The recent Government consultation on ending no fault terminations of residential tenancies, which will effectively abolish assured shorthold tenancies, came to a close on 12 October. Many people will be looking to see what, if anything, results from that process.
As a generational change in residential letting, many stakeholder groups are likely to have commented on the reach and effect of the proposed changes. The devil will always be in the detail, and that will follow once the government has time to consider the consultation submissions. While there is clearly a need to examine how current process and practice suits a changing landlord/tenant and home ownership landscape, we have a few passing thoughts on the potential impacts that these changes might have for the wider living sector.
Homelessness, market segmentation, and tenant covenant strength
Any legal changes that have even a short term impact on homelessness have to be looked at critically, and there is a view - albeit anecdotal, from discussions with some stakeholders in the letting market - that removing ‘no fault’ grounds for terminating tenancies may have the effect of tenant stripping within portfolios.
If landlords can only use fault-based means to end tenancies, which may come with time and cost implications for them, some may take the opportunity now to remove ‘marginal’ tenants in an attempt to upgrade tenant covenant strength. There are already housing pressures in cities for certain classes of tenants
There has to be some concern that certain tenants, who already have challenges in finding accommodation, may see those challenges intensified. Perhaps inadvertently, removing assured shorthold tenancies could result in a tenant group becoming less able to find rented accommodation because they are financially less secure.
As a result they will have to lean harder on the affordable housing sector, stressing registered providers’ ability to provide for more needy candidates. We could see a more polarised renting market developing if no-fault termination is removed, by accident even if not by design.
Asset management and investment
It has become very common practice in residential development and asset management to grant assured shorthold tenancies, on the basis that possession can be obtained on a no-fault basis with relative ease – protecting asset value and loan security, allowing owners to derive an income stream in the short term, and servicing a market need.
Many developers permit and use shorter term assured shorthold tenancies to rent out flats during the sale process, and their funders may actively require that developments are tenanted on shorter term lettings to offset finance costs. Changes that remove this option may put a number of investors and developers and smaller private borrowers in potential breach of their banking covenants by removing this route to market.
In many cases, these property owners are not directly, or typically, landlords as a business model – rather, they are using established and secure approaches to provide shorter term accommodation to tenants who want shorter term accommodation and servicing a need on both sides of the landlord/tenant equation.
Renting still tends to be for more than 12 months according to our investment and developer clients, but with an inherent flexibility that suits both parties. Shifting to fault-based termination only removes these opportunities for those landlords and tenants and we see no particular benefit for anyone.
At the other end of the scale there are the buy-to-let investors. They too may be in breach of their funding arrangements if they let their properties using tenancy agreements that are not assured shorthold tenancies. It is not uncommon for funders of buy-to-let properties to stipulate that those properties should only be let on the basis of tenancy agreements that are assured shorthold tenancies. Furthermore, those buy-to-let investors who own flats or leasehold houses may be in breach of their own lease covenants in those cases where the lease stipulates that the property may only be let using an assured shorthold tenancy.
We believe that it would be sensible for the government to commission research on the risks that these combined concerns might create. In the worst case, it could mean that large numbers of buy-to-let properties cease to be available for occupiers to rent. Furthermore, large numbers of investors might be forced to sell their investments on a fire-sale basis since those properties would no longer be generating any income with which to repay mortgage instalments.
What about existing tenancies?
With any change of this nature, thought has to be given to existing arrangements. There’s a good case for saying that any new arrangements should not apply to any existing tenancies in force when the new legislation is passed, or any renewals of those tenancies.
In these cases, the landlord granted the tenancy originally on the basis that it would be an assured shorthold tenancy, and it would be legislating retrospectively if the landlord was no longer able to use section 21 to obtain possession at the end of that tenancy, or at the end of any renewal of that tenancy. Instinctively, a change that does not accommodate this does not feel entirely fair.
An inevitable consequence of removing no-fault grounds for termination is that landlords will have to prove fault or other reasons to get their properties back. This means increased potential for disputes and these disputes will need resolving through the court system as it is mandatory to obtain a court order to evict residential tenants. It is well documented in the legal press that the court system is already at breaking point.
Unless significantly more funding is injected prior to such changes being effected, the safety net proposed in the consultation of courts both verifying landlord’s intentions/tenant’s fault and enabling landlords to get possession will not exist. Landlords already have to face delay and cost in using the court possession route, particularly when it comes to enforcement, and we have real concerns about the proposals as a result.
Clearly, changing residential landlord and tenant law is no small feat, and no changes will suit everyone. We have offered in our consultation response to meet with the government team to discuss these issues in further detail.
It is hard to predict exactly what changes may come out of this consultation, particularly as the residential lettings market is multi-stranded, and has evolved significantly in recent years to respond to the needs of developers, investors, tenants and funders. This is a very complex marketplace, and it is hard to assess how much of the driver for change is ‘supply side’ (coming from the landlords and funders) and how much is ‘demand side’ (do renters want short terms and are they comfortable with potential volatility?).
Playing devil’s advocate, is this actually neither of those things, and is the root of the issue more to do with a lack of inclination or incentive to let to those on low incomes or benefits? It remains to be seen whether, and how, the law is altered, and we are watching this with interest.