Nov 4, 2020

Buying a Property with Tenants in Situ

Selling a property with a tenant in situ is not that unusual. These properties tend to appeal to more experienced landlords. There are several distinct advantages to the arrangement when it comes to buying a property with tenants in situ. If you like the idea of buying an investment property that offers you an income from day one, read on for a guide to buying buy to let properties with tenants in situ.

What is a Sitting Tenant/ Tenant in Situ?

A sitting tenant, or tenant in situ, is a tenant already renting the property, who will remain in place when ownership is switched from the previous landlord to the buyer. Some landlords take the decision to sell with a tenant in situ because it’s easier than trying to evict them. In some cases, the tenant in situ can’t be evicted. A landlord selling a property with a tenant in situ will have to accept a below-market valuation and wait for a cash buyer to come along. If they are looking to exit the buy to let sector in a hurry, this could be the fastest way of doing it.

The Pros and Cons of a Tenant in Situ

Pros

Properties with a tenant in situ are usually cheaper
Rent from day 1
No need to look for a tenant
The property won’t need refurbishing straight away

Cons

Most lenders will not finance a property with a tenant in situ, as they are considered a bad risk – you’ll need to find a specialist lender, so it’s best to work with a broker
The previous landlord may have cut corners, leaving you with some unexpected bills when you take ownership
The tenant in situ might not be reliable
It can be difficult and expensive to evict a tenant in situ; check the status of their tenancy agreement before you commit to buying the property.

Things to be Aware of When Buying a Property With Tenants in Situ

Buying a property with a tenant in situ is not as straightforward as buying a property with vacant possession. It is best to use an experienced conveyancing solicitor for this type of transaction, so you are not caught out by anything untoward.

There are several key things that must be verified before you buy the property with a tenant in situ. These include:

Is the property licenced? Some rental properties must be licenced, specifically HMOs. Not all landlords licence their property. Some do not know it is necessary. Do check whether the property needs to be licenced. And if it does, ask for the details of the licence. If the landlord hasn’t applied for a licence you might ask yourself what else they have neglected to do?
Are there any restrictions on who you can let the property to? For example, in some areas, new HMOs might be banned in an area of high-density HMOs. This prevents you from converting a single-family dwelling into a shared house.
Does the property have a valid EPC? An EPC tells you how energy efficient the property is. The seller should have given one to the tenant; one is also needed before the property is sold.
Has a gas safety check been carried out in the last 12 months? Gas appliances must be tested annually. If the seller can’t produce a recent gas safety certificate for the property, they may have neglected other safety measures.
Are fire safety measures in place and when were they last checked? There should be a working smoke alarm/CO detector, among other things.
Does the property have a current Electrical Installation Condition Report (EICR) and is it satisfactory? Dodgy wiring is a major fire risk.
Have portable appliances been tested? This is relevant if small appliances are included in the sale.
Has a Legionnaires’ Disease risk assessment been carried out?
Was the tenant given a copy of the ‘How to Rent’ guide from the Department for Communities and Local Government?
Is the property furnished and if so, are the furnishings fire-rated according to British Standards guidelines? Look for display labelling on sofas and other upholstery items.
Was there a property inventory carried out at the start of the tenancy? Property inventories are often forgotten about, but you need to know what’s included in the property before you take over the tenancy and what state the property was in prior to it being let. Ask for a property inventory to be carried out if there isn’t one before buying a property with existing tenants. Insist that all contents are insured before contracts are exchanged.
Was the tenant’s deposit registered and placed in a government-approved scheme? When you buy a property with a tenant in situ, you’ll need to come to an arrangement with the seller about the transfer of the deposit.
How long is left on the current tenancy agreement? Check how long is left on the tenancy agreement. If the tenancy is due to expire in the next few months, it might be worth hanging fire and waiting for vacant possession.
How much rent does the tenant pay and who actually makes the payment? In some tenancies, the rent is paid by a third-party rather than the actual tenant, for example, a family member. You need to know exactly how much the tenant pays in rent. Make sure the figure the landlord gives you matches what the tenant in situ tells you. If there is a discrepancy between the two, find out why.
Has the tenant in situ ever been late with their rent? The seller’s bank statements will need to be checked for evidence of rental receipts. Taking on a tenant with a history of rent arrears could cause problems.

