Renters' Rights Bill – how did we get here and what will it mean?

(6 min read)

The Renters' Rights Bill will reform the private rented sector in a way not seen for over thirty years. This article looks back at the history of residential tenancies from the introduction of the Protection from Eviction Act in 1977 and forward to the changes which will be made when the Bill becomes law.

The Renters' Rights Bill 2024 (the "Bill") has now passed committee stage. A very similar looking replacement of the Renters (Reform) Bill 2024 that fell at the final hurdle when Rishi Sunak called a snap general election, the Renters' Rights Bill is weighted just a bit further in favour of the tenant.

How did we get here?

Legislation around the private rented sector has been evolving since the passing of the Protection from Eviction Act 1977. That Act made it a criminal offence to change the locks on a residential property or evict a residential tenant without a court order. It also made it an offence to harass a residential tenant with a view to causing them to quit the premises. The provisions of the Protection from Eviction Act will remain in effect after the passing of the Bill and apply equally to most forms of residential occupation with some limited exceptions.

The other noteworthy piece of legislation passed in 1977 was the Rent Act. Residential tenancies created under the Rent Act benefitted from succession rights and rent controls. Some Rent Act Tenancies (fondly known as "RATs") still exist and are considered to be a reversionary property interest because, once granted, a RAT provided the tenant and his or her spouse and children with a right to remain in the property for the rest of their natural lives. There are limited grounds on which a RAT can be terminated but they tend to revolve around the landlord providing suitable alternative accommodation which can be difficult to achieve in practice.

The Landlord and Tenant Act 1985 set out landlords' statutory duties to repair and to remedy hazards but arguably the extreme controls on rent and the lifetime security afforded by RATs acted as a disincentive to private residential landlords, discouraging investment in the sector and leading to the proliferation of poor-quality tenements and slums. That, at least, was the argument that Margaret Thatcher's government made when they sought to reinvigorate the sector and encourage new investment with the introduction of the Housing Act 1988.

The Housing Act 1988 introduced two new forms of residential tenancy: the Assured Tenancy ("AT") and the Assured Shorthold Tenancy ("AST"). ATs were slightly better from a landlord's perspective than RATs because they benefitted from only one right of succession and were not subject to the same strict rent controls. ASTs were for shorter, fixed term lets and benefitted from no rights of succession at all but required a notice to be served on the tenant prior to the creation of the AST.

The introduction of the Housing Act 1996 dispensed with the notice requirement and resulted in ASTs being the default form of tenure, save where granted by specific public, quasi-public or government regulated bodies. ASTs have been the default position for private landlords since 1 January 1997, although it is still possible to create an AT. Tenancies that are incapable of meeting the criteria for an AST (usually because the rent is too high or too low or the fixed term is too short or because they are otherwise deemed by statute to be of incapable of being an AST) tend to be common law tenancies governed by the Protection from Eviction Act 1977. It is also possible to grant a "company let" where the intended tenant is a corporate entity rather than an individual.

Following the establishment of ASTs as the default option, legislation began to be introduced piecemeal to protect tenants. In the early stages, legislation was aimed at safeguarding tenants' health and safety (gas safety requirements introduced in 1998 and recommended PAT testing of electrical appliances) and the proper operation and return of deposits (Housing Act 2004). Houses in multiple occupation became heavily regulated and licensed as a result of the Housing Act 1996 and the Housing Act 2004 in an attempt to drive up standards and quality of accommodation in the sub-sector.

Against a backdrop of increasing regulation, the residential property market heated up to boiling point in the early to mid-2000s with some properties doubling in value in as little as two years. That overheating coupled with the increased availability of buy to let mortgages encouraged investment by smaller so called "amateur" landlords (although some would argue that there is no such thing), usually owning only one or two residential investment properties as a nest egg, retirement income or part of a diversified investment portfolio.

