Changes to how buy-to-let income is taxed is prompting some landlords to incorporate their property businesses.
This isn’t a simple process. The law views an individual and a limited company set up by that individual as separate legal entities. This means that transferring a property from individual to corporate ownership can have substantial implications.
The transfer is, in effect, a transaction: the individual is selling the property to the company. If the property is tenanted at the time of sale, it is a transaction with a tenant ‘in situ’ and the company becomes a landlord by purchase.
The existing tenancy is still in place
Properties sold with a tenant in situ are sold ‘subject to tenancy’. The original tenancy agreement that was created between the tenant and the landlord remains in place, with only the identity of the landlord changing.
This is ordinarily to prevent either the original or new landlord from being able to evict a tenant by any means other than the official channels. But whilst the tenancy remains in place, there are still a few obligations the new landlord should discharge.
You should issue section 3 and section 48 notices
The ‘new’ landlord is obliged under Landlord and Tenant Act 1985, section 3 to inform their tenant in writing that the old landlord’s interest has been assigned. You should give this notice no later than:
A similar but separate obligation exists under Landlord and Tenant Act 1987, section 48. Section 48 requires landlords to provide their tenants with an address in England or Wales to which their tenants may serve notice.
You may also wish to send a rent authority letter
Customarily, when a landlord sells a property subject to tenancy, they provide the new landlord with a ‘rent authority letter’ addressed to their tenant. This letter instructs the tenant to pay rent to the new landlord.
Once the property has been transferred, for the avoidance of confusion or doubt, you may wish to officially inform your tenant that rent is now due to the company rather than you personally.
You do not need to reissue prescribed documents, provided they are in date
Provided that you have already correctly issued your tenant with an energy performance certificate, gas safety certificate and DCLG’s ‘How to rent’ booklet, you do not need to reissue this information when you transfer the property. (SI 2015/1646 reg 3(5)(b).)
This is true even if you decide to renew the tenancy, provided that the documents are still in date on the commencement date of the new tenancy.
But you should re-register your tenant’s deposit
A change of landlord is an important material alteration to a tenancy agreement. If you originally took a deposit from your tenant, you will need to protect it again, and reissue the prescribed information.
If in any doubt about the correct course of action, contact your deposit protection scheme administrator.
Written by Ben Gosling at Commercial Trust