It’s up to you and your solicitor to do due diligence checks. Don’t just take the landlord’s word for it – do your own investigating. Verify there are no verbal agreements in place between the current landlord and the tenant, such as reduced rent in return for a cash payment each month. The seller’s solicitor may not be aware of any verbal arrangements, so chat with the tenant to ensure you’re not blindsided by any off-contract agreements late in the day.

Is the Property With a Tenant in Situ Profitable?

A property sold with a tenant in situ is normally marketed at a lower price to reflect the extra risk involved. You still need to do the maths to make sure the property can generate an appropriate rental yield.

Look at how much rent the tenant in situ is currently paying and factor in the cost of any renovation work that may need doing. For example, if the boiler is old it will probably have to be replaced in the next 12-18 months.

Make sure your return on investment is sufficient to outweigh the extra risk of buying a tenanted property.

Viewing the Property with a Tenant in Situ

Not viewing a property with a tenant in situ before you buy is a bad idea. Video tours and brochures don’t give you the full picture. You need to see the property up close and personal.

A first viewing gives you a good idea of the size of the property and its general condition. A second viewing lets you look beyond the superficial to see whether there are any problems you need to know about, such as rising damp, dodgy electrics, and a rodent infestation.

Pay close attention to the state of the property. It’s a good idea to view the property shortly before completion, to make sure its condition hasn’t massively deteriorated while your solicitor has been working hard on contractual stuff.

Make sure the property is safe and meets all legislative requirements from a health & safety perspective. Pay attention to any maintenance issues, as these will become your problem once the purchase has been completed. These are all important things to consider when buying a property with existing tenants

Organising Viewings With a Tenant in Situ

Tenants must be given 24-hours’ notice in writing before a viewing can take place. Note that some tenancy agreements don’t allow viewings without the tenant’s permission. You’ll need to liaise with the seller on this point. If the tenant in situ refuses access for a viewing, it’s probably sensible to ask yourself why that may be the case.

Be respectful of the tenant when asking to view the property, organising a survey or other checks. Make allowances for the fact this is still their home and you want to protect a future working relationship with them. If you upset the tenant in situ now, it will make life difficult when you take over the management of the property.

Speak to the Tenant in Situ

It’s in your interest to talk to the tenant in situ prior to the completion of the purchase. An informal chat is a good opportunity to find out more about them, such as what their future plans are, i.e. are they hoping to stay in the property for the foreseeable future or move on in 12 months’ time.

Find out what they like about the property, and whether they have issues with anything, such as a noisy neighbour or dodgy boiler.
Check when the rent was last increased.
Ask whether they are happy doing minor repairs themselves.
Find out if they usually decorate the place or the landlord does.

This is when you can cross-check what the landlord told you against what the tenant says, in case there are any discrepancies.

Tenant in Situ Checks

When buying a property with a tenant in situ, it is customary for the conveyancing solicitor to carry out checks on the tenants. These should include the same things you would normally do if you took on a new tenant, i.e. credit check, employment check, and previous landlord references. This is partly why you need a commercial solicitor to handle the transaction, as a residential conveyancing solicitor won’t have the right experience.

Check whether the landlord selling the property has ever served any notices on the tenant. Ask for copies of any correspondence between the landlord and tenant. This should highlight any disagreements or unresolved maintenance issues.

Tenancy Agreements

The seller or the seller’s letting agent should provide details of the tenancy agreement during the conveyancing process. This includes when the tenancy agreement was created, the status of the tenants, and the status of the deposit.

Verify there are no other people living in the property, people who might not be named on the tenancy agreement. These could include partners of the named person or extended family members.

Are there any break clauses in the tenancy agreement? You might need to invoke one if it doesn’t work out as expected.

An existing tenancy agreement is still valid after the property handover, even though the former landlord is named on it. The tenant in situ must be given the new landlord’s contact details – more on that below.

