Proposed legislation was supposed to bring one of the most significant developments for the private rented sector for many years, but where is it now, and what will it mean for lenders?
After being introduced earlier this year by government minister Michael Gove, the Renters Reform Bill has stalled in its passage through parliament.
Due to receive its second reading in the current parliamentary session, it is now nowhere to be seen, with media speculation suggesting private interests may see the bill limping into 2024. And with a general election just around the corner, even this outcome is in doubt.
Nevertheless, the mood music is clear, and lenders and landlords must stay ahead of government intentions. Although designed to safeguard more vulnerable renters and enshrine in law landlords’ rights, some measures could raise potential issues for buy-to-let (BTL) lenders that legal teams should be aware of.
No more ASTs and a new ombudsman
One of the biggest changes proposed by the bill will be the abolition of assured shorthold tenancies (ASTs) and, with them, Section 21 ‘no fault’ evictions.
ASTs were introduced in 1987 and have been a mainstay of the private rented sector.
However, the government believes they offer no long-term security, making tenants unlikely to challenge poor conditions or unfair rent increases.
Instead, tenancies will be periodic, rolling month-by-month with no end date. Landlord groups have broadly accepted the government will not relinquish the flexibility (the Government would say oft-abused) provided by Section 21 and so have shifted their focus towards preparing for the aftermath of abolition, concentrating on initiatives such as reinforcing the Section 8 grounds for possession and advocating for court reform.
In this regard, landlord groups and lenders are now in sympathy with each other’s position.
These Section 8 grounds for landlords to repossess properties in certain situations – such as where tenants display anti-social behaviour or repeatedly build up rent arrears – will be strengthened.
Rent arrears can cause considerable uncertainty for landlords and impede their ability to repay loans. This impact is often compounded by the poor state of repair of properties from exiting tenants, so there is a greater opportunity for a landlord to pursue remedial action with the bill also extending the notice tenants are required to give to bring their tenancy to an end, rising from one month to two.
This should give a lender some comfort that a landlord has greater time to fill a potential void or repair and improve the property ahead of re-let. It will, however, provide a logistical challenge to the term-based tenancies in the student accommodation sector.
In turn, landlords will have to give at least two months’ notice before any rent increase and will be limited to just one yearly increase. However, tenants can also appeal against a landlord’s proposed increase with First-Tier Tribunals determining market rents.
This is not quite the age of rent control, but a change in government may see this on the levelling up agenda.
Landlords will also be required to register with a future privately rented property portal, which will replace the functionality of the Database of Rogue Landlords relating to private sector landlords.
It will also make some details relating to offences viewable to tenants and prospective tenants. Furthermore, a new Private Rented Sector Ombudsman scheme, which landlords will be obliged to join, will allow tenants to settle disputes at a low cost.
There is already licencing creep from local authorities (Rent Smart Wales is an example alongside many London borough selective licencing schemes), so landlords shouldn’t find this a challenge to accommodate in time.
What should lenders do?
If approved, changes would be implemented in two stages to allow a smooth transition to the new system. Six months’ notice will be provided before the first implementation date, after which all new tenancies will be periodic and governed by the new rules.
All existing tenancies will transition to the new system after a second implementation date of at least 12 months after the first.
However, the Renters Reform Bill still has several stages to go through before it becomes law, so there could be several changes along the way, particularly after input from the various stakeholder groups.
Landlord bodies have argued for less stringent measures, while tenant organisations have argued for greater protections.
Lender trade body UK Finance has said many of the measures set out in the bill would not impact their ability to exercise a security over a buy-to-let property and has welcomed any moves that strengthen landlords’ ability to retake possession and enhance trust between landlords and tenants.
Lenders’ quid-pro-quo is that possession should become an accelerated procedure under Ground 2 of Section 8, and achieving this with any degree of surety and success will require the reinforcement of Court resources.
In practical terms, lenders should now be reviewing their mortgage conditions (both general and special), lending policy and offer condition schedules.
Non-bank lenders should discuss the ramifications with their funders to ensure expectations are managed as to the nature of occupational interests of tenants were the Renters’ Reform Bill to become law.
The referencing of forms of tenancy will need to be tightened, and credit directors and underwriters will need to ensure they are comfortable with how fixed terms could be contracted, potential break options and rent reviews and assessments are both calculated and challenged.
With different interests in play and the bill still going through the committee process, lenders must stay up to date with the latest developments.
To find out how the Renters Reform Bill and other legal issues could impact your business, contact TWM Solicitors for sector-focused advice. Our lawyers have considerable experience and understanding of all areas of the specialist lending market and work with various lenders, their funders and portfolio landlords.
TWM Solicitors advise lenders on an ‘as-needed’ basis with a ‘sense check’ service to clients for underwriting queries or issues raised by other borrower law firms.
Our lenders also benefit from regular training seminars on current topics and themes in the lending industry to help them remain up to date with the latest developments.
Julian Sampson is partner and head of lending department at TWM Solicitors LLP
