Honourable and personal residential letting experts

17Aug 3 year minimum tenancies increase risks for landlords

3 year minimum tenancies increase risks for landlords

The government have launched a consultation on having 3 year tenancies as standard, rather than the current 6-12 months. We think this has a number of risks for landlords.

Their consultation document provides a summary of their logic i.e. “The majority of tenants are on short term contracts – unsure if they can afford the next rent rise, or whether they might be asked to leave if they make a complaint.”

They state longer term tenancies are in everyone’s interests. We agree with this, but only where both parties properly fulfil their part of the bargain.

Is there an actual problem?

Our statistics show there is not really an issue.

We manage over 500 properties. 56% of our tenancies end within the first 2 years. 15% within the 3rd year and 29% are longer than 3 years.

However as 89.7% of tenancies are ended by tenants, not landlords, the timing is almost always decided by the tenant. The reason for this is obvious, landlords want long term, stable tenancies.

However the risk of a tenancy being ended by the landlord for ‘no reason’ is a big concern to many tenants, particularly those who have kids at school. Whilst landlords almost never end a tenancy where the tenant is paying and looking after the property, as landlords we must recognise that our customers have this concern. The suggested changes would go some way to address this concern.

Sadly one of the things that has influenced the Government is the many examples in high growth areas of the country of landlords serving notice to excellent tenants in order to get much higher rent. This just does not happen in our area – we have over 200 tenancies end each year and in our 13 year history we can think of only 2 examples where a landlord has evicted a tenant who has been a good tenant and the landlord did not want to sell or move into the property.

However longer tenancies make good political sense, being there are more tenants than landlords. It is likely the volume of people renting out of choice will rise, so some change is inevitable. It is clear the Conservatives feel the need to counter Labours efforts to appeal to this growing audience. Given Scotland have moved to indefinite tenancies, with the landlord having to go to court to end a tenancy, which we suspect could be an indicator of what Labour may do, so a lesser option may be better for our landlords!

Therefore we suspect this will happen in some form. We have decided to use the consultation to try to address any actual issues.

What are they proposing?

The Consultation has set out a suggested framework for future tenancies as follows:

  1. All tenancies are for three years, but with an opportunity for landlord and tenant to leave the agreement after the initial six months if dissatisfied. If both landlord and tenant are happy, the tenancy would continue for a further two and a half years.
  2. Following the six-month break clause, the tenant would be able to leave the tenancy by providing a minimum of two months’ notice in writing at any time.
  3. Landlords can only recover their property during the fixed term if they have reasonable grounds.
  4. These grounds would be in accordance with the existing grounds in Schedule 2 of the Housing Act 1988 and would include antisocial behaviour and the tenant not paying the rent. Landlords must give the tenant notice (which would follow the notice set out in section 8 of the Housing Act 1988 for the ground or grounds used).
  5. Additionally, there would be grounds which covered landlords selling the property, as is possible in the current model tenancy agreement, or moving into it themselves. These grounds would require the landlord to provide at least two months or 8 weeks notice in writing.
  6. Rents can only increase once per year at whatever rate the landlord and tenant agree but the landlord must be absolutely clear about how rents will increase when advertising the property. Any agreement on rent should be detailed in the tenancy agreement.
  7. Exemptions could be put in place for tenancies which could not realistically last for three years, for example, accommodation let to students or holiday lets.
  8. No comment what happens after 3 years – whether another 3 years or rolling, we don’t know.

You will see this sensibly uses the existing rules and arrangements, with the notable changes of the minimum 3 year term and the tenants not having to make a commitment to the full length of the tenancy.

What problems do we think this will cause?

This change would mean the landlord can only remove a tenant during the 2½ years by going to court – using a Section 8 notice for breach of tenancy, e.g. not paying. Currently almost nobody does this. We all use the Section 21 ‘no fault’ notice at the end of the current tenancy, which is usually no more than 12 months. Experience shows ‘sitting out’ the balance of the tenancy is almost always cheaper and more reliable than a Section 8 court eviction.

The reasons for this are:

  • Eviction under Section 21 notice requires a landlord to prove all the paperwork and communications have been correct to get a judgement for eviction – regardless of the reason for eviction or any tenant behaviour or views.
  • Section 8 court action has at least one hearing and the tenant can raise a defence. Therefore it is expensive and slow. Sadly there are many examples of tenants who have not paid their rent raising a wide range of imaginative defences. These result in delays and further hearings (and cost), all of which serve to keep the tenant in the property longer. Whilst the final outcome may be eviction, the cost and time delays are greater than using the Section 21 notice.

So for landlords the current short term tenancies are used as protection against those few tenants who do not play by the rules. Once landlords have confidence that the tenants will pay their rent consistently and look after the property most landlords are happy to give tenancies longer than 12 months.

Given this the volume of court cases for breaches under Section 8 profoundly understate the volume of issues faced by landlords. The inevitable risk is any change will mean further court delays as more cases come through.

We also think tenants with poor payment history or references will be effectively excluded from the private rented market as landlords become even more cautious about the risk of evicting tenants who do not pay.

What could change to make it better?

We think there are a number of measures to get an outcome which gives our tenants the confidence that they can keep their home, which protecting landlords interests. E.g.

  • We think there needs to be an option to serve tenants 3 months’ notice without court action if a tenant has not paid their full rent for 6 weeks. If the tenant pays everything due within the next month this notice must then be withdrawn. With this in place most landlords would have the protection they need against non-payment
  • Court action needs to be quicker and lower cost. Maybe following the Small Claims Court online submission model, rather than full hearings.
  • The capacity of the courts needs to be prepared for any increased claims.
  • Rent guarantee insurance should be provided by the Government for tenants who have a poor payment history. These people can’t meaningfully be covered by commercial rent guarantee insurance.
  • We think there should be break clauses at 6 months AND 12 months, rather than just 6 months.
  • We think the outcome of the tenant fee ban needs to be considered before implementation. One of the concerns tenants have is the current cost of moving. With the fee ban this cost will be transferred to landlords, meaning landlords will have even greater motivation to retain existing tenants.
  • Linked to this we think there should be some time commitment from tenants after the initial 6 months to prevent tenants changing tenancies with little reason, adding costs to landlords.
What have we done?

We have spoken to a number of our landlords to check their views and produced the issues outlines above. We have used these to submit responses to the consultation to try and influence how things look in future. Those responses can be found here.

As ever, if you have any comments or views then please let us know by emailing [email protected]