Is there a need for longer term tenancies in the PRS?

Jeremy Leaf

Jeremy Leaf

In October 2013, the Department of Communities & Local Government (CLG) issued their “Improving the Rented Housing Sector” report, otherwise known as the Tenants’ Charter.

The report demonstrates a commitment by the government to increase the quality and choice in the Private Rented Sector (PRS). It is hoped that it might also result in increased investment and improved consumer protection against rogue landlords and letting agents.

Longer Tenancies

Among the proposals are longer, fixed term, family-friendly tenancies which could provide greater security, certainty and lower costs. However, it seems tenants will only be able to request a longer fixed term Assured Shorthold Tenancy (AST) rather than expect an extension.

At present, the length of an AST is determined by market forces and can be continued by agreement, provided it is not signed as a deed. Landlords can’t evict tenants under the “no fault” section 21 of the Housing Act 1988 until after the contract ends or six months has elapsed, whichever is later.
Therefore, six months has become a compromise tenancy length, with landlords retaining the ability to evict tenants after this time period has elapsed. Those who want to stay longer will usually have to demonstrate good behaviour as part of a probation period – especially when it comes to paying the rent!

While many in the PRS would welcome a push for longer tenancies, others believe it’s not a problem that needs fixing. Recent ARLA figures suggest that average tenancy lengths have actually increased over the past five years, from 16.7 to almost 20 months. It also found that only 9% of tenancies are ended by the landlord.

Further research, conducted by the National Landlord Association (NLA), has revealed that 64% of tenants have lived in the same property for at least two years, while more than 40% haven’t moved for four years or more.

In my opinion, speeding up the eviction process, in the event of tenant default, is more likely to persuade landlords to offer longer tenancy lengths. While rent guarantee policies can reduce fall-out from defaulting tenants but they are an added cost that a landlord would rather do without.

Rising demand for longer tenancies comes from a number of groups, but particularly from; families with children in school, the over 50s and retirees seeking to release equity from a property they own.

I believe many landlords would be happy with longer tenancies as a significant proportion of their costs are incurred finding new tenants, refurbishing, financing void periods or on administration/renewal fees between occupations.

Landlords have to balance increased income from longer tenancies with a number of factors, including; the ability to regain possession if tenants prove unsuitable, rents rise faster than anticipated or a sale of the property is required.

One of the main reasons why longer agreements haven’t proved more popular is that most Buy-to-Let lenders insist on no more than twelve month ASTs – often including a break clause after six months.

Lenders have been reluctant to accept longer tenancies to avoid becoming involved in the removal of tenants before obtaining possession if a landlord fails to meet their financial obligations.

The CLG is urging lenders to follow the example of Nationwide which, from July 2013, became the first mainstream lender to allow buy-to-let landlords to offer tenancies of up to five years, provided satisfactory safeguards are included, such as:

  1. a probationary period before landlord and tenant are committed;
  2. a break clause allowing landlords to regain possession if there’s a need to sell, or to use the property for their own occupation;
  3. allowing tenants to leave early; and
  4. rent reviews which are index-linked to inflation.

Other issues

Guaranteed rent increases may not work in the landlords’ favour if a tenant can break the tenancy annually. If a pre-agreed, fixed increase exceeds market rent levels then a tenant is likely to want to move or try to agree a lower rent. Rent review advice and negotiation will probably result in additional professional fees for landlords, and probably costs for the tenant.

Landlords looking to provide longer lettings they will be expecting tenants to provide better quality references, higher deposits and demands on guarantors. While this will provide an added level of security for landlords it will increase the initial outlay that tenants have to put out before renting a property.

Supply and demand

If rental supply falls then rents will rise in the face of increased demand. Unfortunately any shortages of supply tend to impact the most vulnerable or those who earn the least.

Another issue of increased tenancies and a fall in supply is that agents’ fees are also likely to rise as they seek to recover loss of income from the reduction in renewals and low number of available properties.

