An interesting contrast between the letting market and the sales market is the amount of due diligence that tenants and purchasers are likely to carry out. This is particularly true in the prime Central London market – the home of the “UHNWI” and “uber-tenant”. It’s difficult to make a true comparison. A wealthy individual who might be prepared to pay an annual rent of £1m (possibly in advance) is unlikely to buy a flat for that amount, but if he did it’s likely that he’d take a reasonable amount of care to ensure that his investment was secure.
One difference is that as a purchaser he’d probably instruct a solicitor to represent him. The solicitor would deal with all the enquiries and searches that are routinely made before contracts are exchanged. Does the £1m renter take similar precautions? We don’t think so. Instead after finding a suitable property he is much more likely to sign a letting agent’s standard tenancy agreement with perhaps a few bespoke terms. If he is renting a flat is he likely to ask to see his prospective landlord’s lease or make any other enquiries? In our experience the answer is no.
The failure by a prospective tenant to make appropriate searches and enquiries could expose him to a number of risks, particularly if a substantial part of the rent is paid in advance. The following three risks are perhaps the most serious.
Forfeiture of the head lease
The prospect of a court forfeiting a long residential lease is remote but it happens from time to time and if a lessee has let his flat, in breach of covenant, then the tenant may have a problem. In all of our three examples the tenant’s problems are exacerbated if he has paid a substantial part of the rent in advance. While a forfeiture issue may not necessarily lead to the tenant having to move out during the term of the tenancy it’s unsettling and could easily lead to the inconvenience and expense of the tenant having to take legal advice, or even court proceedings. It doesn’t necessarily follow that the lessee has acted dishonestly, he may just be thoughtless.
Many long lessees won’t put themselves to the trouble of reading the lease before they let their flat – some may not even understand that ownership of their flat is regulated by the lease. So what should a prospective tenant do? Well, one thing he could do is to obtain a copy of the head lease to find out what it says about subletting: is it a breach of covenant not to obtain landlord’s consent? He doesn’t even have to ask the lessee for a copy, he should be able to obtain one direct from HM Land Registry. To be safe a prospective tenant could ask the lessee to produce evidence of the landlord’s consent but that might not be well received. In a strong market that sort of request could lead to the lessee turning his attention to a less inquisitive prospective tenant.
The lessee’s mortgagee taking possession
It may have happened, and it’s certainly conceivable, that a lessee who is hopelessly in debt lets his house or flat, takes a substantial part of the rent in advance, and then disappears. Of itself this probably wouldn’t concern a tenant but it certainly would concern him if the property was mortgaged and it was the intention of the lender to enforce his security by taking possession and selling it. On the reasonable assumption that the lender hadn’t consented to the letting his right to possession would have priority over the tenant’s right to possession, and in certain circumstances a lender could take possession without a court order. For a tenant who is a frequent traveller this is a point to note. Although the tenant would have a claim against the lessee in practice this would probably be worthless.
Living next door to a construction site
It would be an understatement to say that a tenant who has just rented a property in, say, a leafy London garden square would be irritated to find that a neighbouring property was about to undergo a major refurbishment which would last for 12 months or more. Could he have foreseen this? It would depend on the nature and extent of the refurbishment but if it required planning permission then information about the application and any decision should be readily available on the local planning authority’s website. If time allows, and more extensive enquiries and searches are required, then an official local authority search could be made but it’s important to remember that these searches only relate to particular properties. Therefore any application for a search should be made in respect of neighbouring properties. Planning permission and building regulation consent may not be required for all refurbishments so direct enquiries of the property owner and adjoining owners might be prudent. It’s important to remember the old adage “buyer beware”. The property owner – the prospective landlord – is not under any obligation to volunteer information about neighbouring building works.
Our observations about risk are all very well but they may not count for much in real life, particularly when there is keen competition for the limited number of properties in the prime Central London market. In these circumstances a desire to secure the right property in the right location may be much more important to a prospective tenant than any theoretical risks.