Occupation Contracts – Do RSLs Need the Consent of Their Lenders?

When the Renting Homes (Wales) Act 2016 (the Act) comes into force on 1 December 2022, there could be ramifications for your secured funding arrangements.

It’s market practice for bank and private placement lenders to place restrictions on disposals of properties forming part of their security portfolio. Sometimes these restrictions relate not only to charged properties but also to any other substantial part of a borrower’s assets. Legally, the granting of a tenancy is a type of disposal and is therefore caught by a disposals prohibition. Under the Act, “occupation contracts” will replace residential tenancies and licences. Despite the change in terminology, in essence an occupation contract will act and feel like a tenancy (and a disposal of the property) as construed and defined by the courts. Therefore, any occupation contract you enter into could be subject to a contractual disposal prohibition.

A typical loan agreement to an RSL borrower will contain an exception that expressly allows any tenancy that meets the following criteria:

  1. It is a residential tenancy at a rent and without a fine or premium and/or within the ordinary course of the activities of a Registered Social Landlord; AND
  2. It complies with the provisions of the Regulatory Framework or any other applicable guidance issued by the Welsh Ministers; AND
  3. It is created pursuant to a tenancy agreement in or substantially in a form approved by the lender OR on terms which confer no fewer material rights on the borrower as lessor and impose no material obligations on the borrower additional to those set out in any such approved tenancy agreement.

The Act and accompanying secondary legislation contain mandatory provisions that must be incorporated into occupation contracts. Under a typical restriction on disposals such as the one outlined above, the occupation contract would require lender approval because, in comparison with your current tenancy agreements, the new occupation contract could confer fewer material rights and/or impose additional material obligations on the borrower as landlord. For example, as a statutory minimum they will include a) changes to the rent increase process in some circumstances; b) increased regulatory requirements such as smoke and carbon monoxide alarms and electrical testing rules; c) enhanced rights relating to the standard of accommodation (i.e. fitness for human habitation, along with a potential supplementary term that rent is non-payable where there is a breach of the new fitness obligations); d) changes to eviction rights and processes; and e) enhanced succession rights.

Existing tenancy agreements will automatically convert into occupation contracts by operation of law on 1 December 2022. Landlords are required to deliver a written statement to the contract-holder setting out the terms of the occupation contract within 14 days after the beginning for a new contract or within 6 months in the case of a converted contract. However the actual contract will be created on the occupation date (for a new contract) or the date of conversion (for an existing tenancy). The consequence, for any secured funding arrangements that are subject to a typical restriction on disposals of existing charged or other properties such as the one above, is that lender consent to the new form of occupation contract for those properties will be required prior to 1 December 2022.

The Welsh Government has published model written statements for some occupation contracts, but RSLs will want to insert additional clauses to capture some of the further protections that are in their current tenancy agreements. Landlords will also need to carry out a conversion process in order to create written statements for converted occupation contracts, following regulatory guidance to ascertain which terms are required by or compatible with the Act.

Each lender and each loan or note purchase agreement will differ in their respective requirements. In some cases, the borrower’s position will be further strengthened by a requirement not to unreasonably withhold or delay consent. We don’t believe a funder would be justified in withholding approval to the new or converted form of occupation contract, insofar as the terms are mandated by law. Nonetheless, a lender may have the right to do so under the terms of their funding agreements.

All Welsh RSLs should be reviewing their funding agreements to ascertain where such consent is required, with a view to obtaining any necessary consents or waivers from their lenders, before 1 December 2022.

For more information, please contact Julian Barker, Lee Russell, or Victoria Smith.

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