Is this crunch time for residential landlords?
Proposed new legislation is latest in a fast-changing landscape for private rented sector
Residential landlords already struggling to keep up with legislation and guidelines, including the tenant protections extended by the government during the pandemic, may feel they have been experiencing constant waves of change so far – from fast-diminishing returns following cuts in tax relief through to the complexities of right to rent checks. But now, gathering power out to sea, lies a potential tsunami.
And while it includes a raft of legislation designed to curb poor practices and unscrupulous landlords, it will, nonetheless, impact the whole sector, with those ‘accidental’ landlords and small-scale property owners likely to be most affected, potentially leading to a significant sell off in the sector.
The Government’s long-awaited White Paper – A fairer private rented sector – finally arrived in June. It sets out structural changes, the biggest for renters in a generation according to the press statement from the Department for Levelling Up, Housing and Communities.
The aim is to improve conditions and rights for those in all housing. As well as changes in the law for privately rented property through the Renters Reform Bill, the Social Housing Regulation Bill will make all registered social housing providers subject to a tough new regulatory regime, with rigorous inspections and stronger powers to tackle failings by social housing landlords.
Re-shaping the renting landscape
For private landlords, the headline takeaway is that the sector will be subject to the Decent Homes Standard for the first time, giving all renters the legal right to a safe and warm home, and it will ban Section 21 ‘no fault’ evictions.
This latter change is one of the most fiercely debated for landlords. The ambition of the legislation, abolishing section 21 of the Housing Act 1988 and re-framing the grounds on which a landlord can regain possession under section 8 of the Act, is intended to protect tenants from unscrupulous or unpredictable landlords.
Alongside, the Government plans to introduce a simpler tenancy structure which it says will be more secure for tenants, yet more flexible for both parties. This will see a shift from assured tenancies and assured shorthold tenancies onto a single system of periodic tenancies for all privately rented accommodation. The effect of this change will be that a tenancy will only end if the tenant chooses to do so, and gives two months’ notice to the landlord, or if the landlord has a valid ground for possession.
As landlords will only be able to evict a tenant in reasonable circumstances, the Government is making changes which it says will strengthen the position for landlords with legitimate grounds for taking back their property. This includes making it easier for them to evict tenants who are wilfully not paying rent, or who are repeatedly engaging in anti-social behaviour, and with scope to end a tenancy when a property is intended to be sold, or for the landlord’s own use.
There are also plans to create a passport form of deposit, to overcome the need to raise second deposits when moving home. A topic which has also been the source of much discussion among landlords, who see problems in releasing deposits before they may have had full opportunity to check for tenant damages.
Also, rent increases will be restricted to once annually, with an easier route for tenants to challenge increases through the First Tier Tribunal, and rent review clauses abolished altogether.
A new Ombudsman service will be established to provide a faster, less adversarial dispute resolution service instead of going to court, and all private landlords will have to participate. Other mediation and alternative dispute resolution procedures will be introduced to enable landlords and tenants to work together to reduce the risk of issues escalating.
And a new Property Portal will give landlords, tenants and local councils a one-stop route to demonstrate and check compliance and other information, the intention being that tenants can check on landlords before taking a property and for local councils to have the necessary data to tackle criminal landlords. There are also plans to integrate the existing functionality of the Database of Rogue Landlords into the planned Property Portal, to make these publicly visible.
It will become illegal for landlords or their agents to apply a blanket ban on renting to families with children or those receiving state benefits. In future, this may be extended to include other groups such as those leaving prison.
Landlords will have to demonstrate good reasons for refusing tenant requests to keep a pet in their property, although landlords will be able to require an insurance indemnity from the tenant to cover the cost of any potential damage by the pet.
Against this backdrop of increasing complexity and lower yields, many private landlords, particularly those who may have fallen into the position accidentally – following a career move or perhaps inheriting a property – may be considering whether to divest and move out of renting altogether, or to move into short term, holiday letting.
As ever, there are pros and cons, and it’s worth considering some of the other potential changes being considered by Government.
Weighing up the holiday let market
The rapid growth of very short term, hotel-style letting on platforms such as Airbnb and Booking.com has been blamed for reduced levels of longer-term rental stock. There’s an obvious attraction with higher nightly rates, payment in advance and no worries about long term problem tenants.
However, the market is gradually being pulled into shape by greater regulation. The Government has said it will review the impact of holiday lets in the UK, as part of moves to address the shortage of housing for those living in popular tourist locations. This will also look at the impact of holiday let rentals on anti-social behaviour, whether from stag nights or pop-up party events. The platforms are themselves taking action, with Airbnb banning parties on all rentals, but local authorities are likely to take action too.
This is likely to add to the national rules and regulations, from tax to health & safety, and local bylaws that must be complied with, such as the maximum 90 days per year rule that applies on short term rentals in London.
Under the Deregulation Act 2015, homeowners in London can rent their homes to guests on a short-term basis for up to 90 days in one calendar year, without having to apply for planning permission to change their property use class from a C3 (Dwelling House) to C1 (Hotels, Boarding Houses, Guest Houses). The 90 days can be a series of one-off nightly or weekly lettings or a single block of time, but once the quota has been used up, if the homeowner goes on to exceed the 90-day rule without permission from their Council, then they can be subject to penalties of up to £20,000 for each unlawful letting.
The Government is also taking action to tackle the issue of second and empty homes in some areas by empowering councils to charge higher rates of council tax, which could see rates double, and in Wales it could even quadruple. There are also reports that regional mayors may be given the power to ban properties from being used as short-term lets at all.
Taking a tax break – if talk turns into law
Other things to consider are the cost of selling and getting out of the rental market, including capital gains tax.
When there is a gain on the sale of a property that is not a principal private residence, the landlord may find themselves with a capital gains tax bill if it exceeds their annual allowance, with tax on the gain payable at a rate of 18% for basic rate taxpayers and 28% for higher rate taxpayers.
Recent reports in a national newspaper suggest that the Government is considering action to shrink the buy to let market, including offering tax breaks for those who are accidental landlords, perhaps where they have inherited a second property, to encourage sales and increase the housing stock.
Whatever the weather
In this fast-moving landscape, taking regular guidance and keeping up to date with access to relevant knowledge is essential. Whether you are an accidental landlord, a single property landlord or hold a major property portfolio, the same rules apply and there is no exemption for lack of knowledge.
As the nursery rhyme goes:
We’ll weather the weather
Whatever the weather,
Whether we like it or not.
Getting clear advice and checking the legal and financial implications as the sector continues to deal with these latest changes may help avoid the situation becoming a tsunami for you, keeping it no more than a summer storm!