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17 November 08

Battening down in buy-to-let

by Laura Smith

As mortgage lenders rapidly retreat from the buy-to-let market, pressured borrowers must not overlook the fine print

The economic chaos which heralded the downfall of Bradford & Bingley, one of the UK’s biggest buy-to-let mortgage lenders, and the capitalisation of the big Scottish banks, HBOS and RBS, has ushered in a new dawn for landlord investors in search of credit.

Where a year ago there was a plethora of mortgage products available to property investors and landlords, now with tight lending the norm, there is a dire shortage of buy-to-let mortgages available. For those able to find a product there can be little time to secure an offer before the product is withdrawn. Undoubtedly, where lending is concerned it is a sellers’ market and purchasers may feel pressured to accept any conditions imposed by a lender.

It is normal practice for a lender to dictate, and insist on the inclusion of, clauses to safeguard their legal position; however in the current unstable financial climate practitioners would be well advised to pore over the clauses to ensure that both a client’s best interests and the lender’s stipulations are met.

In particular, lenders need to ensure that tenants do not acquire security of tenure and that if necessary a tenancy can be drawn to a close at the ish or indeed beforehand.

Lenders are understandably insistent that the agreement affords them the right to seek possession of the property in the event of mortgage default. To achieve this, the lease should give written notice of this eventuality (Housing (Scotland) Act 1988, sched 5, ground 2).

I would add that it is good practice to notify the tenant of all 17 grounds set out in sched 5 before entering the tenancy, and the most practical means of achieving this is by including sched 5 in the tenancy agreement.

Practitioners would be well advised to inform landlord clients of any other restrictions, in case they curb the landlord’s plans for the property. Examples of restrictions we have seen recently are:

A landlord must not:

• let to students – careful consideration should be given to this as in some cases students can be the only suitable market for some flats;
• let premises to people who have diplomatic immunity. For landlords with high quality properties in Edinburgh this may narrow the field of potential tenants;
• allow tenants to pay more than three months’ rent in advance – in my experience advance payment of up to six months can be a useful negotiating tool;
• permit assignation of the tenancy under any circumstances – we understand this to be an “unfair contract term” in accordance with the Office of Fair Trading guidance on tenancy agreements.

With borrowings harder to procure, practitioners may find themselves under pressure from clients to secure funds. However, I would argue it is imperative that a lender’s criteria are understood and met by the client, and to have a suitable lease in situ. It may be wise before agreeing to restrictions to forward all relevant documentation to the lenders and request that they satisfy themselves as to the suitability of the tenancy agreement.

Lenders have teeth and in these hard times may use them. Failure to comply with their conditions may result in withdrawal of permission to let – the consequence of which may be a reversion to the standard variable rate, which may leave landlords feeling the pinch of their own credit crunch.