Renters Rights Bill – planning for new realities

Originally published by The Intermediary

It often feels like there is a whirlwind of legislation floating around the Private Rental Sector (PRS) at any given time, particularly when it comes to the rules and regulations that landlords are subject to.  

For the last 10-15 years, Governments of all different colours appear to have had the private landlord in their sights, with some warranted legislation aimed at them, and let’s be frank, some unwarranted. 

There has been no let-up in the last year, and the Labour Government has not eased back on this, with its own Renters’ Rights Bill containing a significant number of changes that are likely to impact hugely on landlords. And yet it feels like the Bill is going slightly under the radar at present.  

It might be understandable if your existing landlord clients haven’t given this too much thought yet, given that the Bill has yet to pass through Parliament, but it’s not like we have years to wait.  

As I write this, the Bill is at the Report Stage in the House of Lords, however the anticipation is that it will become law by this summer, which – by the time this is published – means that we will have mere months to wait before we see some significant changes for landlords to get their heads around, and implement.  

So, what are they? Well, one of the main ones is that the Bill will end Section 21 evictions and will limit the grounds on which tenants can be evicted full stop, however where I think there is the greatest potential for sizeable changes in the PRS comes with the changes to the law around rental increases. 

Let’s be frank here, the Renters’ Rights Bill outlines a much more prescriptive, and dare we say, restrictive process for how and when landlords can introduce rent increases at their property.

Under the new rules contained in the Bill, landlords will only be allowed to raise the rent once per year using a Section 13 notice, which tenants will be able to challenge if they believe the increase is above the market rate. The notice must expire at least 52 weeks after the last rent increase, and it will only take effect at the start of the next tenancy period.  

So very soon, a landlord will only be able to increase rent to a maximum level determined by the current market rate, and if the tenant feels any proposed increases are over and above this, then they can challenge this at a First Tier Tribunal. On top of this, rent increases can’t be backdated, and therefore if they are challenged but the Tribunal agrees in the landlord’s favour, the higher rent will only apply from the decision date. 

On the face of it, it will therefore ‘pay’ for the tenant to challenge their rent increase, because depending on how long the Tribunal takes to come to a decision, the tenant is going to be paying a lower rent up until that point, rather than the higher one from the point the landlord would like to introduce it from. 

Interestingly, if the Tribunal feels the rent increase is below the market rate, it can’t increase it above the amount proposed by the landlord. Plus the Tribunal can defer any increase in rent by up to two months if it believes the tenant is in financial hardship. There is also a limit on the amount of rent the landlord can ask for in advance. 

Given all of this, and as mentioned, the fact that – to a large degree – the ability to increase rents to a level the landlord needs is being significantly restricted, it is perhaps not surprising there has been further talk about the disincentive this might apply to ongoing property investment. 

My expectation is that landlords will need to be much more cautious when increasing rents, ensuring they have strong evidence that the proposed increase is justified by the current market conditions.  

As mentioned above, it seems likely that tenants are going to want to challenge rent increases a lot, given the state of grace they will get on any rise while the Tribunal makes its decision. Again, this will need to be weighed up by landlords – they are much more likely to accept a smaller rent rise at the immediate start of the next tenancy, rather than potentially waiting months to get a Tribunal decision. 

The other big question will be around how the Tribunal is going to function, how resourced it will be to potentially deal with large numbers of tenant challenges, etc. I suspect there will probably need to be a large degree of automation at play here but will that deliver fair results? A lot is still up in the air. 

Am I expecting large swathes of landlords to exit the sector because of this? No. But it will clearly require a much larger degree of planning and preparation on their part – and that of the letting agents they use – in order to get to the level of rent they might require to maintain ongoing profitability, and importantly, to be able to secure the mortgages they need.  

That is a hugely important question, and one that advisers might wish to set their landlord borrower clients right now, because rental levels are clearly going to be hugely important in the next mortgage recommendation. Plus, of course, for purchasing landlords – already hit by the further increase in the stamp duty surcharge – understanding what the current market rent might be set at, and therefore what is likely to be the most rent they can secure, is going to impact on their decision to buy a property or not. 

Overall, advisers might feel now is the time to communicate with all their clients about the Bill, it’s likely impact, and what this will mean for financing going forward. In a couple of months, these proposals become reality and they need to be aware of them and plan accordingly.