Can small landlords survive the Renters’ Rights Act?
The English rental sector is on the point of the biggest shake-up since the Housing Act 1988 with the introduction of the Renters’ Rights Act. The legislation imposes more costs, regulations and compliance requirements on landlords but does bring in important pro-tenant reforms that have been demanded by housing campaigners for many years.
The two main measures contained in the act are the scrapping of no-fault evictions and fixed-term tenancies, which will have a significant impact on England’s 2.3 million landlords and approximately 11 million private tenants.
The bulk of the act takes effect from 1 May and landlords will need to be fully across the new regime, not least as there are some chunky fines for those that get something wrong.
The end of section 21
On 1 May section 21 ‘no fault’ evictions will no longer be possible. Under section 21 landlords do not need to give a reason for evicting a tenant. The change has long been demanded by tenants and campaigners who saw the outgoing regime as unjust and as a contributor to homelessness.
Section 8 evictions will also be abolished but landlords will retain grounds for eviction, which include:
• The landlord or close family moving in to the property.
• The tenant behaving in an antisocial way.
• The tenant letting the property fall into disrepair.
• Being in arrears with the rent.
The mandatory threshold for eviction will increase from two months to three months of arrears and the notice period will rise from two weeks to four weeks.
There will then be no alternative to the county courts to remove tenants who have challenged grounds for eviction. Typically it takes eight months for a landlord to get back a property, according to the National Residential Landlords Association, and the likely increase in cases in an already overloaded system will inevitably mean even longer delays.
No more fixed-term tenancies
All assured shorthold tenancies (ASTs) in the private sector (the social housing sector is on a different timescale) will be replaced by periodic tenancies, which have no termination date, on 1 May. Periodic tenancies can be ended by the tenant giving two months’ notice or by the landlord on a narrow range of grounds. Tenants should be given four months’ notice, up from two under the law to 1 May.
This will be a huge relief to tenants who faced the annual uncertainly of contract renewal, always with the possibility that a new tenancy will be at a markedly higher rent or that they will have to scramble to find a new home in a very tight market if they cannot agree the terms of the new contract.
Will the changes force landlords out of the market?
Data published in the Daily Telegraph (https://www.telegraph.co.uk/money/property/buy-to-let/renters-rights-bill-when-will-it-become-law-labour/) last November makes the impact starkly obvious of higher taxes, higher mortgage interest rates and more and more regulation on the buy-to-let sector. Between 2018 and 2024 the percentage of landlords who want to shrink their property portfolio or exit the market altogether increased from 15.7% to 31.4%.
If councils’ attitude to drivers is anything to go by, we can expect local authorities to use the new regulations to increase fine income from landlords, justifying the cash grab as necessary to protect vulnerable tenants and punish the unscrupulous.
More regulation can be expected as a result of changes made by the government in December 2024. These allowed councils to introduce licensing schemes covering larger areas without needing permission from the housing secretary. Landlords have to pay for these licences, £995 in the case of Westminster, so we can assume an expansion in licensing schemes, whether needed or not, to raise extra revenue.
Rent increases and repossession rules
How can landlords put up the rent?
Landlords will be able to increase rents once a year to the market rate by means of a section 13 notice. This is the rent at which the property would be advertised if vacant and new to the market. All other ways of increasing rents, such as mid-contract rent reviews, will be outlawed, as will be backdating rent increases.
Tenants who are unhappy with a rental increase can challenge it free of charge at the first-tier tribunal property chamber, which will determine the level at which the rent should be set. The tribunal may not set a rent higher than what the landlord is proposing.
The new rent applies from the date of the tribunal determination not, as before, from when the landlord served notice of the increase. In cases of hardship the tribunal can defer rent increases by up to two further months.
The changes create an incentive for tenants to challenge any rent increase as they will gain a few extra months at the old rent while their challenge is processed by what can be expected to be an increasingly delayed tribunal process.
However, landlords may take comfort from the fact that only a minority of tenants have heard of the first tier tribunal; however, given the viral nature of social media, this may change rapidly.
When can’t landlords seek repossession?
There will be a 12-month protected period after tenants move in during which landlords cannot sell the property even if they want to move into it.
In addition, the act will debar landlords from seeking repossession if they have not protected the tenant’s deposit in one of the protection schemes and if they have not registered the property on the new private rented sector database (see below). The right to repossession returns if these omissions are rectified.
Homes locked out of the market
One of the less publicised changes coming into effect on 1 May is that landlords will be barred from reletting a property for a year if they evict a tenant because they say they want to sell the property and then do not do so. The long period off the market if landlords fail to achieve their target price will mean a tightening in supply of homes for rent.
This rather punitive measure makes no allowance for landlords who fail to hit their target price when putting a property up for a sale.