The global financial crash in 2007-2008 resulted in a credit crunch which made it difficult for many landlords to finance their investments and saw over-leveraged portfolios collapse as their credit lines were cut or expired. The role of sub-prime mortgage-backed securities in the global melt down resulted in moves by the UK government and banking system to tighten up access to buy to let finance and restrict the entry of smaller, unincorporated individual landlords.

As Chancellor, George Osborne introduced a gradual change to tax deductions in 2016 (prohibiting unincorporated buy to let landlords from offsetting the whole of their finance costs against income before tax and replacing it with a 20% tax credit). While this tax credit system still works for basic rate tax payers, it is extremely costly for higher and additional rate tax payers. However, the low interest environment that prevailed during the 2010s and very early 2020s cushioned unincorporated landlords from the effect of this change and allowed them to continue to profit from an arbitrage between income after tax and interest on borrowings of up to 80% loan to value.

The other penalty imposed on landlords introduced in 2016 was an additional 3% stamp duty charged to both unincorporated and incorporated landlords. That surcharge has now risen to an additional 5% following Rachel Reeves maiden budget last month and, of course, multiple dwellings relief has also been quietly axed.

The 2010s saw a succession of legislation seeking to tip the balance in favour of the tenant:

Immigration Act 2014 - made landlords the last bastion of border security by legally requiring them to check the immigration status of their intended tenants.
General Approval 2015 – approval of use of selective licensing (for a fee payable by the landlord on a property by property basis which can be expensive if applied to a large number of properties on an ongoing basis).
Deregulation Act 2015 – sought to tackle "retaliatory" s21 evictions by prohibiting the use of s21 where the landlord is in breach of its obligations regarding the condition of the property, the health and safety of its occupants or the energy performance of the property and to ensure that tenants were aware of their rights by mandating the provision of a government approved "How to Rent" booklet. The Deregulation Act 2015 also provided for tenants to be refunded any overpayment of rent where the tenancy was terminated early by service of a s21 notice and banned the levying of certain tenant fees.
Housing and Planning Act 2016 - introduced Rent Repayment Orders allowing the court to order a landlord to repay rent to a tenant where certain regulations had been contravened.
Building Safety Act 2022 – introduced regulations for higher risk buildings that make them more expensive to operate, regardless of whether or not they actually have fire or cladding issues.

All of these legislative changes have resulted in increased irrecoverable operating costs for landlords, arguably hitting smaller unincorporated landlords harder as a result of their inability to benefit from economies of scale.

An increased regulatory burden coupled with the current higher interest economic environment makes leveraged portfolios increasingly unprofitable, particularly where landlords have failed to actively manage the income from their portfolios through incremental market guided rent increases. It is also increasingly difficult and expensive for incorporated and unincorporated landlords to seed or grow their portfolios. The net effect is likely to be the driving out of smaller, highly leveraged landlords and the creation of a barrier to entry to smaller aspiring landlords, leaving it to larger institutional investors who can benefit from economies of scale to fill the supply gap in the private rented sector.

Where are we going?

Taken in the context of this visible swing of the pendulum towards tenants, the Bill makes perfect sense. There are several elements of the Bill that are likely to further increase operating costs both for incorporated and unincorporated landlords and that likely increase in cost should be factored into any decision to invest in the private rented sector. However, there is a real demand to be met in the private rented sector if landlords can continue to do so profitably in the context of the current economic climate and this latest set of reforms.

ASTs have certain defining features:

initial fixed term of not less than 6 months
reserve not less than £250 per annum in rent (£1,000 per annum in Greater London)
reserve not more than £100,000 per annum in rent
cannot be terminated by the landlord other than by way of a notice served on the tenant under either s21 or s8 of the Housing Act 1988
cannot be terminated by the tenant other than by two months' notice to quit expiring on or after the expiry of the initial contractual term or by operation of an express break clause in the AST
if no new fixed term AST is entered into, can roll onto a statutory periodic tenancy with the agreement of the parties
cannot be granted by certain bodies (e.g. educational institutions and other limited specified providers of student accommodation, the Crown, resident landlords, local authorities and housing associations)

