Updated 16 September 2016
- 1 Introduction
- 1.1 Are you an accidental landlord?
- 1.2 Landlords insurance
- 1.3 Insurance
- 1.4 Specialist providers
- 1.5 Informing your mortgage provider
- 1.6 New and long term landlords
- 1.7 A warning for first time buyers
- 1.8 Know your obligations
- 1.9 Regulations
- 1.10 Tenancy Deposit Protection Scheme
- 1.11 Tenants
- 1.12 Inventories
- 1.13 Customers not friends
- 2 Summary
The difficulties faced by many people in owning the home in which they live has significantly increased the size and importance of the private rented sector in providing that essential human need, housing.
According to the Guardian newspaper, the latest figures from HMRC show that there are 1.75m private sector landlords in the UK and a report in the Telegraph newspaper (last year) estimated that this figure would grow by a further 1.2 million in the five year period between 2014 and 2019.
The supply of housing for rent – buying to let, as far as the investor is concerned – is reflected in the fact that between 1986 and 2012, 57% of all new private dwellings created (whether as new-build or conversions of existing property) were for rent, says the Chairman of the Residential Landlords’ Association, Alan Ward, writing in City A.M. in July 2015.
In short, there is a growing army of UK landlords. Attracted by the financial returns that may be made in such a business, many of these have been attracted to such investments with the sole aim of creating a commercially successful enterprise; others, however, may have found themselves to be landlords without any such conscious effort – this group has earned the popular term of “accidental landlord”.
Since the term is one that you might have seen cropping up in various media reports recently, it might be useful to see:
- just what makes an accidental landlord;
- whether you might be one;
- the accidental landlord’s need for appropriate insurance cover;
- the impact that becoming an accidental landlord might have on your mortgage arrangements;
- the obligations you have as an accidental landlord; and
- your relationship with tenants.
This guide is intended to help point the way in managing your responsibilities and requirements as an accidental landlord.
Are you an accidental landlord?
In fact the term is self-explanatory – an accidental landlord is one who becomes one without ever having had the conscious intention of joining the buy to let housing market. The accidental landlord, therefore, might be distinguished from the “professional” landlord who invests in property with the specific and deliberate aim of creating a financially successful and expanding business.
A survey by the National Landlords’ Association (NLA) found that as many as one in four private sector landlords (or some 360,000 of all landlords) may be described as accidental. That is to say:
- they acquired a let property entirely by chance – commonly by way of an inheritance (and this accounts for 11% of all landlords); or
- they unintentionally or inadvertently acquired an additional property when, for example, they moved in to share with a partner or spouse (5% of the total); or
- letting a property seemed the sensible thing to do if it was proving difficult to sell and the owners had already bought or found somewhere else to live (a further 5%); or
- the owner occupier of a property needed to move (temporarily or permanently) as a result of work commitments in another part of the country at home or abroad (3%).
The figures are revealing, therefore, not only because of the relatively high proportion of landlords who have fallen into the market accidentally, but also because of the variety of reasons for having done so.
The NLA’s survey found that the proportion of accidental to professional landlords appears to be more or less the same across the whole of the country – although London remains the highest at 31%, with the northwest of England having the lowest proportion of just 15%.
With as many as 360,000 accidental landlords around the country, therefore, you might want to ask yourself whether the description fits your own circumstances and – just as critically – what it is likely to take to actually make money from your business as a landlord rather than it soaking up more of your resources than necessary.
With this basic objective in mind, it is important to take on board from the outset your responsibilities as a landlord for taking into account:
- the need for adequate and appropriate insurance of the property you are letting;
- the extent to which any mortgage lender needs to be kept on board about your plans;
- specific obligations you take on as a landlord for ensuring that the property is a safe place in which to live; and
- maintaining a positive and constructive relationship with the tenants to whom you are letting the property.
To help make sure that you are making rather than losing money as an accidental landlord, therefore, this brief guide addresses some of those issues.
Whether you are purposely entering the buy to let market with your eyes wide open, or have more or less fallen into it by accident, the most important thing to remember is that the let property you now own is essentially a business asset.
