Renters (Reform) Bill

On 17 May 2023 the Renters (Reform) Bill (the Bill) was introduced into Parliament.  The proposed legislation provides for significant reform of the residential private rented sector in England.

Some key provisions contained in the Bill are highlighted in the Q&A below.

If the Bill becomes law, will I still be able to grant an assured shorthold tenancy (AST)?

No. Assured shorthold tenancies will no longer exist and tenants will move to a single system of periodic tenancies (which will be an assured tenancy).  In a periodic tenancy, the length of the tenancy is determined by the period for which rent has been paid; to give tenants flexibility and to avoid tenants being tied into long periodic tenancies the legislation provides that these 'periods' must be either monthly or no more than 28 days in length. 

However, note that an assured tenancy cannot include high value properties (£100,000 rent per annum or more), student lettings or lettings to companies (or other non-natural persons).  There are other exceptions.

The Bill abolishes section 21 'no fault' evictions and fixed term tenancies.  If we move to periodic tenancies - how will they come to an end?

Tenants will need to provide not less than two months' notice when proposing to leave a tenancy (which should coincide with the end of a 'period').  A notice to quit must be in writing but a landlord cannot specify a particular form of notice.   A shorter period may also be agreed in writing between the landlord and tenant.  

Landlords will only be able to obtain possession on grounds which are set out in the legislation and must give statutory notice in accordance with the requirements of the Housing Act 1988; the possession grounds are a mix of mandatory and discretionary grounds and each possession ground has a minimum notice period (after which notice period, a tenant must either vacate the property, or the landlord may start court proceedings to regain possession). Mandatory grounds include certain rent arrears, redevelopment, and a sale by a lender who is exercising a power of sale and requires vacant possession.

Although section 21 'no fault' evictions have been abolished – it does not appear completely correct to say it is the end of no fault evictions – there are various possession grounds, including those which allow the landlord to gain possession on the basis they wish to sell or that they or their close family member wishes to move in, which do not require fault on the part of the tenant. There will be a three month moratorium on marketing for re-letting or re-letting the property where the tenant has surrendered the property on grounds the landlord wishes to sell or they or their close family member wishes to move into the property.

Both landlord and tenant want to agree a fixed term - will this be allowed?

Not for anything shorter than 7 years. For tenancies under 7 years, the Bill allows the tenant to dictate the duration of the term as long as the other grounds to bring it to an end are not met. In effect, the tenant has a rolling break of 2 months.

For a professional PRS landlord (where grounds such as selling to family members is irrelevant; and the intention to sell ground is also irrelevant absent a fundamental change in the investor's business plan), they will not be able to "move on" tenants by, say, having a 2 year fixed term and increasing rents and/or re-testing affordability.

When an AST comes to an end the rent is usually reviewed at that point and a new rent agreed on the grant of the new AST. How can rent be reviewed under a periodic tenancy?

Private landlords will only be able to increase rent annually. Subject to amendments which are contained in the Bill, landlords must follow a procedure which is set out in the Housing Act 1988 (although this has not been in common use due to the fixed term nature of assured shorthold tenancies). 

• To initiate a rent increase a landlord must issue a statutory notice (a section 13 notice) giving a minimum of two months' notice of any change. Unless challenged by the tenant, the new rent amount will take effect two months after the notice.
• Tenants will be able to challenge through the first tier tribunal (property chamber) (FTT):
  • the amount of rent in the first six months of a tenancy; and/or
  • any rent increases set out in a section 13 notice.
• The FTT will make a determination of the market rent in accordance with provisions in the Housing Act 1988 (which are again subject amendment in accordance with the Bill):
  • The market rent which the FTT determines may be more than or less than the current passing rent. If the tenant challenges a landlord initiated review, the FTT may determine a rent that is higher than the landlord's proposed rent. The landlord is at risk of the rent being reduced both in the initial six month period or after the landlord proposes a rent increase. The tenant is at risk of  the rent being increased above the landlord's proposed rent if the FTT determines that is the market rent.
  • The provisions provide for an open market review on the same terms and for the same periods as the tenancy (beginning on the date of the application) which is the subject of the review.  
  • The FTT will disregard any effect on the rent attributable to the granting of a tenancy to a sitting tenant, certain improvements and any reduction in the value of the property attributable to a failure by the tenant to comply with any terms of the tenancy.
  • The parties cannot contract out of the tenant's right to challenge the amount of rent.
• There are two different scenarios as to when the new rent is payable from depending on whether the tenant has challenged the rent in the first six months of the tenancy or following a section 13 notice:
  • Tenant challenges in the first six months: the rent determined by the FTT will be the new rent payable for the tenancy and this takes effect from the date the Tribunal directs. This must not, however, be earlier than the date of application to the Tribunal.
  • Tenant is challenging a section 13 rent increase: the rent determined by the FTT is the new rent payable for the tenancy and takes effect from the beginning of the period specified in the section 13 notice. If it appears to the FTT that that would cause undue hardship to the tenant, the new rent will take effect from a date that the FTT  directs. This must not, however, be later than the date of determination from the FTT. There is no further comment in the Bill or explanatory notes on the meaning of 'undue hardship' (see further comments below).