What is clear is that high demand for rental accommodation is unlikely to slow for the foreseeable future – not least because of the continuing increase in population and household formation.

For instance, the CLG recently reported projected annual UK household formation rates of 220,000 until 2032, i.e. more than double the number of new homes currently being built. The UK’s population – especially in London – is growing faster than in any other EU country!

Also, many seem to have under-estimated the impact of the 40% fall in sales transactions, since the beginning of 2007, on the growth in demand for affordable PRS accommodation.

The increased demand, combined with continuing shortage of stock and tough lending criteria, has resulted in higher rents, making deposit-saving even harder for many aspiring first-time buyers – a classic vicious circle.

There are now 3.8 million people living in private rented accommodation. This is the first time since the 1960s that the total number of people in the PRS has exceeded those in social housing. The number of private sector households is expected to continue increasing from 17% to about 20%, or nearly 40% in London, by 2018 while home ownership is now at its lowest for nearly 25 years.

Renting is no longer an option of last resort for many but has become a lifestyle choice. It has the advantages of greater flexibility and often lower costs but many would still rather have their foot on the property ladder.

So how can we better meet demand?

Although ownership of PRS assets is highly fragmented, the overwhelming majority of property let privately is controlled by landlords who own up to five properties, often attracted to the sector by poor returns from alternative investments. Buy-to-let landlords are benefitting, not only from tax advantages, but record rents, rising property values and increasing demand restrained only by affordability.

Institutional investment in the sector could provide more professionally-managed, longer-term accommodation but, while this sort of investment is increasing, it is not doing so at a fast enough rate to satisfy demand, especially while possible tax incentives remain on the back burner.

The government’s Build-to-Rent programme is trying to encourage developers to provide more long term, private rented tenancies in an attempt to help keep rents in check.

Improving the PRS

The CLG’s Tenants’ Charter also seeks to improve standards in the industry by urging letting agents to make full disclosure of fees that will be charged before tenants sign up.

A step has been made towards this with the Committee of Advertising Practice (CAP) guidance on letting agent fees that was released at the end of last year but, while it is a requirement, there is no way of policing compliance.

The Tenants’ Charter also would make it compulsory for letting agents to become members of an Ombudsman redress scheme, something that is expected to come into force in the early part of this year.

I would have liked to have seen a better explanation of landlord, and not just tenant, responsibilities so the document would be regarded more as a “Renting Charter”. Though I believe the government’s separate review of letting agents’ fees, information disclosure and landlords’ safety standards, which is due to be released soon, should help.

A new code of practice will set out standards that landlords and property managers are expected to meet and should complement the findings of the OFT study into leasehold management, which is also due in the early stages of this year.

However, the respective rights and responsibilities of landlords and tenants might be more widely understood if the 100+ Acts of Parliament and regulations, currently relating to private renting, were consolidated and properly policed. This might provide tenants with more confidence that their complaints would be independently investigated and compensation payable, if upheld.

But, can offering redress after a problem has arisen really help prospective tenants make better-informed decisions? Or, perhaps does the Government believe further measures would only deter investors from entering the private rental market and reduce supply even further?

Bear in mind that around 3,000 letting agents, i.e. 40% of the total, are not members of a redress scheme and so don’t have to provide client money protection or have professional indemnity insurance. It seems there will be no action taken to reduce excessive agents’ fees, deal with the mishandling of money, make it a requirement to have written tenancy agreements, increase enforcement of current laws or increase the power for the OFT to ban rogue agents. Is it unreasonable for lettings and management agents to be subject to the same rules as sales agents?

Anyone can set up as a lettings or management agent. There are no qualifications or licensing needed, even if the person has received a ban from selling property. Redress and regulation with defined standards of service are two different issues.

Taking an optimistic view, the government believes its new Charter can make a difference, especially if compulsory redress for agents is introduced as a first step. At the very least, the new measures should improve tenants’ confidence and it should be seen as a step towards a fairer, more transparent and consistent service for all.

Jeremy Leaf FRICS
jeremyleaf.co.uk

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