Unlike the main home, in which you might reside as the permanent owner-occupier, a let property is – by definition – let to tenants from whom you collect rent. Your aim, of course, is to try and ensure that the total rent you collect at the very least covers the cost of your owning and maintaining the property and that it is kept in a condition which allows you to reap any potential capital gain if you decide to sell it in future.
One of the reasons for stressing this distinction between a property in which you and your family intend to live, and one that is owned essentially as a business proposition for letting to tenants, is that it is a critical difference as far as any insurer is concerned.
Just as with the home in which you live, you may also want to protect any property for which you have become the accidental landlord. Uppermost in your mind is likely to be the need to safeguard the structure and fabric of the property and the contents you own against loss or damage – such as that caused by potentially serious incidents as fire, flooding, impacts, storm damage, vandalism and theft.
A serious trap into which the accidental or casual landlord might fall is the belief that the same home insurance policy held as the owner-occupier of the property may continue to offer comprehensive cover if the same property is let to tenants.
This is simply not the case. As we have seen, insurers draw a clear distinction between property occupied by the owner as his or her main home and one that is let to tenants – on what is essentially a business basis.
Because of that distinction, there is a significant difference between standard home insurance and insurance specifically written for the owners of let property. The latter is known as landlords insurance or buy to let insurance.
If you have standard home insurance but subsequently let the property to tenants you may find that any claim is rejected in the absence of your having arranged purpose designed landlords insurance.
“Utmost good faith”
The accidental landlord might be tempted to continue with standard home insurance and simply not inform the insurer that the property is let.
Such a ploy may represent a breach of one of the most fundamental tenets of any insurance contract. That is the principle of “utmost good faith” (or uberimae fidei, to give it its formal Latin term), that is described in some detail in a guidance note published on the website Landlord Zone.
The principle places on the insured an absolute responsibility for informing the insurer of any “material fact” that might affect the insured risks. The letting of a property is considered to be just such a material fact and failure to inform your insurer may result in any claim being rejected – or even your being considered to have committed insurance fraud.
Getting the right, purpose designed insurance for let property, as opposed to standard home insurance, may call for specialist advice and guidance – something about which here at Cover4LetProperty we are especially experienced.
We are aware, for example, that the accidental landlord may fully appreciate the need for adequate public liability insurance, designed to indemnify the landlord in the event of claims from tenants, their visitors or members of the public that a breach of the duty of care has resulted in personal injury or damage to property.
We are also alert to the possibility that not all of your tenants may be as reliable as you may have thought, but instead turn to the malicious damage of your property. Cover is available to offer compensation for such damage.
A specialist provider is also keenly aware of your likely reliance upon the rental income you receive from your tenants and the risk of this being interrupted if the property becomes unlettable following a major insured event. Insurance is also available to cover the loss of such rental income – up to prescribed maxima, of course.
Informing your mortgage provider
Ensuring that you have the appropriate form of landlords insurance may become even more important if you are an accidental landlord and already have a mortgage on the property you want to let – if you are letting your former home, for example, whilst waiting for it to sell.
The Council of Mortgage Lenders (CML) is unequivocal about your need to inform your lender if you intend to let the home in which you once lived. Even if this is for the relatively short term, you must inform the mortgage lender and obtain what is generally known as a “consent to let”. Failure to do so might leave you in breach of your mortgage contract – and in the most serious of incidents may allow the lender to foreclose on the mortgage.
The CML also reminds mortgage holders that a decision to let the property is also likely to invalidate the normal home building insurance – and since adequate and appropriate building cover is invariably a condition of a residential mortgage, there may again be a breach of the mortgage contract.
New and long term landlords
Your experience as an accidental landlord might confirm your interest in running such a business in the longer term. Or you might decide to dip your toe into the market by purchasing a property with the specific intention of buying to let.
If you choose to pursue either of these options with the help of a mortgage, it is important to arrange a purpose designed buy to let mortgage and not the standard residential mortgage used to buy the home in which you live:
- a residential mortgage is advanced on the lender’s understanding that the property is to be occupied as a principal place of residence and the ability to make repayment instalments is based on the mortgagee’s average earnings;
- a buy to let mortgage, on the other hand, represents a business transaction in which the mortgaged property is let to tenants and the mortgagor’s ability to make repayments is based on the estimated rental income from the property.
