Landlords often evict their tenants before putting the house on the market. They assume that potential buyers don’t want a sitting tenant and, therefore, that this is the fastest route to a successful sale.
But landlords should seriously consider the alternative. A good sitting tenant can be a significant asset for sellers: the buyer will have a reliable rental income from day one.
This article takes you through the pros and cons of selling and buying property that has an ongoing tenancy.
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Part One: Selling a House with Tenants
How hard is it to evict tenants, anyway?
Landlords who wish to evict their tenants before putting the property on the market will need to properly evict the tenant. But this can be a hard task to accomplish.
In all of the UK’s nations, a landlord is not able to evict tenants just because they want to sell up. Instead, the landlord must end the tenancy through one of three routes.
Firstly, and best for everyone, the landlord and tenant can come to an agreement that the tenancy will end on a given date so that the landlord can sell the house. Understandably, tenants are often unwilling to move home.
If they are unable to reach an agreement, then the landlord must explore the other two options: Section 21 eviction and Section 8 eviction.
A landlord can initiate a Section 21 eviction by serving a valid eviction notice on the tenant. Unless used in conjunction with a break clause, a landlord can only serve a Section 21 if the notice period will expire once the tenancy’s fixed term has expired. If the tenancy is still within the fixed term, then a landlord must use a Section 8 notice.
Section 8 evictions require ‘grounds’ for the repossession of the property. There are 17 grounds, but the landlord wanting to sell up is not one of them. Unless the tenant has seriously broken the contract’s terms or is significantly behind on rent, then Section 8 is unlikely to help landlords.
The difficulty of evicting a tenant may be reason enough to consider selling the property without evicting the tenant. Evictions can take months to complete, and cost the landlord thousands in fees.
Advantages of eviction
There may be occasions when selling a property without a tenant is preferable. Perhaps the area is not ideal for renting, and potential landlords will look elsewhere to invest. If the rental market is weak, you may achieve a better price and faster sale by selling to owner-occupiers.
Disadvantages of evicting tenants
The time and legal costs of evicting a tenant can be high, especially if your agreement was poorly drafted in the first place. If you have neglected your landlord duties you may have undermined your ability to legally evict your tenants, since serving a Section 21 notice requires compliance with a long list of regulations.
Landlords who choose to evict before selling can lose a lot more money than they expected.
You may evict the tenant, but then find it takes months for your property to sell. Can you afford to pay the property costs, perhaps including a buy-to-let mortgage and bills, with no rental income? Let’s say your rental income is £800 each month. Twelve months without a tenant will cost you £9,600.
Secondly, it may be off-putting for investors. Sitting tenants are attractive since the incoming landlord derives a rental income from day one and knows the tenant’s history from the vendor. An empty property means the new landlord must spend time and money advertising for tenants, getting references and agreeing on a new tenancy start date — all of which can take months with no positive cash flow.
Selling a Property with a Tenant in Situ
Having a tenant in situ means there is an ongoing tenancy at the property. While a tenancy agreement is in place, the tenant has the right to remain even if the property is sold to someone else. The buyer effectively takes over your obligations and becomes the new landlord. They may immediately try to evict the tenant, but that will be down to them. As the vendor of a tenanted property, your role as the landlord will be over.
Sitting tenants will be highly attractive if you want to market your property as an investment opportunity. The existing tenancy agreement will switch from you and the tenant to the new landlord and tenant. Terms and the rental figure will remain the same, and the new landlord cannot change them (without the tenant’s consent) until the fixed term has ended.
Buyer and seller should also formalise the handover of the tenant’s deposit to pass from one to the other and remain protected. In England and Wales, there are insured or custodial schemes to protect deposits, but they differ slightly when it comes to tenants in situ. With the insured scheme, the deposit is passed to the new owner, who must re-protect it. The custodial scheme means the buyer must register a deposit account, and the seller must transfer the sum into it. Scotland only allows for the custodial version.
The contract for selling the property should not be over complicated. It will state the sale includes sitting tenants, their names, how much rent they pay, and their tenancy terms. It may help to use a conveyancing solicitor who has experience of tenants in situ. As the seller, you should prove the rent is up to date and that the necessary gas safety certificate, and electrical safety certificate are in place.
Advantages of tenants in situ
It’s clearly a more cost-effective route with less hassle for all concerned:
- You can market the sale to investors and maintain your cash flow until the sale date
- Your buyer will be a property investor, ready to complete with cash, with no complicated property chain to wait for
- The new landlord inherits a good tenant and receives income from day one
- The tenant does not have to leave and find somewhere else to live
These benefits are huge. Both seller and the buyer avoid void periods, and the buyer does not have to spend money preparing the property for a new tenant.
