Why Selling a Buy-to-Let with a Tenant in Situ Will Be More Appealing
Landlords who wish to sell their investment property with vacant possession when the Renters Rights Bill becomes law are going to have a very complicated process to navigate. However, selling with a tenant already in the property will still be pretty straightforward. In this blog, I look at the process of selling a tenanted property...
Selling a rental property after the Renters Rights Bill becomes law will require landlords to follow a specific Section 8 ground for possession, requiring a valid reason for selling. Landlords cannot evict tenants within the first 12 months of a tenancy to sell.
A 4 month notice period is required before eviction proceedings can begin after the initial 12 months. Additionally, the property cannot be re-let for 12 months after the eviction notice, which could impact the sale price and potentially lead to void periods.
However, selling a rental property to another landlord with tenants in place will continue to be a relatively straightforward process, with the new owner inheriting the existing tenancy. The new owner will need to comply with the existing tenancy agreement and will become the tenant's new landlord.
Selling a rental property with tenants in place will offer several advantages when the new Renters Rights Bill becomes law:
- Avoids Possession Restrictions: Landlords don't need to wait 12 months or give 4 months’ notice to sell as the tenancy simply transfers to the new owner upon completion of the sale.
- No Void Periods: The property continues generating rental income throughout the sale process, eliminating void periods for both seller and buyer.
- Attractive to Buy-to-Let Investors: Ready-made tenancies can appeal to landlords looking for immediate rental yield.
- Simplifies Compliance: The new owner takes over the existing tenancy and legal obligations, streamlining the transition.
This approach sidesteps the stricter rules for evicting tenants purely to sell, making it a smoother, quicker, and potentially more profitable route.
It's clear that selling a buy-to-let property where there is a tenant already renting is going to become much more appealing when the Renters Rights Bill becomes law. However, there are still some considerations that have to be taken into account.
Considerations for Sellers
Expectations of Higher Rents
If a landlord intends to sell their property to another landlord, they aim to fetch the highest possible price. To achieve this, the rent should be at, or near the market rate. With the Renters Rights Bill also making it much more difficult to increase rents, securing an increase sooner rather than later is extremely important.
If the seller hasn’t raised the rent since before the pandemic, there could be a substantial gap between the current market rate and the previous rent. This disparity may influence the valuation of the property, depending on the circumstances of the tenant.
Expectations of Higher Returns
Investors who are interested in purchasing rental properties anticipate higher yields as average yields have also increased over the past few years. This expectation sits along side the expectation that the rent will be at market value to maximise the new landlords return.
Landlord Sellers need to be Realistic on Price
If you are determined to sell your rental property, it is crucial to be realistic about the price. The perceived convenience of selling to an existing investor coupled with the investor buyer wanting a good deal means that this is not the market conditions to 'test the water' with an excessively high price.
By pricing reasonably, you may attract multiple offers. However, if the price is too high, it is likely to remain on the market and require a reduction in price. This situation will likely worsen once the Renters’ Rights Bill comes into effect.
Considerations for Buyers
The Legal Stuff
I would highly recommend that you use a solicitor with the necessary experience when purchasing a property with a tenant in situ. In addition to the standard conveyancing checks, there are a lot of legal processes involved in taking over ownership of the property.
Note also that a Section 48 notice must be served to inform the tenant that the property has been legally transferred to a new buyer. If this is not done - and we have seen lots of instances where it hasn't been - you will not be able to claim for any future rent arrears, property damage, and service charges, as any legal proceedings will not be enforceable.
Also, you will need to carry out due diligence regarding the property, the tenants, and the tenancy agreement. This would usually be done by a competent letting agent if you use one, otherwise, it is something you will need to do yourself.
Specifically, you’ll be looking at:
Property Safety and Condition
Does the property adhere to UK safety regulations?
Does it have the required safety certificates; gas and electric?
Are there smoke alarms and carbon monoxide detectors in place, and are they working?
Does the property meet the requirements of FFHH (Fit for Human Habitation)?
