The Renters Rights Bill – new rules increasing rent and their consequences

Looking at the new rules for rent increases and what landlords should do to protect their position.

Fulfilling a manifesto commitment

One of the manifesto commitments the Labour Party made was to give tenants the power to challenge ‘unreasonable rent increases’.

The procedure they are using for this is as follows:

• The only way that rent can be increased will be the statutory notice procedure under s13 of the Housing Act 1988.
• Rent increase clauses in tenancy agreements will be banned, and
• Increase by agreement will only be permitted after the section 13 notice has been served
• The notice period (currently one month) will be increased to two months

Challenging rent and rent increases

The rules for this in the new legislation will be as follows:

• As is the case now for ASTs, tenants will be able to refer their initial rent during the first six months from the beginning of their tenancy to the First Tier Tribunal for review
• Tenants will also be able to challenge s13 rent increase notices in the same way
• However, the Tribunal will only be able to leave the proposed rent as it is or reduce it. They cannot (as they can now) increase it
• The rent the tribunal awards will be based on their determination of the ‘open market rent’
• The new rent will not take effect until after the tribunal has made their decision or,
• If they consider this will cause hardship, on a date the tribunal directs

The method for working out the ‘open market rent’ is set out in section 14 of the Housing Act 1988.  It is based on what the rent would be for a similar property in the same area.

So what does all this mean?

It means that although landlords can set the initial rent for a property and service notices of increase for the rent that they want – this is subject to the First Tiers Tribunal’s view of what the ‘open market rent’ should be.

The Tribunal panel that will make this decision will normally include a valuer who will be experienced in valuing properties and rents in the area.  They will base their decision on the rents for other properties in the area, so far as they are aware of them.

They will probably treat rents set out in property adverts with caution,  as the new legislation will also provide that landlords cannot charge a higher rent than that given in their advertisement. So these will tend to be higher in many cases, than the rent actually agreed.

It is suggested that the new property portal will include rents for property, in which case this will probably be used by the Tribunal as an aid to determining the market rent.

The prospect of a downward drift in market rents

As all rents will ultimately be subject to the Tribunal’s view of what the ‘open market rent’ should be, there is a possibility that this may result in rents overall falling.

This will be good from the tenant’s point of view as it will make their property more affordable.

However, landlords need sufficient rent to cover outgoings and make a reasonable profit. If the rents drift down too far, as happened under the Rent Act 1977 rules, it could make renting unaffordable for landlords.

Particuarly bearing in mind the new standards being introduced under the Decent Homes rules and the requirement to upgrade properties to an energy level C by 2030.

Under the Rent Act 1977 landlords were forced to continue renting to their tenants as it was very difficult to evict them under the then rules.

This is not the case now, as landlords will be able to evict tenants if they decide to sell. If rents drift down too far, this is probably what will happen.

If landlords sell up

If rented properties are sold, as was pointed out in the bill’s second reading debate, the property will not disappear. It will still exist and be there for someone to live in.  But it will no longer be available, for example, for families unable to buy.

The likely options for properties sold by landlords are:

• It will be sold to another landlord
• It will  be sold to an owner-occupier,
• It will be used for short-term or holiday accommodation
• It will be demolished or converted to some other use

It is likely, overall though, that if a large number of landlords sell, the private rented sector will contract.

If the Private Rented Sector contracts

This is a real possibility. Bear in mind that in the last century, the number of households living in rented accommodation shrank from approximately 80% of the population before the 1914-1918 war to around 8% in the 1980s.  This was largely down to the effect of the Rent Act 1977 (I discuss this in my history article here).

However, it is important for the economy that there is a Private Rented Sector. Not everyone wants or is able to buy their own home. Social housing has shrunk due to the ‘right to buy’ and is now in very short supply.

Private rented housing is needed in particular for;

• Students, who are unlikely to want or be able to afford to buy
• Young people who want the freedom to move that renting gives
• People having to move for their job, needing somewhere to live before they buy
• People who are unable to afford or who do not want (for other reasons) to buy
• Immigrant families

If people are unable to move, for example, for their job, this causes problems. There are already issues with low-income workers being unable to live close to their work in London and other expensive cities. Students are increasingly finding it hard to find accommodation, and some are forced to live far away from their college or university.

If this continues it will cause problems for our economy. The government should take this into account in the development of this legislation.

What can landlords do if the legislation is passed as drafted?

It will be up to landlords and letting agents collectively to ensure that the level of rent is not allowed to drop too far.

So landlords should ALWAYS serve a notice of rent increase regularly every 12 months. This will allow rent increases to be modest – which will be more affordable for tenants, less likely to be challenged, and, if challenged, less likely to be reduced by the Tribunal.

At the moment, many landlords fail to increase rent for several years and then make one big increase to bring the rent up. This is NOT a good idea. Large rents are far more likely to be challenged and reduced.  It also supports the legend of the ‘greedy landlord’.

It is up to landlords collectively to ensure that the level of rent is not allowed to drop. This means that all landlords should ensure that their rent is at a proper market level and increased regularly by small increments to keep up with inflation.

Otherwise, this will prejudice other rent increases made by other landlords.