Life After Section 21
The government is presently consulting on the proposal to repeal section 21 of the Housing Act 1988 (“HA 1988”). Put simply, the proposal is to scrap section 21 notices such that, once a tenancy is granted, a landlord would only be able to recover possession of its property from a tenant by way of a section 8 notice even when the fixed term of the AST comes to an end.
The Housing Act 1988 introduced Assured Shorthold Tenancies (“ASTs”) to replace the old Rent Act tenancies.
Before the current regime of Assured Shorthold Tenancies (“ASTs”), the default tenancy for a residential tenant was a Rent Act tenancy. Rent Act tenancies were tenancies for life with strict rent controls which, in effect, kept the rent for those tenancies below market value. The onerous nature of these Rent Act tenancies, amongst other factors, stifled the growth of the Buy to Let sector.
In a bid to stimulate growth in the private rented sector, the Conservative government of 1987 consulted on the replacement of Rent Act tenancies and a year later introduced the HA 1988 and with it ASTs with a minimum term of 6 months and the option for a landlord to seek possession of the property on two months’ notice pursuant to section 21 of the HA 1988.
Whilst the stated aim of increasing growth in the sector was achieved, the political and social spectrum is divided on the current state of the private rental market in England and Wales. When the HA 1988 was introduced, around 8% of the population lived in private rented accommodation. Today that figure has risen to around 19% and with that increase, a multitude of arguments as to whether the current system remains fit for purpose.
At one end of the spectrum, charities such as Shelter and Generation Rent argue that the minimum 6 month term in an AST coupled with the landlord’s ability to recover possession without any fault of the tenant pursuant to section 21 creates instability for the tenant/tenant family, increases anxiety and worry for those renting and increases the risk of homelessness given the short notice periods involved. They also argue that tenants do not raise genuine concerns about poor living conditions for fear of being served notice terminating their tenancy if they do raise these issues.
At the other end of the spectrum, the NLA and the RLA argue that the landlord should retain ultimate control of its property and that the abolition of section 21 would lead to a reduction in the number of landlords and therefore a drop in supply which itself could cause many of the issues that Shelter and Generation Rent seek to avoid. Further, these groups disagree with the assertion, made by these groups, that if landlords continue to have the benefit of section 21 they will continue to use this section to secure possession at their whim and a recently commissioned report by Manchester Metropolitan University states that over 90% of tenancies are in fact terminated by the tenant rather than by the landlord.
At this stage, the proposals by the government are light on detail or substance. In fact, the proposal to abolish section 21 came as a surprise to everyone as it originated following a consultation by the government on Overcoming the Barriers to Longer Tenancies in the Private Rented Sector; a consultation on the proposed introduction of 3 year tenancies with a post 6 month landlord or tenant break clause. The original discussion was not about section 21 at all but the government has decided to bring it to the fore.
The proposal is that section 21 of the HA 1988 is abolished and in doing so, one of the two statutory ways that a landlord can bring an AST to an end would disappear. Presently, whilst an AST has a minimum term of 6 months, that AST will continue (by virtue of the HA 1988) after those 6 months on a rolling basis until either the landlord or tenant serves notice to terminate the tenancy.
At present the landlord can serve a notice under section 21 or section 8. Under section 21, the landlord does not have to provide a reason for the termination nor does it have to establish that the tenant has done anything wrong. After 2 months, the AST comes to an end and the landlord is entitled to possession even if the tenant does not want to leave.
If section 21 is abolished, the landlord’s only route to possession, without the tenant’s agreement, is section 8. A section 8 notice requires the landlord to establish one of 17 grounds in order to obtain possession. 8 of these grounds are mandatory, such that if the landlord proves one of these grounds before a Judge, the Court must order possession. The rest are discretionary, meaning that notwithstanding the fact that a landlord can prove these grounds, the Court can still refuse to terminate the tenancy.
The mandatory grounds are present are quite specific. For example, ground 8 provides that a Court must (i.e. mandatory) grant possession if a tenant has at least 8 weeks of rent arrears. However, if the tenant has these arrears when the notice is served but the day before the hearing pays a small amount to take those arrears down to, say, 7 weeks’ worth, then the landlord cannot prove this mandatory ground. The landlord would have to rely on ground 11 which is for rent arrears generally. However, this is a discretionary ground and whilst the landlord may be able to convince a Judge that possession should be ordered, it is by no means a certainty.
The proposals are being consulted on as we speak and we can expect (or at least hope!) to see a lot more detail before any concrete proposals are put before parliament. What might those details look like?
