Following publication on 11 September 2024 of the Renters' Rights Bill, which contained some significant new features compared to its predecessor Renters (Reform) Bill, there has been an understandable flurry of interest and speculation into its implications for landlords and tenants alike.
The Bill is considered to represent overwhelmingly good news for tenants, with the proposed abolition of "no fault" evictions; periodic tenancies in place of fixed term contracts (allowing tenants to remain in occupation for longer periods whilst having the flexibility to end their tenancies at any time on two months' notice); the ability to appeal perceived above-market rent increases; reducing the ability for landlords to discriminate against who they let to; ending bidding wars; and, the right to request a pet in the property (to name a few).
These proposals and others aim to make the rental market fairer, more secure and of a higher standard for tenants. See our recent update on the Renters' Rights Bill for further detail: The Renters' Rights Bill.
Implications for landlords
However, landlords may not view the Bill so positively. While the Bill seeks to improve the situation for tenants, the proposals leave landlords with limited options if they have “problem” tenants who (for example) don’t pay the rent, engage in antisocial behaviour or damage the property. The widening of the grounds for possession for rent arrears under the previous Renters (Reform) Bill, which were included as a counterbalance to the tenant-friendly reforms, have now been dropped and even weakened compared to the existing law. Moreover, the new legislation is now expected to come into force next summer before any reform of court processes. So even where landlords serve notice on a tenant to end a tenancy having established one of the grounds for possession, if the tenant refuses to leave the property, then that landlord could face many months of waiting for a court order and then a further delay for court appointed bailiffs to evict the tenant.
Landlords will also need to ensure that their properties are brought up to a good standard – including a new Decent Homes Standard and an EPC rating of C or above, with both requirements to be consulted upon in the coming months – as well as be registered with a new Private Rented Sector Database if they are to obtain a possession order for most grounds of possession. Whilst the drive to improve standards in the private rented sector is to be commended, for many landlords (particularly individual buy to let landlords), these new requirements may represent an unaffordable risk which makes holding onto a rental property financially unviable.
With demand for rental properties remaining persistently higher than supply, this may act to further exacerbate the rental crisis as a growing number of landlords end up selling and exiting the sector.
Implications for build to rent providers
But how will build to rent (BTR) providers fare in this new environment? Given the structure and scale of BTR operators, it is likely that BTR providers will be able to navigate the new regime much better than individual landlords. This is because they benefit from professional, sophisticated in-house resource which is well equipped to onboard new tenants, respond to complaints and manage any court processes; their target demographic are generally more affluent and less likely to fall into rental arrears; and, since most BTR developments are high quality and still relatively new, they are already in a good condition and can therefore more easily meet the standards required (for example, most BTR developments already meet the requisite EPC requirements).
BTR may also indirectly benefit from a potential reduction in the supply of competing rental homes as an increasing number of individual landlords and smaller scale rental enterprises leave the sector. Zoopla’s rental market report of September 2024 found that rents were still rising above the rate of inflation and wage growth; that there were 24% fewer homes available for rent than before the pandemic; and that as many as 12.5% of all homes for sale comprise those being sold by landlords exiting the market. The report also anticipated that rental demand would remain high due to the unaffordability of home ownership.
Yet, BTR operators will still need to proceed with care and ensure that their management systems are geared up to administer the formal annual rent increase notices, which under the new legislation will be the only way of increasing the rent during a tenancy. This procedure, known as a "section 13 notice", has already been used in the affordable housing sector for many years and is notoriously tricky to get right. An invalid notice may mean that the rent increase is delayed for months, leading to significant loss of income for the BTR investor if the errors are systemic.
BTR operators will also need to be vigilant in case their schemes incur a higher turnover of tenants. Longer fixed terms are already preferred in the BTR sector, but the new ability for tenants to end their tenancies on two months' notice could lead to some occupiers using a BTR home as a short let more akin to an Airbnb or serviced apartment.
One crucial feature which doesn’t appear in the Renters' Rights Bill (and which BTR operators and owners will be breathing a sigh of relief over) are rent controls, which have practically halted investment in BTR north of the border, with it being reported that there have been no new BTR developments having been brought forward in Scotland in the first half of 2024. Nevertheless, even without rent controls in England, determining the market rent for homes in a BTR scheme might not be straightforward in localities where there are no genuine comparables, and where competing homes in the traditional private rented sector command a much lower rent. The temptation for tenants to challenge the proposed rent increase will likely grow as the applicable rent will always be the lower of the landlord's proposed rent and the market rent as determined by the Tribunal. BTR operators will also need to be mindful of the connection between rent increases and earnings, as challenges to rent increases are more likely where these exceed growth in earnings.
Provided that these issues are appropriately navigated, BTR operators and investors are unlikely to be too seriously impacted by the new Bill and may even benefit indirectly from the reduction in competition leading to sustained increases in market rent levels. We will be watching both the rental market and the new Bill’s journey through Parliament with keen interest in the coming months.
