 6th April 2006.

The Housing Act 2004 has also introduced the HHSRS (Housing Health and Safety Rating System) which replaces the previous housing fitness standard. The Government has introduced the system as a way of deciding whether the housing conditions of residential premises are satisfactory. It is a risk- based assessment of a property which identifies deficiencies that result in a risk to health or harm – those deficiencies that are attributable to the design, construction and/or maintenance of the building.

Each hazard is assessed and receives a hazard band (A to J) and is based on the threat to a member of the vulnerable age group for each hazard (ie excess cold is a hazard which is a threat to elderly). It is not possible to completely remove all risk of harm from within a property, but the aim of the system is to provide a way that hazards can be assessed and to decide on what is the best way of dealing with them.

The local council will rate your property if a complaint is received. If they identify hazards as per the HHSRS then they can issue an improvement, prohibition or hazard awareness notice. They can also order emergency remedial works to be carried out.

Personal Injury & Damages and Insurance

If a landlord fails to ensure a property is safe and there is injury to a tenant, the landlord may face a claim for personal injury. Damages for personal injury and death will be in the thousands, if not tens or hundreds of thousands of pounds, depending on the circumstances. If equipment or furniture does not comply with current Regulations or you are operating an unlicensed HMO your insurance company may refuse to pay, thus leaving landlords with large personal financial claims, which could lead to bankruptcy. It is therefore worth minimising the risks.

TENANCY AGREEMENTS & NOTICES

The majority of lets will be conducted on Assured Shorthold Tenancies and your tenancy agreement will set out the agreement of terms between your tenant/s and you for the occupation of your property. The Housing Act 1988 as amended, provides for basic rights to a tenant – but you can include any reasonable clauses that you may wish to impose, subject to the right of the tenant to live in the property for a minimum of six months from initial occupation and that the landlord is responsible for basic repairs and maintenance to the property.

However, the Office of Fair Trading commenced investigations into residential tenancy agreements during 2004 and has since imposed stipulations that all conditions imposed on the tenant must be fair and reasonable and individually negotiated – otherwise the conditions could be deemed as void.

It is therefore vital that your tenancy agreement (and any associated guarantee documents) be drawn up to take account of all applicable legislation and are continually reviewed in the light of OFT guidelines.

There will be occasions when alternative tenancy agreements to ASTs will be necessary in the form of Contractual Tenancies and Temples will ensure the correct Agreement is completed to take account of the respective circumstances.

Alongside the Tenancy Agreements, certain Notices under the various Acts must be issued to give effect to the Agreement; others may need to be issued during the tenancy to cover changes in terms, rent arrears and/or possession: Temples are fully conversant with all aspects of the requirements to ensure that the appropriate actionable documentation is completed at all times.

INVENTORY & SCHEDULE OF CONDITION

The Inventory & Schedule of Condition is integral to your tenancy agreement. The Inventory lists the items within the property, including all fixtures and fittings to ensure all are returned to you. The Schedule of Condition, alongside the Inventory, comprehensively records the condition of the property, internally and externally, as well as that of the contents. Opening meter readings and details of fire safety labels & appliance handbooks would also appear on the document.

As a vital document for property management, two copies should be provided to the tenant, one for any comments, signature and return, and the other as the tenant copy. You will then have a clear agreement of the contents and condition of your property by which to conduct inspections and tenant vacation – if necessary then recovering costs for any damage ‘beyond reasonable wear and tear’.

If employed as managing agents, Temples will arrange the Inventory & Schedule of Condition as part of the management services for an additional fee. If you intend to manage the property yourself, our document will provide an independent record for your purposes.

DAMAGE DEPOSITS / BONDS

Deposits are typically taken by Landlords from Tenants and held for the duration of the tenancy agreement against cleaning, gardening, damage or dilapidations ‘beyond reasonable wear and tear’. The deposits generally equate to 6 weeks rent, although could reasonably be increased to cover increased risks likely to arise to property if consenting to pets and/or if the property is let with special furnishings.

Agents will generally hold these deposits, along with rent collected and due to be paid to landlords and contractors, in an insured client bank account thereby protecting all parties. However, currently this is not always the case and incidents of fraudulent action by agents do occur. Therefore, always make sure you only deal with an agent who is a member of a professionally regulated scheme such as NALS, ARLA or RICS, and whose members must operate to hold monies in insured client bank accounts as well as follow strict disciplines, backed by professional indemnity insurance.