Deposits When Buying a House With Tenants

As already mentioned, the transfer of the deposit is something the conveyancing solicitor normally handles. The exact protocol will depend on the deposit protection scheme used by the seller. There may not be much to do other than notify the deposit scheme of a change in ownership – unless you want to transfer the deposit to a different scheme.

The Tenancy Deposit Scheme (TDS) explains what happens when a property is sold in the middle of a tenancy – click here for details.

Handover day

The simplest way to finalise the purchase is to arrange for the completion day of buying a house with tenants, to fall on a day when the rent is due. This negates the need for any rent to be apportioned between the seller and the buyer – and generally makes everyone’s life easier. If this is not possible for any reason, arrangements can be put in place to transfer funds to the buyer for any rent paid in advance, or vice versa.

Arrangements must be made for the future rent to be collected by the seller. If you are retaining the same letting agent, you may not need to change the payment arrangements. Do make sure the property handover is recorded by the letting agent, so rental payments are not inadvertently sent to the previous landlord!

If you plan on managing the property yourself, a letter of authority from the seller is needed, asking the tenant in situ to pay rent to the buyer after the handover date.

Arrangements must also be made for the transfer of the deposit, which is something your conveyancing solicitor will sort out.

A Section 48 notice must be served to inform the sitting tenant the property has been legally transferred to a new buyer, as per Section 3 of the Landlord and Tenant Act 1985. If this is not done, you won’t be able to claim for any future rent arrears, property damage, and service charges, as any court case isn’t enforceable:

(1) A landlord of premises to which this Part applies [all residential lettings] shall by notice furnish the tenant with an address in England and Wales at which notices (including notices in proceedings) may be served on him by the tenant.

(2) Where a landlord of any such premises fails to comply with subsection (1), any rent or service charge otherwise due from the tenant to the landlord shall (subject to subsection 3 below) be treated for all purposes as not being due from the tenant to the landlord at any time before the landlord does comply with that subsection.

Start off on the Right Foot With the Tenant in Situ

Once the property is officially yours, contact the tenant to inform and reassure them. They may be a bit nervous about dealing with a new landlord. At this point you want to begin a good strong mutual relationship with the tenant.

Reassure the tenant in situ their deposit is still safe, and they will get it back if they choose to leave, assuming there is no damage.

If you have plans to make improvements, such as fit a new kitchen or install replacement windows, let the tenant know. It is good to let tenants know if there are any changes to be made to the property and tenants are always keen to know that their landlords are invested in the maintenance of the property.

What Rights Does a Tenant in Situ Have?

Tenants in situ have more rights than other tenants, which is why properties with a tenant in situ are often sold at a significant discount to reflect the extra risk involved.

Landlords usually take ownership of an existing Assured Shorthold Tenancy agreement when they buy a property with a sitting tenant. Under an AST, landlords can evict using Section 21 or Section 8 notice. It is harder to evict a sitting tenant.

Tenants in situ are protected under the Rent Act 1977. If it can be proved they moved into the property before 27 February 1997, ‘no-fault’ Section 21 notices cannot be used to evict the tenant.

The only way to evict such a tenant is if they fall into rent arrears or you can provide them with other accommodation – which must be suitable. There are some discretionary areas, such as when a sitting tenant has breached the terms of their tenancy agreement or sub-let the property.

If a tenancy dates back pre-1989, the sitting tenant has security of tenure – which is the true meaning of ‘sitting tenant’. In a ‘secure tenancy’, Section 21 notices do not apply. It’s extremely difficult to evict these tenants.

This is a complicated area of law and if you do wish to evict a sitting tenant, consult a specialist solicitor for advice.

When you take on a tenant in situ with a regulated tenancy pre-dating 1989, you can’t immediately increase the rent, protected tenants have the right to pay a ‘fair rent’. You can review the rent every two years – or sooner if significant improvements have been made to the property – but rent reviews must be carried out by a rent officer.

Your solicitor should check all this before you complete on the purchase, which is another good reason to use an experienced one!

At first glance, when looking at buying a property with tenants in situ, it might seem like an absolute bargain. Be aware that the below market price is because of the extra work and due dilligence involved with purchasing such a property.

Would you consider buying a property with a sitting tenant? If you have bought such properties, how did it work out for you? Let us know via Facebook or Twitter.