In one of the biggest shake-ups of residential lettings in recent memory, the Government has published the “A fairer private rented sector” white paper. Property Associate, Kim Walker details some of the key changes that landlords need to know.
The latest in a string of Government measures focusing on housing and home ownership, the paper sets out a 12-point action plan aimed at improving the quality of private residential housing and reducing the threat of eviction for tenants.
The abolition of “no-fault” section 21 notices has dominated the headlines although the reforms are much wider. The proposals will affect the duration and termination of tenancy agreements, the standard of properties, the process for increasing rent, selection of tenants, enforcement of the rules and resolution of disputes. The white paper includes a comprehensive explanation of the changes. However, the final details will only be known once the white paper proposals are incorporated into the Renters Reform Bill and passed through Parliament.
In this article we (1) consider who the proposals will apply to (2) compare the current procedures for terminating assured shorthold tenancies (3) highlight some of the key changes that landlords should be aware of (4) look at when the changes will come in and (5) consider practical implications for landlords.
Who will the changes apply to?
All landlords renting out private residential properties in England, ranging from large-scale investors to individuals renting out a second home, will need to be aware of the changes. Exemptions are proposed for Purpose-Built Student Accommodation, although separate regulations will apply.
Terminating tenancies: the current procedures
Different forms of residential tenancy agreement can be used for lettings. The most frequently used is the assured shorthold tenancy (“AST”). ASTs are a type of “assured tenancy”. ASTs are generally granted for a fixed term (often six or twelve months) although can also be periodic tenancies, running from period to period (such as month to month). Under the Housing Act 1988, landlords can currently evict AST tenants by serving either a section 21 notice or section 8 notice (or both). Both types of notice inform the tenant that the landlord wants possession of the property. If the tenant fails to leave on the date specified in the notice, both procedures allow the landlord to apply to court for a possession order. Key differences in the procedures include:
• The type of tenancy: Section 21 notices can only be used to end ASTs. Section 8 notices can be used for any assured tenancy.
• Grounds: A section 21 notice can be served for any reason. A section 8 notice can only be served where certain grounds exist (e.g. the rent unpaid by the tenant exceeds certain thresholds). Some are mandatory grounds, where the court is obliged to order possession. Other grounds are discretionary, where the court can choose whether to make an order.
• Notice: In the case of a section 21 notice, if the tenancy is for a fixed term, the landlord can only seek possession at the end of the term or on a break date specified in the tenancy. No less than 2 months’ notice must be given. Periodic tenancies can only be terminated at the end of a period. The notice period under section 8 depends on the ground on which the landlord is relying. However, the notice can potentially be served during the fixed term of the tenancy.
• Type of possession order: In the case of a section 21 notice, the landlord can apply for an accelerated possession order, which usually avoids the need for a hearing. Where a landlord applies for a possession order following service of a section 8 notice, the judge could decide that a hearing is needed.
• Compliance: A section 21 notice cannot be served where the landlord has failed to comply with certain statutory obligations, such as where the deposit paid by the tenant has not been properly protected. Fewer restrictions apply to section 8 notices.
What are the key proposals?
Changes to duration and termination of tenancies
The proposals aim to increase flexibility and security for tenants. Fixed term tenancies will be dispensed with. We will also see a move away from a system where landlords can choose why to end a tenancy to one where a specified ground must exist.
• Abolition of “no fault” section 21 notices
In a significant change, the right for landlords to serve a section 21 notice to terminate ASTs will be abolished. Tenancies will only end where either the tenant gives notice to the landlord or where the landlord can rely on one of the statutory grounds for possession (the section 8 notice procedure). Analogies could be drawn with the security enjoyed by some commercial tenants under protected leases, although without the option for residential landlords and tenants to opt-out of the security regime.
• Changes to the statutory grounds for possession (section 8 notices)
The Government acknowledges the need for balance between protecting the security of tenants and landlords’ rights to manage their property. The proposals therefore extend the statutory grounds for possession with the introduction of additional mandatory grounds.
Selling or moving into property: Landlords will be able to evict tenants on two months’ notice when selling a property or where the landlord or close family members are moving in. Landlords will not be able to rely on these grounds in the first six months of a tenancy. Landlords will be prevented from marketing and reletting the property for 3 months following the use of these grounds.
Repeated serious arrears: Landlords will be entitled to end tenancies where a tenant has been in at least two months’ rent arrears three times within the previous three years. The actual amounts owed by the tenant at the time of the hearing will not matter, addressing the situation where tenants persistently fail to pay rent but manage to avoid eviction by paying just enough at the last minute.
Changes to existing grounds for possession include:
Current rent arrears: Notice periods will increase from two to four weeks.
Criminal or serious antisocial behaviour: The notice period will be reduced to two weeks.
