Welsh occupation contracts: buyers beware!

On 1 December 2022, the Renting Homes (Wales) Act 2016 (the Act) came into force, applying not only to new rental agreements, but also converting all relevant existing tenancies and licences into the new “occupation contracts”.

A new vocabulary has been introduced: tenants and licensees are now “contract-holders”, and landlords are required to serve “written statements” setting out the terms of the occupation contract on “contract-holders”. The written statements must include prescribed “fundamental terms” which are automatically incorporated in all occupation contracts, “supplementary terms” (with any agreed amendments made clear within the contract itself) and any “additional terms” which have been agreed by the parties.

The regime is completely new and there is uncertainty about how some aspects of it will work in practice. This article provides an overview of the issues created by the new regime that buyers of properties in Wales subject to residential occupancies should consider as part of their due diligence.

Consider which residential occupations are affected

Occupation contracts have replaced assured tenancies (governed by the Housing Act 1988 and previously the most common form of residential tenancy granted by private landlords). Older, Rent Act tenancies (derived from pre-1989 occupations) are excluded, as are agricultural leases (both FBTs and AHAs) and long leases of over 21 years.

However, the Act also applies to licences and other, less formal arrangements previously outside of the scope of the Housing Act where rent or other consideration is payable. It is unclear what will count as "other consideration" as this is not defined, but providing a service to or undertaking work for the landlord are referred to as examples in guidance. Importantly, there is no minimum rent threshold, which means that the Act applies to agreements even where there is only a token rent of £1 per annum (regardless of whether it is paid).

On this basis, a buyer should flush out information on all of the residential occupations on the property, including any less formal arrangements, to ensure that they are clear on which occupations come within the purview of the Act. Buyers should also take care if they are considering granting holdover licences on completion, as it may be difficult to ensure that they are not inadvertently caught by the Act.

Check all written statements were served within statutory deadlines

Landlords are required to serve the written statement on contract-holders within 14 days of the “occupation date” (the date on which the contract-holder is first entitled to reside in the dwelling) and in the case of “converted contracts” (existing tenancies in place prior to 1 December 2022 which the Act converted to new occupation contracts on that date) before 1 June 2023. However, the obligation to provide a written statement can arise again on other occasions throughout the life of the contract, including within 14 days of a new periodic tenancy arising at the end of a fixed term contract, if there are any changes to the identity of the contract-holder and if the contract-holder requests a further written statement.

Where landlords have missed deadlines, contract-holders are entitled to statutory compensation which they can set off against rent. The Act also provides a mechanism for the contract-holder to apply to court for a declaration of the terms of the contract if no statement, or an incorrect or an incomplete statement, is served.

For these reasons, ask sufficient additional questions so that you can determine whether written statements have been properly served within the relevant deadlines and what risk there is of disputes about the agreed terms of each contract.

Has the seller received any applications for consent?

A new statutory procedure has been created to deal with applications where landlord’s consent is required under the terms of the occupation contract, imposing a one month deadline (extended by up to two weeks if additional information is requested from the contract-holder) for landlords to consider applications and, if requested to do so, provide a written statement setting out why consent was withheld or conditions imposed. If these deadlines are missed, unconditional consent will be deemed to have been given. Contract-holders can also apply to court to challenge a refusal or the imposition of any conditions, and the Act sets out the criteria for a court to take into account when determining if a landlord has acted reasonably.

Get information on other occupiers at each property

The Act makes it easier for new parties to be added or removed as a party to a contract. Contract-holders are able to apply for landlord’s consent to add a new contract-holder to a contract (any application to be dealt with in line with deadlines referred to above) and in the case of periodic contracts, a joint contract-holder may give notice to unilaterally withdraw from a contract leaving the remaining contract-holder(s) in occupation.

Succession rights have also been introduced, where, on the death of a sole contract-holder family members (or in some cases carers) who occupy the dwelling as their principal home at the time of death, can qualify to succeed to the contract.

On account of this, a buyer should obtain information about all of the occupiers at each dwelling in order to consider whether these rights are likely to apply in the future.

Do the properties comply with new Fitness for Human Habitation requirements?                    

The regulations requiring landlords to ensure that properties are fit for human habitation have also been extended and updated. There are now 29 standards which must be met both at the start of the occupation and at all times throughout it, meaning that ongoing inspections are important. In relation to converted contracts only, there is one exception to this: landlords have a grace period of until 30 November 2023 to ensure compliance with the smoke alarms and electrical safety certificate requirements.

When is the earliest vacant possession can be obtained, if required?

Interestingly, the Act does not entirely abolish so-called "no-fault" evictions (familiar in the form of s.21 notices for Housing Act 1988 tenancies), but it does extend the timescales before landlords can recover possession. For new periodic tenancies, you must give six months’ notice to terminate the contract (increased from two months) and are prohibited from serving the notice in the first six months of the term (up from four months). In contrast, a contract-holder may bring a periodic contract to an end on four weeks’ notice.

For new fixed term contracts, the earliest you can regain possession under a contractual landlord’s break clause is two years, as landlords are required to give six months’ notice and such notice cannot be served in the first 18 months. Transitional rules apply for converted contracts.

Similar to the English rules for the service of s.21 notices, there are additional restrictions for serving break notices. Landlords are unable to serve valid notices where they are in breach of statutory obligations to include the provision of EPCs, gas certificates or required information in relation to rent deposits. Or where the rules regarding the provision of written statements have been breached.

Overall, the Act is a new regime and requires a new set of questions to be asked in due diligence, so buyers beware!

If you require further information about anything covered in this briefing, please contact Alice Groom or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, December 2022