Tenant payments and restrictions
Paying rent in advance capped
No more than one month’s rent can be paid in advance. This is about the only change that in some cases could be negative for tenants. Those that fail credit or reference checks may have no other way of demonstrating that they are solvent and acting in good faith than by paying three or six months’ rent in advance. These of course will be among the most vulnerable tenants, with uneven credit histories or without an employer to vouch for them.
The rules on prepayment mean the tenancy agreement must be signed and dated before there is any payment of rent, However, holding deposits are still permitted. Landlords may start to ask for rent in the period between the agreement being signed and the tenancy starting. If the initial rent has not been paid by the day the tenancy begins landlords must still hand over the keys to the property.
Other changes, penalties and conclusion
From 1 May will be illegal for landlords and agents to discriminate against prospective tenants who have children or who receive benefits.
Rental bidding will be outlawed. It will be illegal for landlords and agents to ask for or accept offers above the advertised rent.
A private rented sector database will be set up this year and will be fully in operation during 2027 once the 1 May changes have bedded in.
And following the database, the private rented sector landlord ombudsman will come into being in 2028, which will resolve disputes between tenants and landlords. It will be compulsory for landlords to join the ombudsman scheme.
Tenants will gain stronger rights to have a pet. Landlords may not unreasonably refuse permission and tenants may challenge a refusal at the new ombudsman.
Penalties
Councils will be able to issue civil penalties of up to £7,000 to non-compliant landlords; however, serious breaches or repeated non-compliance can be punished by fines of up to £40,000.
Rent repayment orders will be strengthened, which will extend to head lease landlords. The maximum penalty will double to 24 months’ rent payable to tenants for breaches of housing regulations.
As of 27 December local authorities gained new powers to enter landlords’ business properties and seize documents, phones and computers if they suspect a breach of housing law.
Student lettings
University-owned accommodation (known as purpose-built student accommodation or PBSA) will be exempt from the new assured periodic tenancy rules. This means university landlords will be still be able to grant fixed-term tenancies and recover possession.
A new possession ground specific to the PBSA sector, 4A, will allow landlords to terminate student periodic tenancies in houses of multiple occupation (HMO) between 1 June and 30 September to enable them to regain possession in time for the next academic year. There is a transitional period for the changes introduced by 4A and 4A will not apply to new lettings of non-HMO properties.
Rights to a decent home
‘Awaab’s law’ will be applied the private rented sector. The legislation was prompted by the death of two-year-old Awaab Ishaak in Rochdale from respiratory problems that were blamed on severe mould in his social housing flat.
Currently the law requires social housing landlords to remedy serious health hazards within a defined time frame and it will be extended to private landlords in 2026 or 2027.
Also to be extended are the range of defects and hazards covered by Awaab’s law. This year, for social housing landlords, they will include excessive cold or heat, sanitation or drainage issues and the risk of structural collapse. It is to be expected that the requirement to address all these extra hazards will be extended to the private rental sector in due course.
Like Awaab’s law the Decent Homes Standard (DHS) currently only applies to the social housing sector. Homes must be safe, good value and good quality. Its implementation in the private sector has a long lead-in and it will only come into force in 2035.
While the DHS and Awaab’s law may seem similar, the former is more to do with setting standards and the latter with forcing landlords to sort out potentially dangerous hazards promptly.
A small piece of good news
In January the government granted landlords more time to meet higher environmental standards. They now have until 2030 to meet the more stringent energy efficiency targets (the C rating on the energy performance certificate) and spending on trying to reach this is now capped at £10,000 rather than £15,000. Thus if they spend £10,000 without reaching the C rating they can still let their properties.
Subject to certain requirements, private PSBA providers are also exempt from the new periodic tenancy regime for new lettings and can offer fixed-term tenancies for the academic year.
Conclusion
One unintended consequence of the Renters’ Rights Act is likely to be the further decline of the amateur landlord who has one or two properties, generally as a present or future retirement income, and who often will know his or her tenants personally.
Further professionalisation of the sector will lead to an increase in more balance sheet-focused landlords, possibly with shareholders to answer to, determined to wring every last pound out of their portfolios. This can be expected to be accompanied by a decline in the more informal rented sector, which caters to relatively marginal tenants who may have difficulty passing reference checks.
Additional regulation will encourage landlords to sell up not only because it is onerous in itself but also because many may feel they need to let their properties via managing agents to ensure compliance, in some cases reducing profitability below the break-even point.
As the Conservative party pointed out, ‘extra rights for tenants won’t be much use when they can’t find anywhere to live’.
For anyone concerned about the changes contained in the Renters’ Rights Act and who would like more clarity about their impact on their tax and financial affairs, please contact Finsbury Robinson.
We offer a full suite of tax, accounting and business advisory services. Our friendly and highly experienced team can be reached on 020 8858 4303 or via email at info@finsburyrobinson.co.uk.