Have portable appliances been tested?
Has the correct 'How to Rent' guide been given to the tenant when they moved in?
Property Inventory
A detailed, photographic property inventory should have been carried out when the current tenant first moved in. If not, there may be issues when the tenancy deposit is to be repaid.
Tenancy Deposit
Talking of tenancy deposits... is there one? Has it been correctly registered with a government scheme? Your legal representative should deal with the transfer of the tenancy deposit from the seller upon completion.
Tenancy Agreement
Ensure that you have a copy of the tenancy agreement and study it so you know the tenancy terms. Your legal advisor will do this as part of the legal work.
Tenant Checks
Even if the tenant was thoroughly vetted by the previous landlord, you should always run your own checks. Look into their rental history to see if they take good care of properties. Check the references and acquire your own if necessary. Are they using a guarantor? Any there any disputes with neighbours? The more you know, the less likely you’ll face a nasty surprise later down the line.
The Pro's of a Tenant in Situ
Properties with a tenant in situ are usually cheaper than ones with vacant possession, simply because they are harder to sell. This is particularly good for cash buyers who do not need a mortgage.
With a tenant in place on the day that you take ownership of the property, rental income is received immediately. There is also no need to find a new tenant. Finding a new tenant takes time and will extend the void period (time when the property is empty and you are not receiving rent).
If there is a tenant in situ, then there is a better chance that the property is in good condition. It is unlikely the property will need any immediate refurbishment as rental properties are usually refreshed between tenancies.
The Con's of a Tenant in Situ
Mortgage lenders are often reluctant to finance a property with a tenant in situ as they are considered a higher risk - why, we do not know! We recommend using a mortgage broker to access more specialist lenders. The alternative is that you may need to pay a higher deposit.
Landlords who do sell with a tenant in situ usually do this to achieve a quick sale. There could well be no detrimental reason for this, however, it could be because there are issues with the property or the tenant which could result in unexpected bills when you take ownership.
The tenant in situ might not be a good fit. Remember, you haven’t chosen the tenant yourself so they may not fit your expectations of what a good tenant should be.
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. The majority of tenancy agreements are Assured Shorthold Tenancy agreements (AST). Under an AST, landlords can evict using Section 21 or Section 8 notice. It is much harder to evict a sitting tenant.
Tenants in situ are protected under the Rent Act 1977. If they moved into the property before 27 February 1997 and this can be proved, Section 21 notices cannot be used to evict the tenant. In very extreme circumstances, a tenancy dating back to pre-1989 means that the sitting tenant has security of tenure (the real definition of ‘sitting tenant’). In a ‘secure tenancy’, Section 21 notices do not apply. It’s extremely difficult to evict these tenants.
Introduce Yourself
I always recommend meeting the tenant in person as soon as you can, especially if you are not using a letting agent to manage your property. Ideally, you want to have a good, ongoing mutual relationship with the tenant.
Reassure them, confirm that the tenancy deposit has been transferred over properly, discuss any maintenance works that you plan to undertake, ask them about their plans moving forward so you can plan ahead too.
Final Thoughts
With the Renters Rights Bill set to reshape the private rental sector, landlords should approach property sales with careful consideration. While the new rules make it more complex to sell a rental with vacant possession - due to longer notice periods and restrictions on re-letting - selling to another landlord with tenants in situ remains a practical and efficient alternative.
Not only does this method ensure continued rental income and compliance with the law, but it also appeals to investors seeking immediate returns. By planning ahead and understanding the implications of the new legislation, landlords can still achieve a smooth and strategic exit, without unnecessary delays or disruption for tenants.
it is very important for landlords to seek professional advice before making any decisions about selling a rental property. Letting agents, property solicitors, and tax advisors can offer tailored guidance to ensure compliance with the new legal framework, avoid costly mistakes, and make the most of market opportunities. Understanding your rights and obligations under the Renters Rights Bill will not only protect your interests but also support a smoother transition for your tenants and any potential buyer.
