The lease-based model is fundamental to successful supported living investments, yet many property investors make the critical error of assuming they can use Assured Shorthold Tenancies (ASTs). Understanding why this doesn't work - and what you should use instead - is essential for anyone entering this sector.
One of the most important rules to understand is that ASTs physically cannot be used in supported living arrangements. Here's why:
For a tenancy to qualify as an AST, several conditions must be met, including that "the property is your tenant's main accommodation." In supported living, your tenant is the Registered Provider (RP) or care provider - not the individual receiving care. Since the RP or care provider doesn't live in the property, this fundamental requirement isn't met.
By default, your arrangement becomes a commercial lease, which offers different protections and opportunities but requires proper understanding and negotiation.
The model works like this:
Your commercial relationship is solely with the RP or care provider - remember this key point throughout any negotiations.
Gone are the days of 25-year leases. The industry has evolved towards more sustainable arrangements:
Current norm: 5-10 year leases, often with break clauses
Why the change: Long leases create unsustainable liabilities for RPs and make financing nearly impossible
As one expert notes: "The more you understand the sustainability of that Registered Provider, the more you realise those long leases aren't as good as they initially sound."
Many investors initially reject lease offers that seem below market rate, but the calculations tell a different story.
Example comparison:
For HMO properties, the benefits can be even more significant when you factor in eliminated council tax, utilities, and management time.
Fully Repairing and Insuring (FRI): Some leases are FRI, meaning the tenant takes responsibility for all repairs and insurance. Get a professional property condition report at the start.
Break clauses: Ensure you understand whether break clauses work both ways or favour one party.
Rent increases: Link rent increases to CPI (Consumer Price Index) to protect against inflation.
Registration: Leases over seven years must be registered with the Land Registry - it's the tenant's responsibility, but monitor this closely.
Start with market rate as your baseline, but remember that below-market rent can still leave you better off due to eliminated costs.
Consider sustainability - pushing for unsustainable terms may lead to provider failure, ultimately harming your investment and the vulnerable people the service supports.
Early engagement with lenders is crucial. Share draft leases with your broker early in the process, as commercial arrangements require different lending criteria.
The lease-based model requires more upfront work than standard ASTs, but the long-term benefits far outweigh the initial complexity. With proper understanding and negotiation, you can achieve:
Success in this sector isn't about maximising headline rents - it's about creating sustainable arrangements that benefit everyone involved, including the people who need quality homes the most.
Always seek legal advice when negotiating commercial leases, and ensure you fully understand every term before signing. The Supported Living Gateway provides template leases and partners with specialist lease readers to help guide you through this process.
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