Under The Housing Act 2004, it will be mandatory for any landlord taking a monetary deposit to safeguard that deposit with a Tenancy Deposit Scheme, thereby removing the risk of misappropriation of tenants’ deposits by landlords and letting agents. The Scheme also facilitates the resolution of disputes arising in connection with the deposits.

This legislation took effect for all new tenancies entered into from 1st October 2006 with deposits to be held under either a custodial scheme (landlords placing the deposit into a designated scheme account) or an insurance based scheme (deposit retained and transferred into the scheme if there is a dispute with the tenant).

Full details of the schemes and of the bodies approved to operate them are available from Temples or via the Internet. Temples have joined the TDS (Tenancy Deposit Scheme) so that we can continue to hold deposits on behalf of our clients. As a regulated and bonded agent we endeavour to provide a fair and equitable tenancy agreement and service to both our Landlords and Tenants.

SPECIALIST INSURANCES

Buildings and Contents

General buildings and contents insurance policies may prove adequate for usual risks associated with home ownership but you are strongly advised to secure specialist insurance to satisfy and cover the additional risks associated with residential letting, including Employers and Public Liability, accidental and malicious damage, unoccupied cover, lost rent and re-letting costs.

Rent Guarantee & Legal Expenses

Tenant defaults are relatively rare, particularly in the South West London area. You can protect your self with guaranteed rental payments and legal fees – but check carefully those ‘free’ or ‘included’ rent guarantee policies with limited coverage.

Other specialist policies are available for emergency assistance for plumbing, electrics, appliances, all designed to ensure that inconvenience to your tenant is minimised and your costs are contained to a small and budgeted premium.

TAXATION

When purchasing a property for rental a landlord must inform the Inland Revenue that the acquisition has taken place by the following October 5th.

The profits from renting your property are taxable, stamp duty is normally payable on purchase, and capital gains tax on disposal, and you have a legal duty to declare the income to the Inland Revenue for tax assessment.

However, you will be able to offset some of the costs you incur as a landlord against income tax, including: -

  • Mortgage interest on a loan to purchase or improve the property (but not capital repayments)
  • Some small maintenance and preparations costs prior to letting
  • Agent’s commission and management fees including VAT
  • Charges for tenancy agreement, inventory compilation, inspections, check- in and check-out fees
  • Advertising for new tenants
  • Buildings, contents, rent guarantee and legal protection insurances
  • Payments for general, business and water rates if not paid for by the tenants
  • Service charges and ground rents
  • Repairs and maintenance, including any architects or surveyors fees (but not improvements)
  • Maintenance contracts
  • Gas & electrical safety checks
  • Leasing or rental charges for appliances
  • Appliance guarantees and warranties
  • Wear and tear / dilapidations
  • Council tax and utilities during void periods
  • Cleaning and gardening if provided by the landlord
  • Legal and accountancy fees
  • Court and possession costs

All invoices for costs must be kept for at least six years; if the Inland Revenue investigate, they will go back in blocks of six years, checking their records, until they are sure that all income has been declared for tax purposes.

Note also that under Section 19(1)(c) Taxes Management Act 1970 letting agents are required upon demand to advise the Inland Revenue of all landlords, their properties and rental income to check that all income has been declared on landlords’ tax returns.

You can find out more about the treatment of income from rented property in Inland Revenue leaflet ‘Taxation of Rents: A Guide to Property Income. IR150’, or refer to the Inland Revenue website www.hmrc.gov.uk.

Finally, it is easier to account for your income and expenditure by separating your ‘property business’ from your normal affairs – open a separate bank ‘property’ account for your investment portfolio.

Non Resident Landlords

If you are a non-UK resident for tax purposes you will still be subject to tax on your UK income (Section 42A Income and Corporation Taxes Act 1988 as supported by the Taxation of Income from Land (Non-Residents) Regulations 1995).

Under this legislation the Revenue Centre for Non-Residents (CRO) scheme requires that your tenant or letting agent deducts tax from the rent and an account be submitted quarterly. You can apply for an exemption certificate, which would allow your rent to be paid to you without deductions for tax, although you may still be liable for tax. We are required to submit quarterly and annual tax returns on all non-resident landlords for whom we collect rents.

If you are in any doubt about your non-resident status for tax purposes, please consult Temples who will provide appropriate guidance.

It is always advisable to seek independent specialist advice about tax issues.

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