The private rented sector - the reforms and impact

Although the legislation has been passed, the key provisions are not yet in force. While this means more waiting, it also allows landlords to familiarise themselves with the new regulations, consider the potential impact and take steps where needed. Although the legislation is not limited to PRS tenancies, this article focuses on the impact on this sector.

The reforms

The reforms form part of the government’s wider aim to give more control, flexibility and security to home occupiers. When the provisions do come into effect, they will bring changes to the termination of residential tenancies, increased rent restrictions, greater regulation of landlords and new rules on the condition of properties. The changes include:

• The end of section 21 notices: Landlords will no longer be able to end tenancies by serving a section 21 notice without giving a reason. Instead, landlords will have to rely on one of the 'section 8' statutory grounds for possession.
• Changes to section 8 grounds for possession: The grounds that landlords can rely on to evict tenants will be expanded, clarified and, in some cases, tightened. As before, some grounds will be mandatory, obliging courts to make an order for possession where the ground is established. Others will be discretionary, allowing courts to choose whether to make an order, even if the ground is met.
• Moving from fixed-term to periodic tenancies: Both new and existing tenancies will become periodic assured tenancies, continuing until terminated. The amount of notice to be given by a landlord will depend on which ground for possession they are relying on. Landlords will not be able to terminate tenancies during the first 12 months. Tenants will have greater flexibility, being able to terminate tenancies by giving two months’ notice expiring at the end of any rent period.
• Exclusion of long leases from the assured tenancy regime: Leases for more than 21 years will no longer be subject, inadvertently, to the termination rights benefitting PRS landlords, addressing an issue that had led to some leases being unmortgageable.  
• Restrictions on rents: To prevent bidding wars, property owners will be required to advertise an asking rent for the property and will not be permitted to agree rents above that amount. Landlords will be prohibited from requiring tenants to pay more than one month’s rent in advance. Rent increases will only be permitted once a year, in line with market rents, and subject to following the relevant notice procedures. Tenants will also have greater rights to challenge rent increases.
• Introduction of a Private Rented Sector Database and Private Rented Sector Landlord Ombudsman: The measures introduce a new, compulsory, database with details of landlords and their properties. Failure to register will prevent landlords from obtaining a possession order except in the case of anti-social tenant behaviour. To encourage the resolution of disputes outside of court, a mandatory PRS Landlord Ombudsman will be introduced.  
• Application of the Decent Homes Standard and Awaab’s law to PRS tenancies: New provisions will regulate the quality and safety of homes. Tenants will have increased powers to raise concerns, and landlords will be required to take action. However, further consultation is expected on the extension of Awaab’s law to PRS tenancies before the measures are introduced.
• Tighter anti-discrimination rules: Landlords will not be permitted to refuse tenants who claim benefits or have children. Provisions in mortgages, insurance contracts and superior leases that would otherwise prevent such tenancies will have no effect. Landlords and agents will need to check that their advertisements do not breach the rules, for example, by requesting or excluding certain classes of tenant.
• Greater powers of investigation and enforcement: Councils will have greater powers to require relevant information to be provided by landlords and others. They will be able to impose civil penalties of up to £40,000 on non-compliant landlords or pursue a criminal prosecution with an unlimited fine. The First-tier Tribunal will be able to order offending landlords to repay up to 24 months’ rent.
• Pets: Tenants will have a statutory right to request a pet at the premises. The landlord will not be able to unreasonably refuse consent.

Impact

Several concerns were raised about the reforms before the Renters’ Rights Bill was introduced to Parliament. Experience tells us that the impact of new legislation is not always as great as initially anticipated. However, we can expect the new regime to have various practical consequences.

The role of the courts

The ban on 'no-fault' evictions has led to concerns that courts will be unable to cope with the increased pressure on them. It remains to be seen whether the concerns are warranted. Under both the existing and the new regime, landlords will only need to obtain a court order for possession if a tenant fails to leave after service of a notice. However, the new procedures may mean more evictions will be subject to the discretion of the courts, rather than being based on mandatory grounds for possession. This could mean more, and lengthier, court hearings.

The conveyancing process

With landlords being required to give 4 months’ notice to terminate a tenancy on a proposed sale, greater strategic thinking will be needed. Since this is a mandatory ground for a court order, landlords should be no less certain that they will get possession than they were under the section 21 regime. However, there could be more questions about when this will happen. This uncertainty could have a knock-on effect on the conveyancing process. Sellers of rental properties could face tough decisions between securing a buyer by demonstrating vacant possession on the one hand and securing rental income for as long as possible on the other. Over time, market norms may develop that address this. Buyers might come to expect tenancies to be terminated before exchange, or we might see the increased use of conditional sale contracts.

Potential reduction in available rental properties and increased rents

With rent increases only permitted once a year, higher initial rents might be demanded to provide a buffer against unexpected increases in mortgage rates, taxes or other property costs. Many commentators have also expressed concerns that the reforms could lead to a reduction in available rental properties, indirectly pushing up rents. We have already seen some landlords leave the sector, selling properties before the anticipated reforms became law. Although the passing of the Renters’ Rights Bill might incentivise further landlords to sell before the legislation comes into force, it is unlikely that we will see a flurry of activity before the budget later this month. We can, however, expect to see an increase in the service of section 21 notices, particularly where tenants are perceived as being problematic.

Pets

The new right to request a pet will not affect the liability of tenants for damage to a property. However, landlords may seek additional protections from tenants against potential damage, such as an obligation to take out pet insurance. Many long leases of flats prohibit pets. Where a leaseholder is underletting a flat subject to such a restriction, the leaseholder will be able to refuse an occupier’s request for a pet. Unlike the anti-discrimination rules, the Renters’ Rights Act does not render prohibitions in a superior lease ineffective.

Pitfalls for landlords

Granting residential tenancies is, and will remain, a highly regulated area. With additional rules and more severe penalties, landlords and letting agents will need to ensure they are fully aware of the requirements. This might be most challenging for 'non-professional' landlords, such as individuals looking to rent out their home for a short period due to a change in circumstances. Homeowners wishing to let their property while seconded abroad for 6 months may be surprised to find they cannot get their home back for at least a year. Landlords might look for more assistance not only with arranging lettings but also strategic advice on potential lettings.

Timing

The government has not yet announced when the new measures will take effect. The provisions are expected to be introduced in phases, with the ban on section 21 notices and conversion to periodic assured tenancies anticipated early next year. Unlike other recent reforms, the changes to the status and termination of tenancies will apply to both new and existing tenancies on a single date. This will at least avoid the complexity of two different regimes running in parallel.

Final thoughts

After years of consultations and manifestos, the new legislation will not come as a surprise. The reforms are significant, although the PRS sector has weathered a raft of regulatory changes over the years. While landlords would appreciate the certainty of knowing when the measures will come into force, they can at least take time to familiarise themselves with the finer details of the Renters’ Rights Act.