Renters Reform: A deep dive into periodic tenancies
While most of the media attention has been focused on the removal of Section 21 notices, the Renters (Reform) Bill makes some fairly radical changes to the structure of the tenancies you will be able to offer. Here NRLA policy manager James Wood takes a deep dive into the issue of periodic tenancies.
Under the current rules, most landlords offer fixed term assured shorthold tenancies (ASTs) in the private rented sector. This fixed term ties both the landlord and the tenant in for a set duration.
Once the Renters (Reform) Bill becomes law, this will all change. Instead of a fixed term assured shorthold tenancies, you will have to offer a periodic assured tenancy.
According to the Government this change is to retain the flexibility that tenants want in the PRS while enabling ‘tenants to leave poor quality properties without remaining liable for the rent or to move more easily when their circumstances change, for example to take up a new job opportunity.’
This article covers some of the key areas of concern around the changes. It is the first in a series of blogs looking at specific elements of the bill’s proposals.
Rent in advance
Once an assured periodic tenancy is in place, landlords will only be allowed to require the rent is paid every four weeks or every month.
This is likely to have negative consequences for some tenants; particularly students, pensioners, those without guarantors, and new entrants to the UK. For all of these groups, it is reasonably common to offset perceived financial risks, or align payments with their financial circumstances, by requiring larger advance rental payments.
Without that option it is unclear whether landlords will feel as comfortable letting to them. It should be noted that similar reforms in Scotland led to landlords exiting ‘higher risk’ areas of the market in favour of those who could pass traditional referencing checks.
Mortgage rates
At present, most lenders tend to avoid short-term tenancies and often require that their landlord customers impose a minimum six-month initial fixed period on the tenancy.
As UK Finance pointed out in its original consultation response, this minimum term requirement ‘helps to reduce the risk of missed mortgage payments which are more likely to occur where a landlord offers short tenancies.’
Given the enhanced risk of void periods, it is likely that lenders will impose stricter requirements or higher rates on buy to let finance as result. The NRLA believes it is crucial that lenders can offer a wide range of reasonable mortgage rates.
Notice periods
Under the new legislation, tenants will be able to serve two month’s notice at any point during the periodic tenancy to bring that tenancy to an end. Currently, a tenant is required to give one month’s notice. In the Government’s view, this extended notice period covers the cost of reletting a property.
The NRLA is doubtful that two month’s notice is sufficient to cover the costs of reletting. In a recent survey we found that:
- The average void period for landlord’s was 87 days; and
- It typically cost the landlord one to two months rent to prepare a property for reletting;
Once the costs of referencing, advertising and any agent fees are added in this would mean that the typical costs to a landlord are closer to six months' rent than two months.
Given this, the NRLA is arguing that the bill should be changed so that tenants cannot serve notice during the first six months of the tenancy, unless the landlord is in breach of their obligations. This would reflect the true cost of reletting, but also provide more certainty to lenders, allowing them to offer more affordable rates and keep costs low for tenants.
Council tax
While a tenant lives in the property, they will normally be responsible for paying the council tax. However, what happens if there is a tenancy in place but nobody lives there?
Under the current rules, the tenant will usually remain liable to pay the council tax even if they abandon the property or leave before their notice expires. This is because the tenant will usually have a minimum term of at least six months because of their fixed term.
This will not be the case with periodic tenancies. The tenant will only be liable while they are living in the property. Should they abandon it during the tenancy, even if they don’t notify the landlord, then the landlord will become liable for council tax.
Landlords will have to consider this as a risk factor when setting the rent for the property.
Written statements
Landlords will be required to provide a written statement of their periodic tenancy agreement under the new rules. For new tenancies this will be pretty easy as most landlords already provide a written tenancy agreement so nothing really changes.
However, the Renters (Reform) Bill will apply retroactively to existing tenancies which were written with fixed term ASTs in mind. For most tenancies, it is currently not clear how exactly this transition will work, though experiences in Wales and Scotland provide some insight.
Once the bill applies to pre-existing tenancies, landlords will not be expected to provide a full written statement. They will be expected to give information about the changes in the bill though. The one exception to this is where no written tenancy agreement has been provided. In those cases, a complete written statement will need to be provided by a date set by the Government.
For most pre-existing tenancies, the exact information requirements will require further secondary legislation from the Government.
The NRLA will be arguing for this to be made as simple as possible to avoid similar outcomes to Wales, where the difficulties of complying with the Renting Homes (Wales) Act led to a significant spike in possession claims.