The key reforms affecting open market PRS tenancies are:

the abolition of Assured Shorthold Tenancies and fixed term Assured Tenancies, which are replaced by rolling Assured Tenancies which can be terminated by the tenant at any time thereafter on not less than two months' notice
the abolition of s21 "no fault" evictions and with them the obligation on the courts to grant possession on valid service of a s21 notice and the fast track possession procedure associated with it
the addition of a series of new "justified" eviction section 8 grounds. Those relevant to private corporate landlords are: (a) intention to sell (only exercisable after one year), (b) expiry of the term of a superior lease, (c) HMO student accommodation, (d) redevelopment
penalties for abuse of the new "justified" eviction section 8 grounds including rent repayment orders for up to 2 years' rent
the strengthening of existing "bad tenant" grounds such as anti-social behaviour and breach of the terms of the tenancy agreement but coupled with an extension of time for rent arrears
the introduction of an electronic register of private residential landlords and landlord redress scheme (subject to secondary legislation to implement the same)
controls on rent increases applying s13 of the Housing Act 1988 to all rent increases which has the effect of restricting rent increases to once a year on two months' notice to market rent and allows the tenant to dispute the level of such increase by application to the First Tier Tribunal (and any increase determined by the Tribunal is backdated to the date of determination NOT the date of the notice)
consent to keep a pet is not to be unreasonably withheld or delayed (and this appears to include an obligation on the landlord to seek any consent required under a superior lease) provided that pet insurance can be required at the tenant's cost
outlawing of discrimination against families with children and those in receipt of benefits
the application of decent homes standards and Awaab's law to the private rented sector (subject to implementation by secondary legislation)
substantial investigatory powers afforded to local housing authorities
requirement to market at a specified rent (in order to avoid bidding wars)

Note that the provisions in the Bill will not affect purpose-built student accommodation where the provider falls within the limited student accommodation exemption in the Housing Act 1988. As a result of that exemption, those providers cannot grant ASTs, therefore the tenancies granted by them will not be subject to the conversion of ASTs to periodic assured tenancies. Instead, those tenancies will be governed by the Protection from Eviction Act 1977. The institutions that fall within that exemption are universities, housing associations and other specific providers of student accommodation.

The list of specified providers does not equate to all those PBSA providers who are signed up to the government's code of conduct: it is a much shorter list than that. The commentary accompanying this and the previous government's bill suggests that all PBSA providers who are signed up to the government's code of conduct are intended to be exempted but it is not clear at the moment how that exemption takes effect. As currently drafted, the Bill only appears to extend the additional ground for possession to HMOs and not to PBSA or non-HMO student houses.

The impact of the Bill on private sector landlords is likely to be an increase in operating costs resulting from additional regulatory and compliance obligations, increased administrative costs in the operation of s13 rent increases and (if the courts are not properly funded to deal with the reforms) an increase in the time and cost of obtaining vacant possession. As drafted the Bill effectively encourages tenants to challenge rent increases in every case because, if challenged, a proposed increase takes effect from the date of the decision rather than the date of the notice.

In conclusion

it's business as usual for specified student providers, housing associations and universities, which raises the question of whether non-registered providers of student accommodation will find themselves at a competitive disadvantage if the Bill is not amended
smaller, unincorporated landlords, particularly those with highly leveraged portfolios are likely to (or be forced to) downsize their portfolios or seek to exit the market altogether as the regulatory costs combined with higher interest rates and higher service charges on leasehold properties make their businesses unprofitable
the economic and regulatory environment in which the private rented sector is now operating appears to lend itself to investment by bigger institutional landlords with access to alternative finance, economies of scale and good, customer focused property management.
the impact of the Building Safety Act 2022 and proposed energy efficiency reforms potentially makes low density single family new build or refurbished stock a more attractive prospect than high density multi-family.

Next steps

We're waiting for a date to be announced for the Report Stage of the Bill in the House of Commons and will be keeping a close eye on any further amendments. If you would like to discuss how the changes affect you, please get in touch with your usual AG contact.