In what is a significant development for PERE investors, the Renters' Rights Bill was introduced to Parliament on 11 September. With the abolition of fixed term tenancies and 'no-fault' evictions on the cards, alongside key reforms to rental increases, the Government's take on rental reform marks a sea change for the residential rental market.
Initial implementation of the Bill is expected in summer 2025. It is therefore important for PERE investors to digest the potential impact on investments. In this short update, we break down the Labour Government's proposals and identify the following key takeaways:
Abolition of Fixed Term Tenancies
The first major reform is the abolition of fixed term tenancies (including assured shorthold tenancies). Once the Bill is passed, any lease provisions outlining a fixed term will be void. Instead, all existing and new leases will operate as a series of periodic tenancies until termination, with each period lasting up to exactly a month. Additionally, tenants will have the option to leave the tenancy for any reason by giving two months' notice (this can be contractually shortened but not extended) at any time during the lease.
Both developments entail uncertainty for asset managers and investors and make it more difficult to model occupancy rates and rental incomes. Managers may therefore decide to focus on keeping longer-term tenants for sustained rental incomes.
Reform of 'No-Fault' Evictions
The second major change is the abolition of 'no-fault' evictions. Landlords will now only have the option to terminate a lease on the basis of statutory grounds. These include a landlord wishing to sell a property (this requires four months' notice and cannot be exercised in the first 12 months) or, if the tenant is in 'serious arrears' (meaning arrears of three months or more – this process requires a one month notice, potentially leading to four months+ of arrears depending on whether the tenant contests the eviction).
This move greatly limits the ability of investors to manage assets proactively by bringing leases to an end to manage under-rented leases. To mitigate this, landlords may consider the inclusion of a break clause to ensure that they retain some control over active asset management. Greater emphasis may also be placed on tenant background due diligence (with a view to securing reliable tenants) so that such issues are less likely to arise in practice in this new world of establishing cause for a 'fault' eviction.
Limitations on Rent Increases
The third takeaway is that rental increases will be limited. Clauses pertaining to rent increases cannot be included in the lease. Rather, rents can only be increased annually. Crucially, when this occurs, rents can only be raised to the contemporaneous market-rate. Investors should therefore take care when modelling rental incomes over a multi-year basis and not assume above market uplifts. Investors should also note that the tenant can refer any rate increase deemed above market-rate to a tribunal hearing. This could lead to extra costs and disruption for landlords.
Other Considerations
The Bill also introduces other key proposals which may impact an investor's business planning.
Firstly, bids from prospective tenants above the advertised rate of rent cannot be accepted – this means that landlords cannot benefit from bidding wars to obtain higher rents.
Secondly, tenants can no longer be refused on the basis that they have children, or are receiving benefits. Landlords also cannot reasonably refuse a request for pets from tenants. This could limit the ability of managers to narrow down their ideal choice of tenant.
Finally, the decent home standard ("Awaab's Law") that applies to social housing will now also apply to the private rental sector. Whilst this should be a non-issue for top tier sponsors in practice, they must ensure that any properties they hold, or acquire, comply with these basic standards.
Ronan Doherty, trainee solicitor, also contributed to this article.
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