Many landlords rely on a steady rental income for their day-to-day living costs, their pension, or to support their children. For these landlords, deciding the best tenancy agreement length is an important question.
This article shows you the legal upper and lower limits on tenancy agreement length in the UK. We then look at the considerations long-term landlords should keep in mind when drafting their contracts. As we will see, tenancy length is a balancing act between security and risk, reward and agility.
Tenancy Length: What Does the Law Say?
The regulations are different across the UK, with England and Wales having a separate law to Scotland. Here are the rules that you must know.
England and Wales
Most landlords will offer an Assured Shorthold Tenancy (AST). These agreements start with a fixed term, the average being 12 months, although it can go up to three or even seven years. The AST is hard to end before the fixed term is through, so when people discuss tenancy length, they usually mean fixed term length.
When the fixed term is over, the tenants can leave, or you might arrange a new fixed-term agreement with them, again ranging from six months up to three years. Alternatively, you can allow the tenancy to become periodic. This is sometimes called a ‘rolling contract’. In this scenario, there is no end date for the agreement, and instead, it rolls forward on a month-by-month basis. Either party can serve notice on the other to end the tenancy.
Scotland uses a private residential tenancy (PRT) agreement, rather than an AST. The key difference is the tenancy is open-ended. It is an indefinite tenure. With no fixed term, a landlord cannot simply ask a tenant to leave when it is over.
The rules do, however, set out 18 clear circumstances where a landlord can regain possession, including if you decide to sell the property or your tenant has breached the terms of the agreement.
Use OpenRent to set up your tenancy and benefit from rent collection, free renewals and a professional contract.Learn more
Deciding the Best Tenancy Agreement Length
The key decision for landlords in England and Wales is, therefore, how long to make the tenancy agreement length. Given that most landlords are letting out a property as part of a long-term investment or income vehicle, the obvious initial choice is to make the agreement cover as long a period as possible. Long fixed terms, however, come with disadvantages to offset the benefit of security.
The decision is a delicate balancing act between going long and knowing you have a tenant in place, providing an income over the long term, and going shorter. Shorter gives you greater flexibility but risks empty periods and could mean paying for rental advertising more often.
Advantages of longer agreement
If you have a tenant who wants to remain at your property for the long-haul, then they will usually prefer to have a longer term. According to the charity Shelter, 90% of tenants would welcome the security that a more-lengthy agreement gives them.
Tenants like this are far more likely to take good care of the property as they feel more “invested” in it; it feels more like their home. You also have fewer costs because drawing up one AST and letting it run for a few years is cheaper than renewing every six months or year. Some agents charge hundreds of pounds to renew (although OpenRent allows you to renew your contract for free). Another benefit is that you will have fewer void periods between tenants, minimising the days with no rent coming in.
You save further costs because you will not need to find new tenants so often. Although tenant-finding packages are cost-effective on services like OpenRent, including finding, referencing and creating agreements, it’s cheaper to do this once every 3+ years rather than every six months.
You will likely have a better relationship with a long-term tenant, which will help because any issues will be much easier to resolve. The tenant will also be more likely to pay their rent promptly, every month, without being late or falling into rent arrears. You cannot underestimate how this helps a landlord, in terms of cash-flow prediction and peace of mind.
Disadvantages of longer agreements
While long agreements are preferable for many reasons, they can have disadvantages. In the unlikely event you have a difficult tenant, issues can persist for longer. It is possible that some long-term tenants may be fussier. While that’s good in terms of taking care of your property, it means they may be more demanding.
A clear disadvantage of long-term tenancies is rent reviews. While you are free to change the rent for new tenants, it’s not so easy with existing ones on a long-term agreement. In fact, you cannot increase the rent during a fixed-term tenancy, unless you have a prior agreement with the tenant. This should be written into the contract as a rent review clause.
If you do wish to increase the rent with the same tenant who is renewing a fixed-term tenancy, then you must tell them before the current term ends. This will give the tenant time to decide if they wish to pay more and stay, or leave at the end of the term, in which case you would have time to find a new tenant.
In Scotland, a landlord cannot increase the rent more than once a year, and the tenant must receive at least three months’ notice.
Advantage of a short-term tenancy agreement length
Longer tenancies will not suit all landlords. Although everyone wants the maximum return from their property investment, some also need to be able to move fast if circumstances change. Shorter-term lets give landlords the agility to sell quickly and increase the rent. They are also essential for landlords who plan to return to live in the property on a fixed date — for example, landlords letting out their own home for a year spent travelling or living abroad.
Depending on location, there could be a higher demand for shorter-term tenancies. In this case, you can perhaps be more choosy about looking at tenant references and selecting your tenant. This is especially true of towns with large student populations.
Do your research to find your optimum length
Like everything else to do with buying property to rent, research is key. To properly weigh up the pros and cons of tenancy agreement length, take each of the factors into account. By all means, balance the financial costs and savings where you can. But don’t forget your time and emotional investment — being locked into a two-year tenancy with a troublesome tenant can take just as much out of you as finding a new set of tenants every six months.
Being a landlord is rarely plain sailing, and the fewer problems you have, or administrative issues you must deal with, will sometimes be more important to you than any incremental financial costs.