May 2023 saw the introduction of the much anticipated Renters (Reform) Bill to Parliament, bringing a package of proposals to reform the residential sector in both England and, to some extent, Wales. Now that the dust has settled following publication of the Bill, we consider how the proposed legislation will affect landlords of mixed use properties.
This is the second in a short series of articles about the Bill. Read the first insight in the series, which explores the key proposals and their implications for landlords in the residential 'Living' sector.
Residential parts of a mixed use building: what's changing under the Bill?
The Government's intention in putting the Bill forward is to give more protection to individuals renting residential accommodation in which they live as their home. It therefore does not affect long leases of whole buildings or parts of buildings held by an intermediate landlord, which are a common feature of mixed use buildings. It will, however, affect the individual leases of each flat that is rented out to individuals and, therefore, will affect the owners of those buildings. The main headlines for occupiers and their immediate landlords are:
- Assured shorthold tenancies (ASTs) will be abolished and there will no longer be such a thing as a fixed term assured tenancy. The aim of the Bill is to give tenants more security so that they can remain in occupation of their home indefinitely, together with giving them the ability to end the tenancy at any time by giving two months' notice.
- Rents payable under the new form of tenancy proposed under the Bill must be calculated on a monthly basis, as opposed to any other basis that might have previously been used in an AST.
Both of these changes will bring challenges for landlords managing the residential parts of buildings; there will be little certainty about when tenants will leave, and, once a tenant gives notice to terminate, a landlord will only have two months to find a new tenant, which will further increase the chance of voids in an already difficult market. Furthermore, as there is no minimum term, there is nothing to stop a tenant moving in and giving notice to leave shortly afterwards – having to find new tenants more frequently will naturally have time and cost implications.
- Section 21 "no fault" evictions will be abolished and landlords will only be able to evict a tenant in reasonable circumstances, as set out in the Bill. However, while it might be easy to view the Bill as a triumph solely for tenants, it is important to note that the mandatory grounds upon which a landlord can evict a tenant are also being strengthened and extended, and include situations where the tenant is not at fault. The permitted grounds for eviction likely to be useful to landlords of mixed use properties are where:
- the landlord has an intention to sell the property;
- redevelopment of the property is proposed, although the tenancy does need to have existed for at least six months;
- there are rent arrears (i.e. the tenant has two months' rent arrears at the time notice is served and also at the time of the hearing), or repeated rent arrears (i.e. the tenant has been in at least two months' arrears on at least three separate occasions within the last three years, and it is irrelevant that the arrears are cleared at the date of the hearing);
- the tenant is in breach of the tenancy;
- there has been deterioration of the property; or
- there is severe anti-social or criminal behaviour by the tenant – the Bill is widely drawn, in particular, in this regard and refers to the tenant being "capable of causing nuisance or annoyance".
There is currently little guidance in the Bill as to what evidence a landlord will need to provide in order to be able to prove the above grounds and the Government has said it will not be mandating what that evidence must comprise. Regaining possession using some of these grounds will undoubtedly be uncertain and may prove more costly and time consuming. In the past, landlords may have used section 21 notices – even where the tenant was at fault - as it was simply easier to do so than having to prove a fault.
- Rent review clauses will have no effect. Instead, the only way for a landlord to increase rent will be to serve a statutory notice on the tenant (not more than once a year) to establish a "market rent". If the new rent stipulated by the landlord in the notice is agreed, nothing more needs to be done. However, the tenant may challenge the increase if it believes that the proposed new rent is above market rent. The matter will then be dealt with by the First-Tier Tribunal, who will assess what the landlord could expect to receive if letting to a new tenant on the open market. Landlords will, therefore, no longer be able to count on a fixed annual rent increase and will have to be prepared to justify any increases they are seeking.
- Tenants will have the right to request to keep a pet and the landlord may not unreasonably refuse. Dealing with pet requests will take time and corresponding with tenants about requests may cost money. That said, landlords are entitled, as such terms will be implied into the tenancy, to require that the tenant obtains insurance in respect of the risk the pet causes damage to the property, or obtain an indemnity from the tenant in respect of such damage. The Bill, at present, does not contain any guidance as to what grounds would be reasonable for a landlord to withhold consent, but does allow a landlord a six-week period to make this decision.
- All landlords will be required to join a new Ombudsman that will aim to provide fair and binding resolutions in relation to issues faced by tenants. The intention is that this will be less adversarial than going to court and should be quicker and cheaper. However, it is only tenants who may refer matters to the Ombudsman. Landlords will need to get familiar with this system once it is launched.
- A new Property Portal will be launched and will include details of all existing and prospective residential landlords, and all properties let under residential tenancies – it is effectively a landlord register with some parts of it being visible to the public. A fee will be charged for registration on the database and properties may not be marketed or let until the registration is completed. Failure to register could lead to fines of up to £30,000 or even criminal prosecution. This is another level of cost and bureaucracy for landlords.
So on closer analysis, it is an oversimplification to describe the Bill as wholly tenant-friendly – it is more nuanced than that. Overall, however, a responsible tenant who is not in breach of its tenancy is the overall winner on the basis of the current drafting.
What will happen next with the proposed reforms?
The Bill is in the early stages of its passage through Parliament and will no doubt be amended following what are likely to be lively debates. There is also the chance that the Bill may not be passed before the next general election. However, even if this were the case, the broad level of cross-party support for reform in this area may well see it resurrected before long.
You can read more about the Bill in our earlier article on the residential 'Living' sector, as part of this ongoing series. In our next update, we will also look at the implications specifically for the student accommodation sector.
To discuss any of the points raised in this article further or speak more generally about what to expect under the planned reforms, please contact Helen Emmerson or Edward Colreavy.