Renters (Reform) Bill – unbundling the Bill

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The news headlines following the Renters (Reform) Bill’s introduction to Parliament on 17 May 2023, have been heavily focussed on the abolition of Section 21 evictions but there are also other important elements of the Bill to consider. These will be particularly interesting to investors, landlords and mortgage lenders.

Key points of the Renters (Reform) Bill to consider

Tenant’s right to terminate

The Government has made it very clear that it is committed to reforming the residential rental market to offer increased protection to private tenants. Under the proposed Bill, assured shorthold tenancies will be abolished and all private tenants will be moved onto a single system of periodic tenancies.

Under the new system, a tenancy will be on a periodic basis (i.e. rolling) and, consequently, tenants will be entitled to terminate the tenancy at any point by serving two months’ notice on the landlord. From a landlord’s perspective, the potential problems that may arise following such change could include:

The lack of certainty in respect of the term of the tenancies or leases and the risk of an increased number of unexpected vacant periods of properties (“voids”) resulting in loss of profit.

If landlords have a greater turnover of tenants, they will also face repeat costs associated with re-letting the property (e.g. agency fees, cleaning and inspections).

With such change, landlords of non-purpose-built student properties may also face unexpected voids, as they will no longer be able to rely on 12 months fixed term contracts to match the academic year (purpose-built student accommodation will be exempt).

Rent review

Part of the proposed changes of the new Bill include a general prohibition on rent review clauses. The Bill intends to ban the inclusion of clauses in tenancy agreements which allow landlords to increase the rent, unilaterally. Instead, with the introduction of the new statutory regime, landlords will be entitled to propose a rent increase once a year by serving a two months’ notice on the tenant. In response, the tenant can either accept the new proposed rent or formally challenge it at the First Tier Property Tribunal.

The new statutory regime will also allow tenants to challenge the initial rental amount at the tribunal during the first six months of their tenancy. The tribunal will determine the market rent of the property and apply it accordingly. There is no doubt that the new statutory regime will make it much more uncertain for the landlords to achieve planned rental yields and make it more difficult to use these as securities for loans or mortgages.

Landlord’s right to terminate or evict

Since the Bill abolishes Section 21 “no fault” evictions, the tenancy can only be terminated by a landlord if there is a valid ground for possession. The full proposed changes to the grounds of possession are detailed in Clause 3 and Schedule 1 of the Bill. Some of the amendments are particularly relevant and beneficial to mortgage lenders who are also landlords intending to sell the property.

The Bill introduces Ground 1A as a new ground for possession for the sale of a dwelling-house. Should the landlord wish to sell the dwelling-house, Ground 1A can be relied on as it is a mandatory ground for possession by appointing a receiver exercising a power of attorney. This new ground cannot be used unless the tenancy has existed for minimum period of six months at the date specified in the section 8 notice, unless the sale is subject to a compulsory purchase order.

The Bill further introduces a similar mandatory ground for possession if a private registered provider of social housing intends to sell the property under the Government’s Right to Buy This insertion is found in Ground 1B of the Bill.

The Bill removes the two requirements relating to Ground 2. The landlord is no longer required to give the tenant written notice before the tenancy began that they may seek to rely on this ground in the future and neither is the mortgage required to have started prior to the tenancy. The notice period for Ground 2 remains two months.

Section 8 Notices

The process for serving section 8 notices has not changed. A landlord will only be able to evict a tenant by obtaining a possession order.

The Ombudsman and Compensation

The Bill will create a new Ombudsman and a new national property portal database, where all landlords will be legally required to register themselves and their property. Landlords who fail to register can face fines by the local authority of up to £5,000, and those who repeat the offence, can face criminal prosecution and fines of up to £30,000. It is likely that landlords will be required to pay a fee to use the portal, however the amount has not yet been confirmed.

If a landlord fails to deal with their tenant’s legitimate complaint, the tenant will be able to seek redress from the new Ombudsman for matters such as repairs or nuisance (and many more). If the landlord again fails to deal with the complaint, the Ombudsman will have the power to order landlords to pay up to £25,000 in compensation.

Conclusion

The Government appears to be committed to reforming the residential rental market to offer more protection for private residential tenants, with less regard to protection of landlords.

With the introduction of the Bill and the marked rise in interest rates, there is likely to be a corresponding increase in the landlords deciding to leave the sector and sell their properties.

For further advice and practical information for landlords and mortgage lenders, please contact our Landlord and Tenant expert Fatma Ozsayan on Ozsayan.f@oraclelawglobal.com.