Property auction experts have warned new investors to exercise caution when bidding on a tenanted property.

Auction Finance Limited, a Manchester firm that provides finance for property professionals purchasing at auction, says that it has witnessed several instances of investors running into difficulties because they were unaware that their new property came with a sitting tenant.

Scott Hendry, New Business Manager at Auction Finance Limited, says:

“There are still a significant number of properties with regulated tenancies turning up in the auction catalogues, so it is very important to understand the type of agreement that is in place before you bid on a tenanted property.”

Most private properties are now leased under an Assured Short-hold Tenancy (AST) Agreement.  A bidder who acquires a property with an AST will benefit from an instant rental return and, if they require access to the property for their own occupation or to undertake large scale refurbishments, they are entitled to take possession when the agreement comes to an end.  However, if the tenant was in residence prior to 15th January 1989 they may be on a Regulated agreement.

Hendry continues:

“The rights of regulated tenants can create difficulties for investors who are purchasing on a buy to let or buy to sell basis.  Rents are often fixed at low levels that are insufficient to cover mortgage repayments and the tenant can only be made to leave if the owner can prove grounds for possession as defined by the Rent Act of 1977.  In some circumstances the tenant can pass the right of occupation on to a relative when they die, and even if the buyer intends to inhabit the property themselves this does not guarantee that a court will grant them possession.”

These factors mean that properties with regulated tenancies usually sell for substantially less than those with vacant possession.  Some investors are prepared to wait until the tenant moves on before they realise the profits from their acquisition, but most buyers will not want their capital tied up for an indeterminate period of time.

The advice for anyone planning to bid on a tenanted property is simple.

“Don’t just assume that a tenant is on an AST,” says Hendry.  “Read the legal pack provided by the auction house thoroughly to make sure that you understand the terms of the tenancy agreement and how this could impact on your plans for the property.  If there are any points that are unclear then get your solicitor to clarify them before you make a bid.”