The Pros and Cons of Different Types of Tenancies

The tenancy agreement you choose is important – not only does it outline the terms of the tenant staying in your property, but it also highlights how long they will live there for and is formal protection for both landlords and tenants if anything goes wrong.

There are various types of tenancy agreement to choose from, each with their own pros and cons to bear in mind before you draw up the rental agreement.

Short Term Tenancies vs Long Term Tenancies

Before determining the type of specific tenancy agreement, you need to work out if you need a short or long-term tenancy, depending on several factors including the rental yield. As mortgage advisors Town & Country Mortgage Services highlight, “property investment is a great way to invest and traditionally it has produced long term growth for many investors along with great monthly rental yields”. However, the potential yields depend largely on the property location type and importantly the type of tenant you have in place.

The rise of short-term lets is primarily because of the flexibility these tenancies provide. But for landlords, they also offer higher yields as short tenancy agreements are usually priced at a daily rate which can be as much as 30% higher than long-term agreements.

The downside of short-term lets is that they can result in unstable income, and they can also mean more work for property owners in finding new tenants to fill the property. The high turnover of guests means that there’s likely to be higher repair and maintenance costs, along with utility bills that would ordinarily be covered by the tenant with a long-term agreement.

Long-term agreements provide landlords with a stable, steady income that they can rely on. Tenants in a long-term tenancy will also cover utility costs and maintain the property as part of their agreement. Tenants in a long-term agreement require less time and effort for property owners, as bank transactions are automatic and once the tenant is settled in, there’s rarely anything for a landlord to do. However, there are legal obligations with long-term tenants and lower rates compared to short-term agreements.

To determine the right length of tenancy for your requirements, it’s important to factor in all details. If you have a good tenant who pays on time, a longer agreement may work out well, however, short-term tenancies are certainly more flexible.

Types of Tenancies

Assured Tenancy

Assured Tenancy (AT) and Assured Shorthold Tenancy (AST) agreements offer more security than other tenancies as they offer the tenant more rights. For an agreement to be an Assured Tenancy, the tenant needs to occupy the property as their sole residence, and they have to be an individual, not a company.

Assured Tenancies can be for a fixed term, usually of 6 or 12 months; a periodic rolling tenancy for an indefinite period; or a statutory periodic tenancy where the initial fixed term ends but the landlord doesn’t specify a new term.

It’s the landlord’s responsibility to protect any deposit given on the property in a deposit protection scheme. However, this type of tenancy isn’t suitable if you’re charging higher rents of over £100k per year, or if you’re renting out a holiday rental. The main difference between an AT and AST is the limited security of tenure with an Assured Shorthold Tenancy for the tenant.

Non-Assured Tenancy

A Non-Assured Tenancy can only be used in certain situations where an AST can’t be used, such as when the rent is less than £250 per year or if the tenant has a main home elsewhere. If the landlord lives in the same property as the tenant but doesn’t share facilities, they will also need to use a Non-Assured Tenancy. Since it’s not an AST, there’s no need to pay the deposit into a government-backed protection scheme and there’s no need to give a Section 21 or Section 8 Notice to end the tenancy.

Excluded Tenancy

If the landlord lives in the property and shares facilities, this will be categorised as an Excluded Tenancy. This type of agreement doesn’t provide the tenant with as much protection as an Assured Tenancy and there’s no legal requirement to put the deposit in a protection scheme. Landlords using this tenancy can also evict their tenant without giving notice, providing they adhere to the tenancy agreement, so it’s more flexible for the landlord.

Company Let

Property owners renting their property to a company instead of an individual, the tenancy can’t be labelled an Assured Shorthold Tenancy, so it’s not governed by the same rules and regulations. There’s no need to protect the deposit in a government-backed scheme or follow the same guidelines in terms of eviction, and landlords can give a notice to quit at the end of the tenancy.

Regulated Tenancy

Regulated Tenancies are uncommon, as they were used prior to 1989. This was a long-term tenancy that offered tenants fair rent set by the Valuation Office Agency, but it’s rarely used now.

Rolling Tenancy

When the tenancy expires, periodic or rolling tenancies come into play automatically if there isn’t a new contract signed. Neither the landlord nor the tenant has to do anything, as the terms of the initial contract will continue to be in place. This will usually continue on a monthly basis until notice is given by the tenant or landlord.

Verbal Agreements vs. Written Agreements

Some landlords may be of the opinion that a verbal contract is just as good as a written agreement, but there are many flaws to this argument. Having a formal, written tenancy agreement protects both parties if things go wrong and provides evidence of what the tenant and the landlord are responsible for, which can be difficult to prove with only a verbal agreement. Without this document, both parties are vulnerable, and it can cause many issues with regards to evictions, notice periods and deposits further down the line.

A written agreement also highlights anything that could void the tenancy. For example, failure to pay rent on time and in full, allowing more than the number of occupants on the contract to stay in the property long-term, sub-letting a room or the property without permission, and decorating or making changes to the structure of the property can all void the agreement. Without a contract, the landlord isn’t protected legally against these types of breaches.

Conclusion

Different types of tenancy offer benefits to landlords and tenants, depending on their needs and the type of property being let. In most cases, an Assured Tenancy will be suitable and also means that it can be passed on to another person, such as if a member of a family passes away, the family can continue to stay by inheriting the tenancy. However, the type of property, the price of the rent and the flexibility needed all play a role in which tenancy agreement should be chosen to protect both parties as much as possible.