Contractual Tenancy or AST – What’s the Difference?

contractual tenancy

In our previous article ‘Tenancy or Licence’, we saw in the case of Street v Mountford 1985 that a court will look at the facts to establish what type of tenancy exists rather than what was intended, created or negotiated. In a similar vein and following a timely question we will consider under what circumstances you could or should have a contractual tenancy as opposed to an assured tenancy and in particular the common form of assured tenancy, the assured shorthold tenancy (AST).

So what is a contractual tenancy?

A contractual tenancy is known by a number of different names the most popular alternatives being a non-Housing Act tenancy or a common law tenancy. The reference to the Housing Act is of course the Housing Act 1988 which gave us assured tenancies offering greater protection to the tenant and, of course, the ability to end an AST under section 21 of the Act. The origins of a contractual tenancy are from Common Law and therefore not written down in a single legislative document.

How is an AST different?

Section 1 of the Housing Act gives us the meaning of assured tenancy and says that a tenancy will be an assured tenancy if the tenant, or each of joint tenants, is an individual and that ‘the tenant or, as the case may be, at least one of the joint tenants occupies the dwelling-house as his only or principal home’. The third requirement in section 1 is that the tenancy is not an excluded tenancy.

Schedule 1 of the Housing Act 1988 gives us a list of tenancies which cannot be assured tenancies (are excluded). Of particular note, and well known, is tenancies at a high rent, which is currently set at rent exceeding £100,000 per annum (£8,333.33 per month) but also less well known tenancies of less than £250 per annum. With rents at these levels, it does not apply to many tenancies. Also listed are business tenancies i.e. where the purpose of the let is business i.e. Rent to Rent, Care Homes etc., holiday lettings and where there is a resident landlord.

If therefore a tenancy has any of these characteristics or all the tenants are not individuals or if it is not the only or principal residence of at least one of the tenants, then the tenancy is not covered by the Housing Act 1988 and therefore must be something else.

If the tenant is not an individual, then who is the tenant?

The tenant would have to have an identity, such as a company, a limited liability partnership or a local authority, and therefore the tenancy cannot be an assured shorthold tenancy because Section 1 of the Housing Act tells us it cannot be.

If the tenancy is outside of the Housing Act then compliance with Housing Act requirements is not required. Some notable exclusions here would be deposit protection legislation, the Tenant Fees Act 2019 or the requirement to provide the tenancy prescribed information i.e. the How to Rent guide. So, for instance, under a contractual tenancy a deposit in excess of the five week limit set out in the Tenant Fees Act 2019 is permitted and the deposit does not need to be registered.

If the tenant is a company, not an individual, then this is unlikely to change without the knowledge of the landlord as a change of tenant has the effect of creating a new tenancy and therefore this would have to be agreed.

In next week’s post, we will be covering what kind of situations may cause a contractual tenancy to become an assured shorthold tenancy. In the meantime, why not take a look at our 30-Point Landlord Checklist? Download it for free below.

Assured shorthold tenancies and semi-permanent homes

What would be the situation if the tenant declared that the property was not going to be their only or principal home but circumstances changed later on?

Less permanent methods of employment have led to an increase in short term employment contracts and more people are having to travel greater distances for employment. This has led to the option of a ‘pad in town’ becoming a more practical and affordable alternative to a daily commute. In this instance, if the individual is renting the property in their own name they will have a principal residence elsewhere and are likely to return to that home at the weekend. It is likely that the tenant’s driving licence and insurance addresses is registered at their main home and, for instance, that their bank account and credit cards statements are posted to their main home too. The applicant’s declaration of whether the property will be their principal residence will determine the type of tenancy you prepare: either a contractual or an AST.

Moving from a contractual to an assured shorthold tenancy

Imagine a scenario where we have a tenant in a property who ordinarily resides from Sunday evening to Thursday morning and has quite rightly signed a contractual tenancy. There is a good chance that the deposit exceeds the maximum five week plus deposit under the Tenant Fees Act, the deposit was probably not registered and the How to Rent guide may not have been issued. Unbeknown to the landlord or agent, the tenant’s marital situation has changed and the tenant is now living full time in the rented property. It is unlikely that the tenant will bother, or even be aware of the need to notify anyone.

By the time that anyone finds out, the contractual tenancy will have become an AST because the property is now, in practical terms, the tenant’s only or principal home. The gas safety record and EPC were required for the contractual tenancy anyway but where do we stand in relation to the tenancy deposit and How to Rent guide?

The subtle differences

The tenancy deposit was received at a time when the tenancy was not an assured shorthold tenancy agreement. The requirements in the Housing Act 2004 relate to a deposit ‘received in connection with’ an AST. The deposit was not received in connection with an AST; it was received in connection with a contractual tenancy. Therefore, it does not need to be registered or protected and prescribed information is not required. The amount of the deposit when received in connection with the contractual tenancy was not limited, meaning any amount over the five week limit is not a prohibited payment under the Tenant Fees Act 2019.

There is a subtle difference regarding the tenancy prescribed information: the How to Rent guide. Section 39 of the Deregulation Act 2015 requires the provision of the tenancy prescribed information to the tenant ‘under an assured shorthold tenancy’. So because the tenancy has become an AST, the tenant is due to be given the relevant guide.

This would be an unusual set of circumstances, but it’s not outside the bounds of possibility. A renewed tenancy with the same tenant under the above circumstances would almost certainly be an AST by default, even if a contractual tenancy was signed.

As we saw in Street v Mountford 1985, the court considered the circumstances to determine the type of agreement that existed between the parties. In this instance we know a contract exists (rent payable for a term and exclusive possession) and the court is likely to determine that the tenant has an AST.

A conclusion

Whilst nothing wrong was done in the first instance, reliance on only or principal residence is vulnerable to a change of circumstances. Where this vulnerability exists, landlords and agents should continue to use the contractual tenancy initially but consider offering the comparable protections of the Housing Act. This may include increasing the landlords’ notice period in line with the requirements under Section 21 using the relevant Section 21 to give that notice.

Landlords and agents should consider registering the deposit with a deposit protection scheme and only take a deposit that does not exceed the deposit limits set by Tenant Fees Act. The deposit protection legislation whilst not requiring the registering and protection of a contractual tenancy deposit does not preclude it either. If the contractual tenancy was later found to be an assured shorthold tenancy, it can at least be argued that the protections given to the tenant match those required by the Housing Act and that breaches of deposit protection legislation and the Tenant Fees Act are avoided.

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