• Moving from fixed term to periodic tenancies
Under the reforms, all tenants who previously had assured tenancies or ASTs will move to periodic tenancies. Tenants will be able to end these tenancies on two months’ notice at any time, reducing the period of guaranteed income for landlords. We will have to see whether this impacts the value of Private Rented Sector properties or the terms of “buy-to-let” mortgages. Unlike landlords, tenants will not be limited to terminating tenancies on specified grounds.
Changes to rent increases, tenants and restrictions on pets
• Restrictions on rent increases
Whilst stopping short of historic levels of rent controls, rent increases will be limited to once a year. Rent review clauses will also be banned. Instead of tenancies fixing in advance the level of rent increase, landlords will have to inform tenants of the proposed increase no less than two months before the increase takes effect (doubling existing notice periods). Tenants will be able to challenge “disproportionate” rent increases through the First-tier Tribunal.
• Prohibition on blanket bans on renting to families with children or those in receipt of benefits
Many of us will have seen lettings advertised as “no benefits” or “no DSS”. The white paper identifies the obstacles that tenants on benefits or with children face in finding suitable housing. It will be illegal for landlords or agents to impose blanket bans going forwards. The Government proposes to review whether bans should also be extended to other vulnerable groups, such as former prisoners.
• Right for tenants to request a pet at the property
Landlords will be obliged to consider requests by tenants to have a pet in the property and will not be able to unreasonably refuse consent. This appears to put renters in a better position than many flat purchasers. The paper discusses the potential use of pet insurance to provide security for the costs of remedying any damage caused by the pet.
Regulation of the standard of properties
• Extension of the “Decent Homes Standard” to the Private Rented Sector
The Decent Homes Standard already imposes a standard of decency in the Social Rented Sector. This will be extended to the Private Rented Sector, with homes required to be free from serious health and safety hazards such as carbon monoxide poisoning or fire risks. As with social housing, the standard could extend to wider repairs or even layout of properties. Tenants will be able to apply for a rent repayment order for sub-standard homes.
Resolution of disputes, compliance and enforcement
For the new rules to have any practical effect, landlords and tenants need to be aware of their rights and obligations. Adequate methods of enforcing those rights and obligations must also be available. A number of changes are proposed to address this.
• Introduction of a compulsory Ombudsman
Private landlords will be required to join a single Ombudsman scheme. This is aimed at stream-lining dispute resolution services for landlords and tenants as well as making the process quicker, cheaper and less adversarial.
• Introduction of a new Property Portal
Landlords will be required to register their property on a new Property Portal. The proposed Portal is aimed at both providing information on legal requirements and facilitating enforcement by local councils.
• Strengthening local councils’ enforcement powers
Measures will also be explored to make it easier for local councils to share information and pursue serious offenders.
• Reduction of delays in court proceedings
The reforms will potentially see courts play an increased role in ending residential tenancies. The white paper acknowledges that improvements in current court and tribunal processes are essential to reduce delays and increase efficiency.
When will the changes come in?
The proposals will be incorporated into the Renters Reform Bill, expected to be introduced in this parliamentary session. Once the Bill has been passed, the start date for the measures will be known. A transitional period is expected, with at least six months’ notice to be given by the Government before new tenancies will be periodic and subject to the new rules. There will be a gap of at least twelve months before the new regime then applies to existing tenancies.
Practical implications for landlords
At first glance the changes appear to significantly reduce the rights and discretion of landlords. However, on closer inspection, the implications are perhaps narrower than first thought.
The abolition of section 21 notices will not affect tenancies that are not ASTs, such as lettings to companies. Even if the current section 21 notice procedure is used, the landlord cannot evict a tenant who fails to move out of the property without a court order. Further, although landlords will only be able to end tenancies where a specified ground exists, those grounds will be extended with additional mandatory grounds being introduced.
The Decent Homes Standard brings an additional level of regulation. However, some controls already exist over the standard of homes, such as through building regulations, minimum energy efficiency standards and requirements for gas safety certificates. It is anticipated that many properties will already exceed the minimum standard required.
Few people would deny the right of individuals to live in a safe and healthy home. However, measures that are perceived as overly tenant-friendly can deter landlords, reduce the availability of rental properties and potentially lead to increased rents. The Government acknowledges that a balance is essential.
One aspect that is not discussed in the paper is the role that section 21 notices have played in giving teeth to other regulations. Many compliance failures (such as failing to properly protect deposits) currently result in landlords losing the ability to serve section 21 notices, acting as an additional incentive for landlords to comply. Abolishing section 21 notices could potentially have a knock-on effect in other areas.
Undoubtedly, there will be greater focus on “fault” evictions and the court system will need to withstand increased pressures.
In the short-term, we may see increased use of section 21 notices as landlords prepare for the introduction of the new rules and the changes that they will bring.