In both cases the FTT is also given jurisdiction to determine an amount payable in respect of rates (ie council tax).

• Landlords and tenants can agree in writing on a lower amount than that which has been determined by the FTT.
• Where a section 13 notice has been served landlords and tenants can also agree to a variation in rent before the FTT has made a determination. This can be higher than the current rent but must be the same as, or below the rent specified in the relevant section 13 notice.
• Terms which seek to allow rent increases outside of the statutory mechanism will be of no effect. Therefore, any fixed rent increases and/or index linked increases are prohibited.
• A downward variation of rent can be agreed at any time and other terms of the tenancy can also be changed.

The Bill also makes provision for rent review in relation to a 'relevant low cost tenancy' which is defined as an assured tenancy of social housing (within the meaning of Part 2 of the Housing and Regeneration Act 2008, where the landlord is a private registered provider of social housing). The Bill also allows for the Secretary of State to make regulations to specify a description of other assured tenancies that meet the definition of 'relevant low-cost tenancy'.

What does "undue hardship" mean and how will the FTT apply that principle to rent reviews?

As noted above, the Bill does not define undue hardship (nor is it defined in the relevant Housing Act). There are some clues that can be found in reported decisions from the FTT in relation to the existing rent review appeal mechanism under the Housing Act 1988. A decision in August 2022 following the FTT's determination of a rent review appeal by the tenant simply states "the Tenant has provided evidence of undue hardship in her written submissions, due to her financial position coupled with her health conditions and that of one of her sons." The FTT decided that the increased rent would apply from the date of the FTT decision. The appeal was lodged by the tenant in January 2022, which followed the rent review notice in the preceding November. So, the rent increase applied 9 months after the landlord's rent increase notice and 7 months after the appeal.

To be clear the undue hardship test only impacts in the date in which the increase takes effect, not the amount of rent payable.

In relation to timing, the only requirement under the Bill is that the rent increase cannot take effect later than the date of the FTT decision.

So, unlike commercial property rent reviews, the tenancy agreement cannot stipulate that the rent increase will be back dated to the rent review date. And if the FTT is clogged up and takes months, if not years, to resolve the dispute then landlords need to expect not only a delay in when the new rent is set but also the date from which they can expect the increase to be applied. With high inflation that could be costly to landlords.  In the above example, it took the FTT 9 months from the rent review notice to determine the rent. With annual rent reviews, there could be a constant process of tenant appeals. It only costs £100 to apply to the FTT and £200 for a hearing.  However, the tenant might find that the FTT determines that the market rent is higher than the landlord's proposed rent increase.

How will the FTT decide on the market rent?

Other than the very few directions given under the Bill (which relies heavily in this regard on the 1988 Housing Act), it is up to the FTT to determine the market rent. The same FTT reported case mentioned above gives some idea of the FTT's workings. The case refers to evidence submitted by the landlord conducting searches on Zoopla and Rightmove. Not exactly a sophisticated approach by this landlord (a private individual). The FTT considered the evidence was of "limited value" as it lacked sufficient comparability. The FTT went on to state "using our own knowledge and experience of the market rent levels in the relevant area we determined that.....". Another case report refers to the FTT inspecting the property themselves!

Can we agree a mechanism other than market rent increases eg RPI or CPI linked?

In a word, no.

What about pets?

The Bill gives tenants the right to request a pet in the property, which the landlord must consider and cannot unreasonably refuse (pet insurance will be required to cover any damage to the property).  It will be reasonable for a landlord to refuse where accepting a pet would breach an agreement with a superior landlord.

How will periodic tenancies be documented?

Before the beginning of the tenancy a landlord will be required to give a tenant a written statement of certain terms and information (further details of which are to be set out in secondary legislation) and if the landlord wishes to rely on certain grounds of possession (the 'prior notice' grounds) this must also be stated. Sale by a mortgagee will no longer be a ground which requires prior notice to the tenant. The explanatory notes state that the requirement for written agreements is to 'help avoid and resolve disputes, and provide evidence if disputes go to court'.

