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Due diligence in lettings and lettings insurance

publication date: Aug 19, 2008
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author/source: Mike Summerhayes
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IN spite of the current economic climate and reports suggesting that landlords are losing confidence in the buy-to-let market, the private rented sector remains an important aspect of the housing market; accounting for 12% of England’s housing stock (2.6 million homes); an increase of 4% on 2006 figures. [Source: Survey of English Housing – Communities and Local Government]

The ‘experts’ in the national media continue to prophesise gloom and doom with long term falling house prices; negative equity on mortgaged properties; mortgage foreclosures on the increase along with unemployment. What will the impact be on the private rented sector as the recession deepens?

Common sense tells me that a natural consequence will be that more tenants will default on their rental payments by reason of circumstances beyond their control (such as redundancy) and investment landlords will purchase buy-to-let properties at knock down prices to add to their property portfolios in readiness for when property values increase.

However careful landlords may be with the vetting of prospective tenants, there will be tenants who will breach their tenancy agreement. This is likely to result in the landlord not receiving the rent needed to service their mortgage commitments. For many landlords it is standard practice to have rental guarantee and legal expenses insurance from the outset of the tenancy.

But what if the landlord elects not too? Can landlords afford not to take out such insurance cover? When a tenant defaults or fails to vacate a property, where can a landlord go for a professional, speedy and competitively priced solution?

While they may be referred to their letting agent’s appointed solicitors or their insurers’ appointed solicitors, landlords need not necessarily appoint solicitors. They can place instructions with organisations who offer tenant eviction services for a fixed fee. This seems to be a growing business; a website search identifies scores of businesses offering high success rates without the need for solicitors.

In reality, these organisations have arrangements with firms of solicitors for the court issue and representation stages of the eviction process with their fees being deducted from the all inclusive fixed fee paid upfront by the landlord to the service provider with a standard of service that might fall short of the landlords’ expectations.

Having represented uninsured landlords in Court I have been disappointed by the number of ‘inexcusable’ errors which have appeared in the initial statutory notices (and court process) resulting in the S8 HA 1988 Notices of Seeking Possession being incorrect and worse, fatally flawed resulting in the court possession action either being ‘lost’ or the Court granting leave to dispense with the S8 HA 1988 Notice precluding the landlord from relying on the statutory grounds for possession.

Simple errors which should have been picked up by the service providers and if not by them, by the service providers’ appointed solicitors. Errors such as misspelling of names; failing to incorporate all parties in to the court proceedings; citing an incorrect monthly rental and failing to show a correct accumulative arrears total.

While these instances may be few and far between when taking in to consideration the volume of matters actioned, it is still of little comfort to the landlord who now suffers unnecessary delay in obtaining vacant possession and is likely to be financially prejudiced with little prospect of financial recovery from the tenant at the end of the day.

Greater care needs to be taken by the service providers and their appointed solicitors to check the information initially provided by the landlord and/or the managing agent and to cross reference information with the tenancy agreement and associated documents notwithstanding any declarations signed by the landlord confirming the information form to be correct.

How easy it is for the uninitiated landlord to state that the rental is four weekly (as oppose to monthly) because they receive 4 weekly housing benefit rental payments from their local authority. A simple misunderstanding on the part of the landlord which can have consequences if not picked-up by the service provider or appointed solicitors and no redress by reason of the declaration signed by him.

With the growth in tenant eviction service providers it begs the question why firms of solicitors who offer residential repossession landlord and tenant services appear unable to provide a service at a competitive rate. The answer may be that they consider such work not to be ‘economically viable’ meaning that it would not generate as big a profit as they would like. Isn’t any profit better than no profit at all? With the decline in conveyancing transactions and firms‘ bread and butter’ money, perhaps they should consider the viability of ‘standard’ possession work.

For as long as landlords elect to use third party service providers, they need to satisfy themselves that their interests are properly protected and the matter will proceed without avoidable hiccups. For this they should use providers with a solid industry background.

Mike Summerhayes is Director of Legal Services [DDI 01908 340022] – LetSafe (UK) Limited - providers of tenant assessment services for Letting Agents and Private Landlords as a well as a comprehensive range of Legal Protection Products for landlords and landlord eviction services. www.letsafe.net

SUSPENDED PRISON SENTENCES AND BIG FINES FOR LETTING AGENTS

Cardiff County Council has recently prosecuted two letting agents in Cardiff for fire precaution failures and Housing Benefit fraud. One agent was fined £4,000 for failing to maintain fire alarm systems in two student properties. Another was given eight six-month prison sentences suspended for 18 months, fined £15,000 and ordered to carry out 200 hours community service in respect of fraudulent benefit claims. In a third case brought by tenants a Cardiff landlord whose letting agent failed to protect the deposit of £900 may have to pay out £2,700 in compensation.

Last year landlords and tenants were embroiled in rows over unpaid rent and lost deposits when a Cardiff Bay firm shut up shop at a moment’s notice and hundreds of thousands of pounds of client monies went missing. None of the agents involved belonged to any professional body or accreditation scheme.

Andrew Thomas of Chris John & Partners, ARLA Vice-President said: “As in the rest of the UK, no more than half of the letting agents in Wales are regulated in this way. I want to see quality agents, and there are many, recognised for the good service they provide. But it’s high time a compulsory system of licensing or accreditation was introduced to protect consumers and raise standards. If Government in Westminster continues to fail to act on this issue then the Welsh Assembly, working with ARLA, could and should consider stepping in to regulate the lettings industry in Wales.”