It is important to match the type of mortgage for the purpose to which the property is put. Whether you are using your residential mortgage to buy a property which you in fact let, or whether you use a buy to let mortgage to buy a property which you occupy as your own home, you are likely to be in breach of your mortgage contract – and might even be considered to have committed the crime of mortgage fraud.
A warning for first time buyers
Last year, the Telegraph newspaper pointed to the considerable increase in the number of buy to let mortgages advanced (up 33% from the previous year) compared to those issued to first time buyers (up just 10%).
Some first time buyers, therefore, might be tempted to apply for the apparently easier to get buy to let mortgage but then occupy the property as their own home.
Misleading the mortgage lender in this way might also be regarded as mortgage fraud.
Know your obligations
Even the accidental landlord bears the same responsibilities and obligations as those who have entered the buy to let market with a conscious business plan.
It has already been mentioned that any landlord has a fundamental duty of care towards tenants, their visitors and members of the public. If any one of these suffers personal injury or has their property damaged as a result of the landlord’s negligence, the latter may be ordered to pay substantial compensation – hence the need for public liability or landlord insurance.
Following is outline of what you need to bear in mind. For further information, read our Guide to landlord legislation here.
In addition to these common law responsibilities, however, the landlord also has specific obligations for ensuring tenants’ health and safety within any let property:
- gas – not only must all gas appliances be safely installed and maintained, but the law also requires the landlord to arrange an annual inspection by a certified gas engineer (registered by Gas Safe) and the issue of a certificate of safety;
- electric – the law also requires that any electrical installations and appliances are also safe, although the need for inspections may vary from one property to another, depending on the results of previous inspections and the nature of the supply and appliances used;
- fire – the landlord is required to follow all national and local fire safety regulations including new laws surrounding carbon monoxide and smoke alarms; and
- Energy Performance Certificate (EPC) – the landlord is required to make available to his tenants a copy of the property’s EPC. (It is also important to note that new regulations come in to force from April 2016 where landlords -accidental or not – will need to upgrade the energy efficiency of hundreds of thousands of homes currently rated F and G to a minimum of E)
Tenancy Deposit Protection Scheme
Any landlord who has accepted from a tenant a deposit as part of the tenancy agreement – typically to cover possible breakages or damage caused by the tenant – is legally obliged to place that deposit with an approved third party agency for safe keeping and for assistance in the resolution of any dispute which might arise between the tenant and landlord over the return of the deposit at the conclusion of the tenancy.
As an accidental landlord, you might think that your choice of tenant is entirely up to you – a risk you take that the rent will be paid and your property treated with respect – subject only to your abiding by those responsibilities and obligations previously discussed.
The Right to Rent scheme, however, has been introduced by the government in an attempt to control the number of illegal immigrants taking up residence in England. The onus for policing such a right to rent, however, is placed on the landlord, who may be fined up to £3,000 for letting a property to any tenant who does not have the necessary right to rent.
Although you may have conducted whatever background checks may be necessary and selected your tenants carefully, it is important that both parties have the clearest possible picture of the state and condition of the let property and its contents at both the beginning and the end of any tenancy.
This record typically takes the form of a detailed inventory, which needs to be agreed by both parties. It is in the ultimate interest of both landlord and tenant that the inventory is as thorough and as detailed as possible.
Taking photos of higher value items may help stop any disputes over damage further down the line.
Customers not friends
Finally, it might be worth reiterating that your tenant is essentially a business customer and not a friend. As an accidental landlord, you might be tempted in taking what is a friendly and civil business relationship a step too far and regard the tenant as your friend.
This is something you might want to take care to avoid.
You might have become a landlord by accident, without making an especially conscious decision to take on that role.
Even as an accidental landlord, however, there are a number of important considerations to keep in mind when stepping into such shoes. In this respect, the accidental landlord is no different to the landlord who has set out with the specific objective of building and running a successful business.