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Will compulsory three-year tenancies work?

The PRS is housing ever-greater numbers of families so the Government wants longer tenancies to provide stability. But will three year tenancies really help?

Janany Kathirgamanathan, Senior Associate at Bryan Cave Leighton Paisner,

Houses of Parliament - Westminster - image

WHAT IS THE CURRENT AST REGIME?

Under the current assured shorthold tenancy (‘AST’) regime, tenancies are usually granted for a fixed term of six or 12 months. Once the fixed term has expired, tenancies become statutory periodic tenancies. To get possession, landlords must either:

Give at least two months’ notice in writing (a section 21 notice). The date for giving up possession must be after the initial fixed term; or

Seek possession under section 8 of the Housing Act 1988 on one or more grounds set out (i.e. rent arrears; overdue rent etc).

The key negative in the Government’s plans for landlords will be the lack of flexibility, in terms of being able to get the tenant out of their property when they want to take up occupation or sell.

Whilst longer terms are permitted under the current regime, the market has not moved in this direction (aside from the Build to Rent ‘BTR’ sector – see below).

THE GOVERNMENT PROPOSAL

A minimum three-year tenancy in which, after the initial six months, if either party is dissatisfied, that party can terminate;

Beyond the first six months, the tenancy continues and only the tenant can terminate by providing a minimum of two months’ notice. There would be no right for the landlord to break the tenancy (save as set out below);

Rents can only increase once per year at a rate which the landlord and tenant must agree and which must be included in the marketing materials; and

Exemptions for tenancies which could not realistically last for three years, such as holiday lets and student accommodation.

WHY INCREASE THE FIXED TERM OF AN AST?

From a tenant’s perspective – the main benefit for tenants will be greater certainty and security. With more families living in rented properties, there is an important social aspect to ensuring that families can plan for the future. A longer term is likely to include a rent review procedure giving the tenants more certainty on affordability over a longer period.

Those tenants who enjoy the flexibility of a shorter tenancy will still be able to break the longer term, but on two months’ notice.

From a landlord’s perspective – a longer term will produce a stable income and lower turnover of tenants, leading to reduced costs. For that reason, it’s no surprise that some BTR operators have been offering longer term tenancies for a while now. Tenants can make their house or flat into a real home, decorating as they wish. This is a key benefit that sets the BTR sector apart.

The key negative for landlords will be the lack of flexibility, in terms of being able to get the tenant out when they want to take up occupation or sell.

CURRENT ISSUES FOR LANDLORDS

Landlords currently face a lengthy wait when trying to evict tenants out of their properties.

There is a no fault notice procedure (section 21 notice). However, when using the accelerated possession procedure, the tenant can file a defence. If the tenant does so, the process is no longer accelerated and must go to a hearing, which elongates the process.

Often this is used by tenants simply to buy time, particularly as by using the accelerated procedure you preclude the ability to include an arrears claim.

Janany Kathirgamanathan image

Janany Kathirgamanathan

A landlord must therefore decide what is more important to it: the possession or the arrears. Usually the accelerated procedure is selected as possession (and stopping the drain on the income generated) is more important. Generally if the landlord has to take steps to seek possession (because the tenant has not left on expiry of the section 21 notice) it is because the tenant is ‘playing the system’ and knows it can string out the process.

How would a landlord recover their property under the new proposals?

The Government proposes that landlords can recover their property during the longer fixed term on reasonable grounds. These replicate the existing grounds used for assured tenancies (which give tenants greater security of tenure than ASTs), but would be supplemented by grounds such as antisocial behaviour and where a landlord wants to sell a property, or move into it themselves. The landlord would need to provide at least two months or eight weeks’ notice in writing.

The view from landlords is that, if longer term tenancies are to work, the repossession process must be streamlined, meaning:

  • a combination of a minimum statutory period but with grounds for possession during the fixed term (for breach of the tenancy or own occupation and redevelopment) and a no fault ground at the end of the term (given that the landlord might simply need to unlock capital and/or do something with the property and not have the spectre of potential costs of going to court/proving a ground);
  • prescribed termination procedures with notices of two to four months but the ability to start proceedings once the notice has been served enabling the landlord to obtain a possession order on expiry of the notice period (to help reduce loss of rental income);
  • an accelerated possession procedure allowing a quicker turnaround for bailiff attendance; and
  • where defences are still permitted they should be defined – perhaps a tick box process which includes the retaliatory eviction point brought in by the Deregulation Act.
LENDER CONSIDERATIONS

Generally lenders stipulate a maximum length for an AST of three years. The reason for the limit on the length of the AST may be because of the capital adequacy requirements under Basel III. A bank enjoys a risk-weighting of 35 per cent on loans secured over land occupied under ASTs, provided other relevant conditions are satisfied, such as being able “to realise the value of the property within a reasonable time frame”. Otherwise the risk-weighting increases to 150 per cent, which would affect financing costs and even the continued availability of investment, funding and supply of this type of property. The proposal for a minimum three year AST, combined with the potential loss of section 21 rights, will make that condition difficult to satisfy.

Whilst the consultation considers mortgage conditions from a private residential perspective, we will need to see how lenders financing other forms of residential development (i.e. BTR) adjust their valuation methods under a new regime.

CONCLUSION

Longer term tenancies are ideal for BTR operators whose rental models benefit from longer term tenants. However, for those landlords outside the BTR sector, longer term tenancies will cause concern due to the lack of flexibility. Streamlining the repossession process may go some way to appeasing these landlords.

Property Protect launches For agents, landlord and tenants
Roma Shama image

Roma Shama

A long established property management firm, Rushbrook and Rathbone, has launched an all-in-one insurance product for landlords helping to mitigate the growing risks of renting and anticipated repercussions of next year’s ban on tenant fees.

Providing a solution to the major change in the way the industry will operate, it is billed as being the only all-in-one product and the most cost effective way for landlords to fully protect their investments.

That’s a chunky claim, but, says Roma Shama, Head of Product and Business Development at Rushbrook & Rathbone, combining protection against four key risks of renting, Property Protect enables landlords to safeguard their properties and rental income, negating the need to take a tenancy deposit and covering landlords through deposit replacement insurance.

At present, one of the key risks to a landlord of letting a property is taking on a rogue tenant, which can lead to rental arrears and associated legal costs, or the possibility of damage to their property.

There is a concern that when landlords can no longer ask tenants to pay for referencing, some landlords may not bother to do it at all.

While all of these risks can be lessened by carrying out thorough due diligence – referencing, taking a tenancy deposit and having comprehensive landlord insurance, many landlords are already being forced to cut corners following new tax restrictions which are squeezing profits. “There is a concern that when landlords can no longer ask tenants to pay for referencing, some landlords may be tempted to do it themselves or not bother at all.” says Roma.

“Assessing the current and future issues in the PRS, Rushbrook & Rathbone have developed an insurance-based solution which is not elsewhere available as a combined package. It n makes it easier and more cost effective for landlords to protect their investment, but also makes them more appealing to tenants.”

All-in-one Property Protect includes comprehensive tenant referencing including ongoing monitoring of tenants’ credit record, rent and legal protection (up to £8000pcm and £75,000 legal assistance), property damage protection (up to £10,000) and no deposit protection.

The cover means tenants can move in without paying a deposit, one of the biggest affordability issues for tenants. “We believe this will be very appealing to a lot of tenants, but crucially there is no risk to the landlord,” says Roma. Packaging the four most important protection elements together significantly reduces moving in costs for landlords and tenants, meaning tenants can move in more quickly and landlords can reduce void periods.”

October 30, 2018

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