Residential lettings – the worry for landlords

Many schools use their housing assets to provide an income stream through lettings on the open market. This usually involves entering into Assured Shorthold Tenancies (known as “ASTs”) with individuals who let the properties from the school on a fixed term or periodic basis. These agreements can usually be terminated by the school (once the fixed term has expired) on two months’ notice.

It seems that the Government has these arrangements in their sights – proposing wide-ranging reforms which may see the abolition of a landlord’s right to terminate a residential tenancy unless the tenant is in breach of its terms.

Should the proposed reforms be adopted it will become more difficult to terminate residential tenancies, meaning that those letting properties may want to consider more carefully whether they wish to enter into ASTs in the first place.

Current Position

The principal attraction for schools letting residential property on ASTs is that, assuming any fixed term has expired, they allow the school to bring the arrangement to an end on two months’ notice by way of a “section 21 notice” (a notice served in compliance with section 21 of the Housing Act 1988).   There is no need to prove any fault on the part of the Tenant before serving such a notice, and the route to obtaining possession following service of a valid section 21 notice is relatively streamlined.  In an increasingly clogged up court system the “section 21” route is often the most efficient way of ending a tenancy and obtaining possession even where a tenant has breached terms of their tenancy.

Proposed Changes

The Government is highly critical of the “no fault termination” feature of ASTs, stating these “short notice” evictions are a leading cause of homelessness. Many will have seen the Prime Minister’s recent announcement which followed last year’s consultation into residential tenancies in the private sector. While promising to improve the court system and mechanics for landlords seeking to regain possession for “legitimate reasons” the Government is also proposing to abolish “no fault evictions” and introduce a minimum term of 3 years, illustrating a clear move towards security for residential tenants. The Government’s stance, that tenants have the right to feel secure in their home, does little to balance a landlord’s right to deal with its property in the manner it sees fit; nor does it recognise the fact that most residential landlords have very few properties, and would rather avoid evictions so generally only terminate an AST when the tenant is in breach.  This has prompted concern that property owners (and investors) may move away from the residential market altogether, reducing available properties and causing rents to increase. It is also likely that landlords will want to fulfil a deeper due diligence exercise before renting out property. Those with limited means may find it more difficult to find housing, a presumably unintended consequence of the proposed reforms.

The Government has stated it will launch a further consultation considering the “details of a better system that will work for landlords and tenants” but no time frame for this consultation has yet been released and could take some time.

Recent Trends

Even if the government does not opt to abolish section 21 notices, the result of regulatory change in recent years (and decisions in the courts) has been to place an ever-increasing compliance burden on schools and other residential landlords. When entering into new ASTs, extreme care should be taken at the outset to ensure that Tenants are provided with all the required material – failure to do so may mean that it is not possible to terminate the tenancy in the absence of any fault of the Tenant, which may of course affect plans to sell or develop property assets.

Currently, at the outset of the AST and before any section 21 notice can be served the landlord must be able to provide evidence that the Tenant has been provided with:

• Deposit Information – the prescribed information in relation to the deposit (which must be placed in a Government backed scheme) and confirmation that the deposit was protected promptly.  This information must be provided to the tenant within 30 days of their paying the deposit. If it has not been provided it may not be possible to terminate occupation under section 21. Given the consequences of failure to comply, increasingly we are seeing the prescribed information incorporated at the back of the AST document and signed by all tenants at the same time the tenancy is entered into.  This is a sensible way of dealing with the issue, but does require the deposit to be paid and protected in advance.
• Energy Performance Certificate, Gas Safety Certificate - up to date copies of these documents must be provided to the Tenant (and updated as necessary) before any section 21 notice can be served (which may mean updated copies will need to be served during the term of the AST).
• How to Rent Booklet (as produced by the Government) - again, this must be provided to the Tenant  before any s 21 notice can be issued.

It is also worth noting that a section 21 notice cannot be served in response to a maintenance complaint from a tenant – any section 21 notice served after such a complaint will be invalid if the tenant then takes the complaint to the Local Authority and the Local Authority issue a repair notice. 

Increasingly tenants are aware of the various pitfalls which a landlord may slip into when entering into ASTs and serving section 21 notices; it is therefore well worth ensuring that all the required steps are complied with at the start of any tenancy and that the notices are valid before they are served – an invalid notice may well significantly delay obtaining possession.

If you require further information about anything covered in this briefing, please contact Jo Ord, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, June 2019