The Renters (Reform) Bill, the most significant overhaul of the private rented sector in over 25 years, has entered Parliament. However, it has been temporarily postponed until the court system undergoes necessary reforms to handle the anticipated increase in workload due to the proposed changes. It may be tempting for schools who provide accommodation to their staff to heave a sigh of relief at this point. It would, however, be wiser to view this hiatus as a chance to take stock and prepare for the coming changes, now that we have a better idea of what they comprise.
What are the changes?
For many years the default form of short-term residential letting has been the Assured Shorthold Tenancy (AST), governed by the Housing Act 1988. Under this legislation, landlords have been able to let properties safe in the knowledge they can regain possession on two months’ notice without having to give a reason. This is the section 21 or "no-fault eviction" process. This has been especially useful for schools in situations where they have needed to terminate employment and associated accommodation quickly if, for example, there are safeguarding concerns. The new Bill’s headline measure is the abolition of section 21, replacing it with a spread of grounds under which possession can be sought, but only where those specific situations exist. In the example above, under the new Bill, the school could seek possession on the basis that (a) the dwelling was let to the tenant in consequence of their employment and (b) either their employment has terminated or the landlord needs possession to re-let to a new employee. The rub, however, is that unlike section 21, schools will need to apply to court for an order for possession and prove the ground exists, which will introduce cost, delay and uncertainty.
Some of the Bill’s other measures include provision for the creation of a landlord redress system, an ombudsman and a database setting out details of landlords and properties. At heart this is about making landlords accountable, but the increased regulatory burden, adding to existing strict rules about deposits, gas and electrical certificates, will give responsible landlords a headache. As presently drafted the Bill means that "honest" mistakes made by landlords when preparing their tenancy agreements or possession notices, or failing to register information correctly on the new database, could attract fines or even criminal liability. Letting property on residential tenancies is becoming an increasingly specialised business and schools may lack the expertise and resources to cope.
Not all schools use residential tenancies: many use service occupancy agreements or licences. What are the points to watch here?
Service occupancy agreements
A true service occupancy is a licence (not tenancy) and so falls outside the existing statutory regime and therefore, the new Bill. There is, however, a strict test to qualify:
- There must be an express term in the employment contract that an employee has to live at the property for the better performance of the employees’ duties, and
- It must genuinely be the case that the required occupation enables the employee to better perform those duties (ie it is not a sham).
A classic example is a housemaster in a boarding house.
Where there is a true service occupancy, the right of occupation generally ends with the termination of the employment contract. Service occupancies are therefore attractive and provide schools with maximum flexibility to move out staff members when employment ends.
Schools cannot, however, simply create a service occupancy purely through the employment contract requiring the employee to reside somewhere for the better performance of their duties. There must also be a genuine requirement for them to live there, which may be difficult to make out if the house is some distance from the main site, for example. Likewise, schools must be careful not to charge rent (including deducting an allowance from wages). Service occupiers do not pay rent, because their occupation is required for the better performance of their duties. Rent is a characteristic of tenancies.
Licences and hostels
Alternatively, schools may purport to make bedrooms available to staff on "licences", but this is another situation where the law will "look through" the paperwork to what is happening in practice. If an arrangement with an employee is for a term, at a rent / fee and affords "exclusive possession" of the bedroom, it will be an AST, no matter what the paperwork says and regardless of whether there are communal, shared areas such as a kitchen or bathroom. There is no formal test to determine when an arrangement is a licence. However, some key characteristics for a school environment are as follows:
- The ability for the school to change the bedroom occupied by a staff member and evidence of this actually happening in practice,
- The school paying all council tax and utilities,
- The school’s cleaners having access to and responsibility for cleaning the bedrooms, and
- No rent or licence fee being requested.
Schools should ensure they understand their current arrangements, including stress-testing service occupancy agreements and licences to ensure they are what they say they are. If they fail, section 21 should still be available (for now) and can be used to regain possession (and new arrangements can then be put in place if desired). For schools who prefer or need to use residential tenancies, thought should be given to the fact that the agreements will need to be redrafted and the arrangements then managed in a manner consistent with the new law. Either way, and most likely regardless of who is in government, the private rented sector will be reformed and schools can use this breathing space now to prepare themselves for the changes.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, January 2024