These three challenges have implications for landlords and tenants and are likely to be compounded by the cost of living crisis, increased rents and the high cost of borrowing. The supply of available rental stock is tight and ever-growing demand is leading to a highly competitive market for tenants, while landlords are facing higher energy efficiency standards and an overhaul of their ability to gain possession from a tenant.

Estates will need to evaluate the impact of these three challenges and thoroughly review their portfolio strategies, both to endure the short-term transition and prosper in the long term.

Rural communities already face a 'rural premium' due to the additional cost of living burdens, which become more pronounced during an economic crisis.

Managing residential portfolios

What impact will the Renters Reform Bill have on the management of residential tenancies?

The Renters Reform Bill is the biggest change in residential tenancy legislation in England since the Housing Act 1988. Section 21 will be removed and with it the ability for a landlord to serve a no-fault notice to recover possession at the end of a fixed-term tenancy. Rural estates need to carefully consider how to manage their portfolios once tenants have increased security. Under the amendments to Section 8 of the Bill, possession may still be gained on specific grounds that cater for many portfolio management scenarios. However, there has been a knee-jerk reaction among some landlords as Ministry of Justice statistics show a 16% increase in no-fault eviction court proceedings between Q1 2022 and Q1 2023; an approach that risks reputational damage.

Changes to Section 8 grounds

• Rent arrears The reform means eviction will become mandatory if a tenant has been in arrears for at least two months three times within the previous three years, regardless of the arrears balance at the time of the hearing. This change provides landlords with a remedy against tenants who are persistently in arrears while ensuring tenants cannot be evicted based on one-off financial shocks that occur years apart. The court process for dealing with this will also be reformed to protect both parties. Estates should continue to focus on the collection of rent arrears, with effective long-term record-keeping essential if use of this ground becomes necessary.

• Owner occupation Landlords can secure possession where they intend to sell or they (or a close family member) intend to occupy the property. While these grounds cannot be used within the first six months of the tenancy, it means that there is flexibility to provide for a member of the family or to raise capital through a sale.

Termination by tenant

Tenants will need to serve two months’ notice to terminate a tenancy. With proactive management and pre-planning of remedial works, landlords will, therefore, be able to better minimise void periods. As well as a loss of rental income, voids require landlords to cover expenses ordinarily covered by tenants, such as council tax and utilities. Extended void periods reflect an increase in statutory compliance requirements and investment in energy efficiency improvements, which are easier for landlords to undertake when a property is empty.

The end of the AST

Fixed-term assured shorthold tenancies (ASTs) will be abolished and replaced by periodic assured tenancies. These have an undefined term and end either by the tenant giving two months’ notice or by the landlord serving a valid Section 8 notice.

What will this mean for landlords? Where previously it was known that a property would be occupied for at least the full term of an AST, this change will result in greater flexibility for tenants in choosing when to vacate and means landlords should stay fully engaged with their tenants to best predict the timing of vacant possession.

Tenancy lengths

Private renters are occupying properties for longer compared to a decade ago. In 2021–22, the average was 4.4 years, compared with 3.8 years in 2011–12. Tenancies could lengthen further if the supply in the rental market continues to contract, as it is likely to be cheaper for a tenant to stay rather than take on a new tenancy. Our analysis of rural estate rent in the 12 months up to April 2023 shows that rents reviewed on existing tenancies rose by less than half of the increase achieved when letting a property on the open market.

Market rents

There will be a greater onus on landlords to prove that proposed rents are a true reflection of the open market. Landlords will also be required to serve a formal notice to increase rents and can only do so once a year. While this means an extra administrative task, the introduction of a formal process with the backing of the tribunal gives landlords the potential to keep rents in line with the market in the knowledge that they can rely on the tribunal to arbitrate should a tenant contest it.

In a further attempt to make rented homes more permanent, tenants will be given the legal right to request to keep a pet within the property, which landlords can only reasonably refuse.

Reflections from Scotland and Wales

Similar changes were made in Scotland in 2017 where a new private residential tenancy was introduced via the Private Housing (Tenancies) (Scotland) Act 2016. This created open-ended tenancies, removed the no-fault route to possession, requiring a landlord to specify one of 18 eviction grounds and stipulated annual rent reviews. In Wales, the no-fault route was changed in 2022 to increase the notice period from two to six months.

In England, the reformed clauses will apply retrospectively to all tenancies, whereas Scotland imposed them solely on newly created tenancies.

Mark Fogden of Savills Estate Management in Scotland says: 'The removal of no-fault ground hasn’t made any difference as there have and will continue to be challenges with some tenants'. Mark reflects that there is always a natural churn of tenants, but investing time at the start to find the right tenants is key, rather than just relying on a mechanical referencing process.

The Scotland estate management team notes that as higher standards have been applied to the private rented sector, residential tenants are becoming more informed and their expectations are greater. However, these expectations are not necessarily matched with correspondingly higher rents.

Government support

The reform will require landlords to use a new online property portal via gov.uk, which is designed to ensure the required standards for renting are clear to all parties and that compliance can be recorded. On 1 August 2023, the government launched a scheme to support tenants facing eviction or repossession in England and Wales. They will be able to receive free expert legal advice, helping them to keep their homes and avoid lengthy, costly court proceedings.

Timescale

The Renters Reform Bill is currently awaiting its second reading in parliament, and MPs have debated whether more stringent rent controls should be introduced – this is a route that has been taken in Scotland and is currently subject to legal challenge.

Once the Bill has received royal assent, an improved court process will be deployed. The changes will then be applied to all new tenancies six months later and to all existing tenancies a further 12 months after that. This gives landlords some time to consider the impact of these changes upon their portfolios. However, experience in Scotland, confirms that effective administration and investment in finding the right tenant at the start of the process should mean that the changes can be absorbed with limited disruption.

WHAT ARE THE GROUNDS FOR POSSESSION?

Section 8 of the Renters Reform Bill contains 17 grounds for possession, eight of which are mandatory, including:

• Owner occupation
• Sale
• Redevelopment
• Persistent rent arrears

The other nine grounds are discretionary, leaving a judge to consider whether it is reasonable. These include:

• Provision of alternative accommodation
• Tenant damage
• Tenant causing nuisance

HOW SHOULD ESTATES PREPARE FOR THE CHANGES?

Attention to detail, accurate record-keeping, and smart tenant selection are crucial to ensuring that tenancies are effectively managed under the reforms:

• Smart tenant selection will be crucial.
• Diarise annual rent reviews and keep rents aligned with market levels.
• Declare and clearly record concessionary rents.
• Keep up to date with arrears and set flags for when arrears meet the grounds for possession.
• Fully specify and correctly administer Section 8 grounds for possession.
• To effectively manage expectations, inform tenants at the start of the tenancy if the landlord might, in future, wish to regain possession under the mandatory 'prior notice grounds'.
• Use the newly created online property portal via gov.uk to record all tenancies.

SOCIETAL BENEFIT

Providing good quality, safe homes is a moral obligation for landlords, but how legislated improvements are to be funded is a challenge. Some rural estates choose to accept concessionary rents in the case of long-standing tenants who are seen to provide an important contribution to the community, and this may be extended due to the cost of living crisis. They absorb the rent foregone or what some will see as a subsidy in return for societal gain, which for those who choose to measure, it will help them meet their environmental, social and governance (ESG) objectives.

_{Read the articles within Spotlight: The future of rural homes below.}