You should have no difficulty selling with a tenant in situ in strong rental areas, such as those close to town centres or transport hubs.
Disadvantages of selling with a tenant
There are some logistical hoops you must jump through. Selling with a tenant in place means an estate agent cannot turn up to show a prospective buyer around unannounced. Every viewing must be arranged with the tenant. And although there should be a clause in the tenancy to stipulate this, viewings should be fair – so not, for example, at 8.30am on Saturdays!
Keeping a tenant in situ makes your property so much more appealing to buy-to-let investors. But it also means a large portion of the market, owner-occupiers, will be uninterested in buying your property. Most home purchases in the UK are homes bought to move into immediately. People are unlikely to buy a new home if they have to evict the tenants before they can move in.
In areas of low rental interest and where buy-to-let investment is weak, this could mean your property takes longer to sell.
It’s becoming increasingly rare, but tenants who have been in place since before 1989 will not have an assured shorthold tenancy agreement in place. Instead,the Rent Act 1977 gives them the security of tenure and the right to remain.
This is the true meaning of sitting tenant, although the term has now become interchangeable with a tenant in situ. In the case of a pre-1989 tenancy, the landlord can only renegotiate the rent every two years – and even then, a rent officer must conduct the rent review.
Part Two: Buying a Property with Tenants
Assuming you are buying a property to rent it out, having a sitting tenant will almost certainly be a positive. The actual process of buying the property will not differ much. Your conveyancer will guide you, but you should be across who your tenants are, how much rent they pay, and the details of their tenancy agreement.
Once you take ownership of the property, you also inherit responsibilities to the tenant. You must inform the tenant in writing that you have taken over the landlord interest in the tenancy agreement, in accordance with section 3 of the Landlord and Tenant Act 1985. If you wish to make any changes to the agreement, including terms and rent, you must do so with the proper notice. Bare in mind that you may not be able to change the rental amount until the fixed term has ended.
Advantages of buying with a sitting tenant
There are many positives for the incoming landlord, including:
- Not having to search for a new tenant
- Receiving rental income from day one
- Knowing the history of a tenant
- Knowing all regulations (like gas safety certificates) are in place
- Not having to refurbish the property in readiness for new tenants
Inheriting a good tenant means the landlord can save over £1,000 compared to paying a letting agent to find tenants. Landlords also benefit from tenants being in the property, paying rent, from day one.
You can also ask the seller about their tenant’s history of rental payments and other issues — but do take this with a pinch of salt as they are trying to sell the property and the tenant. Buying a property that is already a rental means the gas and electrical safety certificates should already be in place, saving you much admin and a few hundred pounds.
Disadvantages of buying with a sitting tenant
- Cannot move into the property easily
- Major renovation/building work will have to wait until the initial tenants have moved out
- Cannot renegotiate rental contract until the fixed term has expired
Tenanted properties are unlikely to suit you if you are looking for a home to move into. It can take months to evict tenants, so this option only really works for landlords looking to invest in a buy-to-let.
Another potential disadvantage is that you may wish to do some work on the property. You are perhaps thinking about remodelling or adding an extension to increase your potential rental income. Most investors would want to do this work after the sale and then rent the property out after completing the work.
Unless you have a particularly agreeable tenant, you cannot do this sort of development work with a tenant in situ. You might also wish to increase the rent that the sitting tenant pays, but you cannot do so until the tenancy is up for renewal.
None of these are significant issues, though, and you will know about them when you make the decision to buy. Nobody likes nasty surprises, after all.
Legal Advice and Eviction Help
When dealing with tenants, it’s vital to remain on the right side of the law. OpenRent can support you, having partnered with Legal Action, the eviction and housing law specialists. This will save you becoming overwhelmed, trying to pick a path through money and possession claims, bailiffs and more.
Hopefully, you will not need legal representation, and you can deal comfortably with your property sale with a tenant in situ.
If you are a landlord who decides to sell, you can now see real advantages of putting your property on the market with sitting tenants. The process will not only be attractive to investors, but it could save you much of the pain associated with lost rental income.
While it’s true you will narrow the number of potential buyers, remember that investors will be less fussy. Yes, they are interested in the property’s condition, but mainly care about the potential rental yield. They are not going to live in the property themselves. Regular house buyers have so many more factors to consider: condition, position, time to complete and complicated property chains.