Rent reforms

The Renters (Reform) Bill is currently making its way through UK parliament. Matthew Bonye, our head of Real Estate Dispute Resolution, and Shanna Davison, professional support lawyer, consider the proposals for change.

According to Michael Gove, secretary of state for levelling up, housing and communities, the Renters (Reform) Bill aims to “fulfil this government’s pledge to level up the quality of housing in all parts of the country so that everyone can live somewhere which is decent, safe and secure – a place they’re truly proud to call home”. The headline is the abolition of section 21 of the Housing Act 1988 (the 1988 act) and so-called ‘no-fault’ terminations. The tenancy framework for private rented housing is being rewritten around this principle.

Here and now

Under the current regime set out in part 1 of the the 1988 act, tenancies in the private rented sector in England are typically granted in the form of assured shorthold tenancies (AST). They are usually granted for a short to medium fixed term, after which they can be renewed with another fixed-term AST, or they convert to a statutory periodic tenancy if the tenant remains at the property and continues to pay the rent.

An AST is a form of assured tenancy. At any point during an assured tenancy, a landlord may seek to terminate the tenancy and recover possession of the property under section 8 of the 1988 act. However, the landlord must satisfy one of the grounds in schedule 2 to obtain an order for possession from the courts. Landlords must not take any steps to recover possession or change the locks of a residential property without a court order, otherwise they risk committing a criminal offence.

The section 8 possession route can be slow and expensive, and there is the prospect that the claim may be defended on its facts. Some of the grounds are mandatory, such as ground 8, where a tenant owes over two months’ rent when the landlord serves the section 8 notice and continues to do so at the court hearing. In this case, the court must order possession to the landlord. But other grounds are discretionary, causing uncertainty for landlords.

Section 21 provides an alternative route for landlords to recover possession after the expiry of the fixed term of an AST only. The landlord does not need to establish any grounds and, if the process is followed correctly and they have complied with certain duties in relation to the provision of gas safety certificates and the protection of tenancy deposits, a court order for possession can be granted without the need for a hearing, using the accelerated procedure. It’s clear why many landlord clients prefer the certainty of using the section 21 route, and they may even wait until the fixed term has expired, even when they may immediately be able to satisfy grounds under section 8.

As well as an alternative to home ownership, ASTs have been widely used for retirement living and student accommodation (except where the latter is provided directly by educational institutions, where a statutory exception applies). Landlords of student housing can market their property and secure tenants for the next academic year with the certainty that the existing AST will terminate, and possession be regained at the end of the current academic year.

Manifesto commitment

In June 2022, the government released a white paper called A fairer private rented sector, setting out its proposal for reform. That paper referenced the English Housing Surveys from 2019/20 and 2020/21, which showed that:

• The private rented sector accounted for 4.4 million households (19% of housing stock).
• While the sector doubled in size between the early 2000s and 2013/14, it has remained stable at 19-20% ever since.
• Families with dependent children accounted for 30% of the private rented sector.
• The majority of households who moved from a privately rented home ended their last tenancy because they wanted to move. However, 8% were asked to leave by their landlord and a further 8% left because the fixed term of their AST ended.

Despite the fourth point, the government proposes to “level the playing field” and introduce “a modern tenancy system that gives renters peace of mind so they can confidently settle down and make their house a home”. Importantly for this government, the Renters Reform Bill delivers on a 2019 manifesto commitment to abolish section 21 so-called ‘no-fault evictions’. Strictly speaking, the popular label is a misnomer as it suggests that landlords may only terminate a tenancy under section 8 if the tenant is at fault. But existing grounds for possession under this section include such things as sale by a mortgagee, occupation by the landlord as their only or principal home and redevelopment of the property – a tenant is not ‘at fault’ in any of these circumstances. A more accurate description of section 21 would be ‘no-ground’ termination, as landlords do not have to show any reason for the termination other than the expiry of the fixed term.

Modern tenancy system

The benefit of using an AST, from a landlord’s perspective, is the certainty of possession under section 21. It follows that abolishing section 21 involves an abolition of the concept of an AST. Instead, all new tenancies will take the form of an assured periodic tenancy, which automatically renews until it is terminated. The rolling period, linked to frequency of rental payments, is limited to a maximum of one month. Any tenancy which purports to have a longer term will automatically be considered a periodic tenancy with rental periods of one month starting on the first day of the tenancy. An apportioned rent will fall due on the first day of each monthly period (so that a tenancy starting on 15 January will run from the 15th day of every month, with the rent falling due on that day, irrespective of whether the tenancy agreement states a longer period).

Tenants will be able to end the tenancy at any time on at least two months’ notice to the landlord, unless a shorter notice period has been agreed. Any additional conditions or requirements specified in the tenancy for the form or content of the notice will not have any effect. Interestingly, the bill proposes to depart from established law to allow a tenant to withdraw their notice to quit at any time before it expires with the landlord’s written agreement. Ordinarily, a notice to quit cannot be withdrawn even with the consent of both parties and a fresh tenancy must be granted for any continued occupation after the termination date.

The abolition of fixed terms and the two months’ notice period for tenants means landlords will not have any medium-term certainty of income from their residential tenancies. In turn, this may impede their ability to accurately forecast rental income, which may impact lending if these cannot be provided with certainty.

Conversely, a landlord may only terminate the tenancy under section 8. The government recognises that: “the system must work for responsible landlords, letting agents, and communities. Landlords who maintain good letting practices and standards are a valuable part of our housing market and must be able to regain possession of their properties when necessary.”

Accordingly, the bill reforms the grounds for possession and intends to make them comprehensive, fair and efficient. It includes new grounds for repeated rent arrears, landlord intention to sell the property, and severe antisocial behaviour. The government proposes to draft guidance to help landlords navigate the new and revised grounds for possession in due course.

