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Overcoming the barriers to longer tenancies in the private rented sector

Since the introduction of assured shorthold tenancies under the Landlord and Tenant Act 1988, tenancies of 12 months have become the norm.

The Ministry of Housing, Communities & Local Government has just launched a consultation on “Overcoming the Barriers to Longer Tenancies in the Private Rented Sector”, asking whether measures that would encourage or compel landlords to grant longer term tenancies would lead to greater stability for both tenants and landlords.

The consultation document states that research by a major developer in the build to rent sector  suggests that one of the main reasons that tenants do not take up or demand longer term leases is because shorter terms have been the market standard for so long.  Once accustomed to the idea of taking a longer term tenancy, tenants have shown more interest, provided that they are given enough flexibility (such as break rights) and control over rent increases.

What is wrong with a market dominated by short term tenancies?  According to statistics published in the consultation paper, 38% of households in the private rented sector are families with school age children.  The paper states that short term tenancies create uncertainty. Tenants who pay their rent and comply with their covenants may still find themselves having to incur the cost and disruption of relocating their families after a year or two.  More sobering still, the end of assured shorthold tenancies is now the leading cause of homelessness, with tenants finding it difficult to find new, affordable accommodation when their tenancy comes to an end.

One question for consultees is whether the solution lies in legislation (prohibiting tenancies of less than 3 years other than in exceptional cases) or introducing incentives to landlords to grant longer terms (such as tax breaks).

The principal proposal in the consultation is for a standard tenancy of not less than 3 years, starting with a 6 month probation period after which either the landlord or tenant can decide to walk away.  Provided that the tenant complies with their obligations, they would enjoy the security of a longer term, but landlords would still be able to terminate the tenancy early on the tenant default grounds that currently apply to assured shorthold tenancies.  The landlord would have a right to increase the rent every 12 months, but without any nasty surprises: the tenant would have to understand up front what the maximum rent could be.

It will be interesting to see how the market responds to this consultation.  The sector is already highly regulated, and the sources of many tenant complaints have been tackled in recent years.  Tenancy deposits are protected under a statutory scheme (and some landlords do not take them anyway), letting agents are to be regulated, and letting fees banned. The Deregulation Act 2015 introduced protections for tenants against so-called “revenge evictions” which should allow tenants to speak more freely about disrepair and problems with their homes without fear of being thrown out by a disgruntled landlord.

It will also be important to ensure that regulation of tenancy lengths does not dissuade institutional and private investors. It is investors, after all, that fund and develop build to rent schemes. The consultation paper recognises that major upheaval and more regulation could stifle investment in the sector at a time when the investment market is already softening and the need for supply is still very high.

Ultimately, the recommendation for longer “short term” tenancies is driven by a wider problem in the residential property market.  Home ownership is in decline, due to a lack of affordable stock.  Assured shorthold tenancies are by far the most common tenancy in the private rented sector.  There seems to be little in between the two extremes. However there are signs that the private rented sector is evolving naturally, thanks to diversification (student accommodation, buy to rent, and retirement living, to name a few) and innovative steps by developers and planners.  In London, tenancies of new PRS stock are already expected to have a 3 year term, under the Mayor’s Affordable Housing and Viability SPG (July 2017), and this policy is reflected in the draft NPPF that will be published this month.

Perhaps the answer is to let the market adapt, rather than forcing change upon it.