Selling a House with Sitting Tenants?
What rights do sitting tenants have and what are your best options for selling a property with sitting tenants?
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Normal tenancy V’s sitting tenancy
A sitting tenancy, also known as a regulated, controlled or sometimes lifetime tenancy gives the tenant the right of occupation in a property for their lifetime and sometimes even the lifetime of their children when the original tenant dies. There’s a big difference between a sitting tenancy and a normal tenancy agreement. Not knowing the difference between these types of tenancies can lead to confusion on many levels! This article explains the difference between sitting tenants and normal tenants with a particular focus on how landlords should approach the sale of a property with a sitting tenant.
As of 2012, some 100,000 households in the UK were home to a sitting tenant.
There is a common misunderstanding about the term “sitting tenants”. Some people incorrectly talk about sitting tenants to describe a tenant in situ, or in residence, believing the tenant pays a monthly rent and the landlord has the right to evict the tenant at the end of the term. Even the Oxford English Dictionary misleadingly defines a sitting tenant as: “a tenant already in occupation of premises, especially when there is a change of owner.”
What is a sitting tenant?
A sitting tenant is not just a tenant who’s stayed in the same property for a long time with different landlords, where the tenancy is passed from one owner to the next. A sitting tenant has considerably more rights than a normal AST (Assured Shorthold Tenancy) tenant, their rights are protected under the Rent Act 1977. A sitting tenant is more accurately defined as a regulated tenant. In most cases the tenancy pre-dates the Housing Act of 1988.
What rights do sitting tenants have?
Housing legislation from the 1970s gave more protection to tenants in private accommodation, regulation was far stricter than it is today. The two important rights a sitting tenant has is (1) their rent is capped and (2) they’re protected from eviction. This means the landlord cannot increase the rent as they wish, or evict the tenant if they want to sell the property.
How do I know if my tenant is a sitting tenant?
If the letting agreement signed by you (as the landlord) and the tenant sets out the terms as an AST, then the tenancy is not regulated i.e. you don’t have a sitting tenant. If it’s not clear if the tenancy agreement is an AST or not, then look for wording in the contract regarding notice periods for the landlord to gain possession of the property. If that’s not in the contract and the contract is dated in the 1980’s then there’s a good chance the tenant is a sitting tenant.
We often receive enquiries from property owners who have inherited tenanted properties and don’t have any paperwork to show the terms on which the property is rented. Without a tenancy agreement you don’t know for sure whether the property is let on an AST or is a regulated (sitting) tenancy. If there’s no paperwork to be found and the tenant doesn’t have a copy of a tenancy agreement then solicitors need to be instructed before there is any attempt to sell. If the tenant doesn’t have legal advice about their rights, you could find them complaining about being treated unfairly because they didn’t know their rights, even a few years after the sale!
Is it possible to sell a property with a sitting tenant?
There’s usually no restriction on the sale of properties with a sitting tenants, although the audience of buyers is obvioulsy restricted to investors only becuase the property cannot be sold with vacant possession. Specialist companies exist that purchase sitting tenant properties, they look at the property as a long-investment, with yield of around 4% in London or 6%+ elsewhere in the country. Most rents for sitting tenant properties are low (so the yield is low), therefore the sale price is often considerably less than market value. Investment companies also take into account the age of the tenant and whether the tenancy is likely to be passed on to the tenant’s children.
Can the owner “buy out” a sitting tenant?
It’s quite common for investment companies to offer sitting tenants a payment to vacate the property and end their contract. If you are considering selling a property with a regulated tenancy there’s nothing to stop you from doing the same. Tenants don’t have to accept a buy out and they very often don’t. The buy out amount is usually calculated as the difference between the value of the property subject to a regulated tenancy and the value of the property with vacant possession. So if the investment price of the property is 60% of market value, the sum offered might be 20% of market value.
Auctioning a property with a sitting tenant
There are two reasons why properties with sitting tenants are best sold at auction, but we can only support the rationale for the first reason!
Auctions are attended by the type of buyer on the look out for investments, so if two or more prospective buyers are interested in the property the sale will benefit from competitive bidding which ultimately results in a sale for the best possible price.
The second reason why properties with sitting tenants sell particularly well at auction is because they sometimes sell for considerably more than they should! If a novice investor isn’t fully aware of the implications of a sitting tenant, they might bid to a higher level assuming they’re able to either increase the rent or evict the tenant. Property investment has changed a lot over the past few decades, so it’s not surprising if a reasonably well-informed investor isn’t aware of a type of tenancy that was only originated until 40 years ago.
Of course, an investor would have themselves to blame if they didn’t fully read through the legal pack and check the tenancy agreements. But it does happen!
Further reading about sitting tenants
As time goes by the number of households in the UK with sitting tenants decreases, because new tenancies are issued on an AST. You can read more about the subject of sitting tenants on the government website.