Section 21 does provide some protection for tenants in the current regime though. Landlords cannot recover possession under section 21 unless they have provided the tenant with gas safety certificates, protected the tenancy deposit in one of the approved schemes, and provided the tenant with prescribed information about the deposit. The abolition of section 21 means these protections need to be provided elsewhere. The bill retains the requirement to comply with the tenancy-deposit rules in order to regain possession of the property (unless grounds 7A or 14 relating to serious crimes and anti-social behaviour are relied upon). However, late compliance with these requirements will not prohibit the landlord obtaining possession, provided they are done, or the deposit returned, before the section 8 notice is served. The statutory penalties in section 214 of the Housing Act 2004, which require the landlord to pay the tenant up to three times the amount of deposit if not protected within the specified timescales, will remain in the new rules. As for gas safety certificates, one proposal is to record compliance with gas safety in a new compulsory database of landlords, but further details are awaited.

There are certain other exceptions and requirements for an assured tenancy which will remain unchanged in the new rules. For example, the annual rent must be at least £250 (or £1,000 in greater London) but no more than £100,000. The property must also be used as the tenant’s only or principal home. If these requirements are not met, a common law tenancy is granted, under which the parties are free to agree a fixed term and any termination provisions unrestricted by section 8. A landlord under a common law tenancy still needs a court order for possession under section 3 of the Protection from Eviction Act 1977, unless the tenant leaves voluntarily after termination, but they need not state or satisfy any statutory grounds to obtain possession.

Potential flashpoints

Court resources

For new tenancies granted after the bill comes into force, all rent-review clauses will be banned. The only way a landlord may increase the rent is to rely on section 13 of the 1988 act. Once per year, a landlord may serve notice on the tenant that they propose an increase. If the tenant disagrees with the proposed rental increase, they may apply to the First-tier tribunal of the Lands Chamber to decide the appropriate increase. If the tenant does not challenge the notice, the proposed increase will take effect when the notice expires (two months later). Any increase ordered by the tribunal should be based on market rents, with comparable evidence provided – this may be higher than the rent proposed in the section 13 notice if the evidence supports this.

Removal of section 21 also means that a court hearing will be required in every case to gain possession under section 8, unless the tenant voluntarily leaves following the landlord’s notice. Without simultaneous reform of the court system, there is widespread concern that the court and tribunals will be unable to cope with the substantial increase in cases. The courts are already overworked and face substantial backlogs in many areas.

In his statement to the House of Commons on 17 May 2023, the secretary of state for levelling up, housing and communities said “the government remains fully committed to improving the court system for landlords and tenants” and that court improvements would include end-to-end digitisation of cases and exploring the prioritisation of certain cases, including antisocial behaviour. There had been calls for a specialist housing court, but the government is not supportive of that idea. These concerns have not yet been properly addressed in the bill or otherwise.

Student accommodation

Purpose-built student accommodation (PBSA) cannot typically be let to non-students. There is no express provision in the bill itself for PBSA; however, statements have been released in ancillary documentation that indicate the intended position. The Explanatory Notes dated 17 May 2023 say that PBSA will be exempt from the changes so 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. Once royal assent is granted, the government intends to lay regulations as soon as possible via the affirmative procedure in both houses of parliament, to make special arrangements for niche tenures such as PBSA. We are unlikely to have any further insights on how the grounds for possession will work for PBSA until those draft regulations are published.

However, students who rent properties in the general private rented market will be protected by the new rules. The rationale is that: “Most students will continue to move property at the end of the academic year. However, for certain students, this is not appropriate, for example because they have local ties or a family to support. It is important that students have the same opportunity to live in a secure home and challenge poor standards as others in the PRS.” This causes concern for landlords, who will be unable to re-let for the next academic year with any certainty, as there are no clear grounds in section 8 upon which they can rely to obtain possession. This could ultimately lead to a serious housing supply issue in student locations. The government continues to engage with stakeholders on this issue and we may see changes to the bill as it progresses through parliament.

Local authority enforcement

Local authorities will have the power to impose financial penalties for breaches of the new rules. For example, purporting to grant a fixed-term tenancy after the act comes into force or terminate a tenancy with a notice to quit (outside of section 8) can lead to a maximum fine of £5,000. It will be a criminal offence for a landlord to serve a section 8 notice seeking possession for a ground that they are not entitled to use, either knowingly or recklessly, and the tenant surrenders the tenancy without a court order for possession. Marketing for rent or re-letting the property within three months of possession, where the landlord has relied on ground 1 (occupation by the landlord or family) or ground 1A (intention to sell the property), is also a criminal offence. For both offences, the local authority may issue fines of up to £30,000 as an alternative to prosecution.

However, there is concern that local authorities are already under-resourced. By way of example, limited action has been taken by local authorities to impose fines or other penalties against landlords of substandard commercial properties, even though they have had the powers to do so since April 2018 under the Minimum Energy Efficiency Standards regulations, as laid down in the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015. Without increased funding and training, many local authorities may be ill-equipped to deal with these new enforcement powers. Furthermore, many will rely on the tenants reporting the offences to the local authority. An awareness campaign is therefore crucial to its success.

Ready, get set…

The bill is in its infancy and has recently suffered some stalled progress, but we must prepare for what is to come. The proposals include a phased introduction, giving at least six months’ notice of the first implementation date, after which all new tenancies will be periodic and governed by the new rules. At least 12 months later, all existing tenancies will transition to the new rules. However, many clients in the sector will be interested in how the new rules may affect their businesses and what steps they should be taking now to prepare for the biggest shake-up of renters’ rights in decades.

This article was originally published by The Law Society: Property in Practice (Issue 84 September 2023)