Better for tenants? Government moves to make THREE year tenancy agreements as standard.

Better for tenants? Government moves to make THREE year tenancy agreements as standard.

Monday 6th August 2018

A CONSULTATION launched by the Government this week into whether three-year tenancy agreements should be offered as standard has been met with a mixed response from landlords and housing groups alike.

Landlords claim it could wreak yet more havoc on the private rental sector, and the latter saying that the changes can't come soon enough.

The private rental sector has seen a seismic shift over the last three years.

A series of measures announced by the Government in 2015, including the introduction of increased taxation on landlords by way of additional Stamp Duty and Land Tax on investment properties, the restriction of mortgage interest tax relief and changes on the way that income from rental properties is assessed, together with tougher lending legislation around buy to let mortgages, which was introduced by the Prudential Regulation Authority in 2016, have all reduced investor demand for buy-to-let properties in many parts of the country.

Now however, landlords potentially face further reform as the government seek to provide longer term security for those who are renting privately, which accounts for nearly five million households in the UK.

Overseen by Housing Secretary James Brokenshire, the consultation will run until August 26th but already its launch has seen polemic reaction from the property industry.

Talking about the reasons behind the review of current tenancy agreements, James Brokenshire explained: "I know this is particularly important for the growing number of families, vulnerable tenants and older people who rent and live with the uncertainty of suddenly being forced to move or fear eviction if they complain about problems with their home."

The suggestion is that three-year rental contracts would be introduced as standard, with six-monthly break clauses if either party - landlord or tenant - wants to exit the agreement early.
However, this would potentially remove the current flexibility of the Assured Shorthold Tenancy (AST) model, which following an initial six month period, allows the landlord to give their tenant two months' notice - providing they serve notice in accordance with legislation - and the tenant to give one months' notice, again providing they follow the clauses set out in their lease.
Many letting industry professionals suggest that moving to three-year fixed term contracts with break clauses at six months will make it harder for landlords to evict problem tenants, for example those who don't pay their rent or who damage the property, making some investors reconsider whether it's viable to continue to let out their property.

There is also concern that the changes may deter 'accidental landlords', for example those who let out their property due to changes in their circumstances rather than as an investment decision and who it's suggested account for nearly a quarter of all landlords, due to the lack of flexibility these new contracts would impose.

In both cases, this could significantly reduce the amount of private rental stock available, which may then in turn cause rents to increase in areas where there is a resulting lack of private rented housing available.

The National Landlords Association, which represents over 40,000 landlords in the UK, already estimates that up to 20 per cent of landlords are set to sell off their rental properties in the next two years due to additional taxation.

Should this occur, it would equate to nearly a million homes being removed from the private rental sector alone, before any further investors withdraw from the sector if they believe the proposed new legislation, should it be introduced, was too onerous.

In his statement about the consultation, Richard Lambert, CEO of the National Landlords Association (NLA) was strident about the implications of the proposals and said: "This is supposed to be about meeting the needs of the consumer.
NLA research with tenants finds consistently that around 40 per cent of tenants want longer tenancies, but 40 per cent do not.

"More than 50 per cent consistently say that they are happy with the tenancy length they were offered, and 20 per cent tell us that when they asked for a longer tenancy, they got it."
Richard continued: "We would accept that the flexibility of the current Assured Shorthold Tenancy isn't used as effectively as it could be, and that we should be looking to find ways to ensure that tenants are offered the kind of tenancies they need at the time they need them.
"That means thinking about how to modernise a model devised thirty years ago, to take account of the changes in the people who are renting and the way they live their lives. How will that be achieved by moving to a more rigid system, more reminiscent of the regulated model the current system replaced?"

However, from the perspective of tenants who rely on the private rental sector, Polly Neate, Chief Executive of Shelter argued: "This is an important step forward. Losing a tenancy is the main driver of homelessness and also causes huge instability for renting families so everyone who rents will be very pleased to see a move towards longer tenancies.

"But if the government really wants to stand up and provide stability for renters, they can and should go beyond three years to provide real protection from eviction, and the huge upheaval of having to move home, jobs and schools."

So, if implemented, could three-year tenancies really be as catastrophic for the private rental sector as some predict?

Mark Homer, Director of investor network Progressive Property Network is pragmatic about the proposed changes and said: "This latest consultation has the potential to provide landlords and tenants with security of tenure and income stream which I believe would largely be welcomed by both groups.

"However, it seems there is a possibility, although unclear at this stage, that tenants will be able to serve a tenant-only break providing notice to landlords prior to the three-year term ending, meaning their minimum tenancy may be as low as two months which would put landlords at a large disadvantage."

Mark continued: "Additionally, rent rises may also be capped or excluded within the three-year term giving tenants more visibility of their future outgoings but may mean that landlords end up out of pocket if mortgages rise".

But it's not just landlords' appetite for continued investment that the new proposals may affect.
Another issue is that the proposed longer-term tenancy agreements may not meet many mortgage lenders' criteria, which in most cases stipulate a maximum of twelve months for any one agreement.

Therefore, if introduced, new legislation could make it harder for landlords with existing buy-to-let loans on their rental properties to remortgage and may prove a barrier to entry for those who are considering purchasing a buy to let property but need to arrange borrowing to do so.
Brian Murphy, Head of Lending for Mortgage Advice Bureau suggested: "As the Government is currently at consultation stage, it's imperative that lenders are included in the process to ensure that the proposals are practical from a buy to let borrowing perspective.

"Whilst creating a more secure environment for tenants is clearly paramount, legislation also needs to work hand in hand with lenders' underwriting processes around buy-to-let to ensure that the private rental sector, which after all is a key part of the UK's housing ecosystem, remains sustainable to avoid a reduction in rental stock."

With so many moving parts involved, and the need to balance tenant wellbeing and security with a requirement to incentivise private landlords to remain in the sector, it seems that there are no easy answers to the government's conundrum.

Or as Abraham Lincoln once famously quipped, "You can't please all the people, all the time."