If section 21 is abolished then we would expect the government to look to enlarge the number of grounds under section 8. For example, at present ground 1 (a mandatory ground) states that a Court must grant possession if the landlord wishes to move into the property itself. However, the landlord will only succeed if it lived at the property in the past; if it bought the property as a BTL investment then it will not be able to rely on this ground even if it genuinely wishes to occupy its own property. In Scotland, where there is no section 21 procedure, the equivalent ground has removed the requirement of the landlord having previously resided at the property which should be followed south of the border.
A further consideration is whether the Government continues with the original purpose of the consultation and extends the minimum term of an AST from 6 months to up to (or beyond) 3 years. Generation Rent and Shelter (amongst others) continue to push for greater reforms in the private rental sector and in particular for an introduction of a minimum 3 year term for AST/private tenancies. A section 8 notice cannot be served within the fixed term of an AST so this would be either a further barrier to landlords or a further safeguard for tenants depending on your viewpoint.
A further issue is rent. If ASTs are effectively open ended because the circumstances in which a landlord can recover possession are limited to the section 8 grounds, the government needs to give some thought to how a landlord is able to ensure its ability to increase rent, at least in line with inflation. If the idea is that tenancies are intended to last years if not decades absent any fault of the tenant then a landlord must be entitled to increase the rent in that period to cover rising costs etc. At the same time, the government will wish to provide some protection to the tenant to avoid landlords increasing the rent arbitrarily to try and force a tenant to vacate.
The NLA and RLA, who generally represent the interests of private landlords, are fighting these proposals hard and lobbying for a change in policy and direction. A petition is available online for signature and, as above, they have already commissioned university reports into the assertions used to justify the proposed changes.
For our part, we do not vehemently oppose the proposals and do see some value in providing those tenants that comply with their tenancies with a greater degree of security. We do of course hold the concerns above regarding the lack of detail at this stage and the need for section 8 to be reviewed in light of any abolition of section 21 to ensure that a landlord is not forced to continue to accommodate a tenant who has no intention of complying with its lease terms.
However, generally, our business and our philosophy is built around providing good quality rental accommodation to a market which desperately needs it. As our business is tenant and lettings focused, we are built to facilitate long term lettings and want to see our properties occupied by people who care for those properties. Those that treat our houses as their home are exactly the type of people we welcome and we have no need to seek possession of these properties via section 21. In fact, we have never served a section 21 notice for that very reason. Troublesome tenants are, unfortunately, par for the course, and subject to the provisions of section 8 being tightened, we are happy to rely on that recourse should we have cause to seek possession.
We do however anticipate that the removal of section 21 will have a big effect on the market. Those landlords who have one or two properties, or accidental landlords who let out their second home because they have not yet decided what to do with it, will be discouraged from letting those properties. Imagine owning a property in a town in which you used to live and had designs on moving back there in a few years. Firstly, would you rent that property out if you knew that you may need to issue legal proceedings to recover possession and may even be refused possession if you sought it on a discretionary ground. Secondly, would the financial benefit of renting the property out in the short term sufficiently justify the legal costs of possession proceedings if required; costs which are rarely recovered from a tenant. We anticipate those smaller landlords would simply see this as the final straw following the stamp duty increase, the taxation changes and increased regulation. That could lead to a larger number of properties remaining empty whilst the owner decides what to do with them and therefore actually causing the sector to contract or at least stunt growth, as the Rent Act tenancies did back in the 1980s.
However, this could ultimately improve the rental market and the standard of rental properties as, if the above does come to fruition, those landlord will ultimately likely sell their properties to companies such as ourselves who specialise in rental property. Those that will continue to succeed in this market will be those that maintain the properties to a high standard and attract good quality tenants who want to make a house a home. The tenants will have a greater availability of high quality housing and the landlord will have more tenants looking to put down permanent roots rather than treating the property as a transition or temporary arrangement.
This could be a win-win situation if managed correctly and if due thought and consideration is given to the proposals by parliament and those drafting the relevant legislation. That may be a big if.
And despite all of the above, the matter could be over before it has even started. We are in the throes of a leadership race with the current government with a new PM and even the possibility of a new government if a General Election is called, before the consultation has even finished. This could see the current consultation shelved or enlarged depending on the leaning of the party in power and the leader of this party.
So for now, we watch and wait. We will of course update you as soon as any concrete progress is made.
In the meantime, if you want any more information or have any queries, do not hesitate to get in touch with us.