What about deposits?

The requirement for landlords to have complied with the tenancy deposit scheme in order for a court to award possession will apply to assured tenancies (save in relation to grounds related to serious crime or anti-social behaviour).

Will tenants be able to complain about their landlord?

Yes - the Bill introduces the framework to require residential landlords to become members of a landlord redress scheme. The explanatory notes to the Bill state that the government intends to approve or designate one redress scheme - the PRS Landlord Ombudsman scheme (the Scheme). Previously private residential tenants have not had the opportunity to specifically to complain to an ombudsman or redress scheme about a landlord.

Landlords may be expelled from the Scheme in certain circumstances placing them in breach of the legislation and restrictions may be placed on marketing a property where a relevant landlord is not a member of the Scheme. Former landlords will be required to remain members for a certain period of time although that period is yet to be determined.

The Bill provides that decisions under the Scheme may be enforceable as it if were a court order. However the explanatory notes set out that the government will only introduce this if there is evidence that non-compliance is high and that the expulsion mechanism proves to be ineffective at ensuring compliance in all situations.  

Full details of the Scheme are yet to be published.

The explanatory notes suggest the government is also considering a form of mediation service although in relation to complaints that residential landlords may have against their tenants but indicates that this would not issue binding decisions on tenants.

What else is changing?

The Bill will introduce a new 'Property Portal' including a database of residential landlords and privately rented properties in England. Properties and their associated private landlords will need to be registered on the database before a property can be let (or before a property is advertised or marketed for let). Information will be publicly accessible. Fees will be payable for registration and active entries will need to be kept up to date.  There will be a unique identifier for each landlord and each property with an entry on the database.

Full details as to how the portal will operate are yet to be published.

Are there any offences or penalties?

There are various financial penalties and offences set out in the Bill including in relation to the misuse of possession grounds by private landlords, the failure to provide a written statement of terms, a failure to comply with the ombudsman scheme and in relation to the database. Financial penalties may in certain cases be imposed as an alternative to prosecution.

What about long leases?

It is worth nothing that the Bill specifically provides that fixed term tenancies of more than seven years will not be assured tenancies. It is noted that this will primarily affect shared ownership products and long leases with ground rents which are high enough to mean they are also an assured tenancy.  In a positive step for long leaseholders (and their lenders) it will mean landlords are no longer able to use the section 8 grounds (ie the basis on which a landlord can terminate a tenancy) to obtain possession of long residential leases which are also assured tenancies because they have a high ground rent.

However, there is no specific reference to Home Purchase Plans (or similar) so, if the tenancies that are entered into as part of those financial products otherwise constitute assured tenancies (including what would have been ASTs) then they fall to be governed by the Bill. If that is the case then increasing the rent (by reference to the equivalent of an increase in interest rates) would be subject to the procedure (including a tenant's right to appeal that the rent is not a market rent).

What about Purpose-Built Student Accommodation (PBSA)?

The explanatory notes to the Bill state that 'Purpose-Built Student Accommodation (PBSA) will be exempt from these changes as long as the provider is registered for government-approved codes, since these tenancies are not assured. Lettings by PBSA landlords are governed by the Protection from Eviction Act 1977.'

Comment

The Bill certainly delivers for tenants. There are some concessions for landlords but these are few and far between.  Although this stops short of rent control in the purist sense it does create a considerable straightjacket around the terms of tenancy agreements and the conduct of the landlord and tenant relationship. As noted above, landlords may now be subject to a downward rent review if this is determined to be the open market rent.

For £100-300 it seems plausible that any tenant of an assured tenancy can drag the rent review process through the FTT for months, and possibly more than a year if the FTT becomes inundated. The British Property Federation make particular comment about the lack of digitalisation of the FTT and express concern about the impact of the Bill on an unmodernised FTT.

For the professional PRS / BTR market, the lack of flexibility in what terms can be agreed on a rent review may be a concern (and a slow, inefficient FTT rent review process will certainly be a concern), but having good quality comparable data, a natural churn of new lettings also providing good evidence of current market rents, will potentially put them in a much better position compared to the amateur buy-to-let type investor market.

So, more management headaches and some potential drag on financial performance (if driving through rent increases gets dragged into the slow lane that is the FTT) but perhaps this Bill and other factors (eg tax) that are pushing out the amateur/small buy-to-let investors will ultimately benefit the bigger PRS/BTR players.