The UK Government has announced plans to repeal Section 21 of the Housing Act 1988 and bring about the end of so called ‘no fault’ evictions, as part of sweeping reforms to the residential letting market in the UK. Is this a long overdue change? Or do these radical plans risk having unintended economic consequences at a critical point for investment in the UK market?
Read on for a summary of the key questions (and answers) below.
Section 21 of the Housing Act 1988 governs the private rental sector (PRS) in England and Wales. The vast majority of short-term residential tenancies in England and Wales are assured shorthold tenancies (AST) created under the terms of the Act.
The defining feature of an AST is the flexibility it gives to landlords. And that flexibility is a result of the way that Section 21 operates.
By serving a 'Section 21 notice' on their tenant, a landlord can require them to vacate the property within just two months of the notice being served (as long as that would not mean them leaving before the end of the initial, fixed-term of the tenancy).
Good question, and it’s one that many landlords are already asking.
At the moment, the government’s plan is to replace Section 21 with a scheme to enable landlords to quickly recover possession of their properties in situations where the tenant is at fault.
But this is nothing new. Section 8 of the Act already provides the means for landlords to do just that. And it’s already an effective remedy for landlords. For example, if the tenant is in arrears of rent beyond a certain threshold (two months’ worth in most cases) the Court has no option but to grant the landlord an order for possession.
The aim is to strengthen Section 8 so that landlord’s claims can be fast tracked through the court system (e.g. removing a ‘loophole’ that allows tenants to avoid the mandatory grant of an order for possession by making a part payment of rent at the last minute).
The issue with this is that the County Courts in England and Wales are already dealing with a huge number of residential possession claims. If each and every one of those claims had the potential to be defended (i.e. if the tenant were to dispute the allegation of fault under Section 8) they would take far longer to resolve. Creating a fast-track system to cater for them will need both substantial financial investment and planning to ensure that the system doesn’t buckle under the strain of dealing with a sharp uptick in litigation. And at the moment, it’s not clear if (or how much) additional funding will be made available to the Courts.
But the headline point is that if Section 21 is abolished, landlords will no longer have a right to claim possession of their properties unless they can:
- Prove fault on the part of the tenant
- Prove that they want to sell the property; or
- Prove that they want to move into the property themselves.
It seems so. At first glance, that sounds like a fair compromise. Landlords lose the right to take back possession of their properties for no reason at all, but will still be able to claim possession if they want to sell the property or use it as their own residence.
But dig a little deeper and you soon discover a significant drawback.
What happens if the tenant requires the landlord to prove that they want to sell the property, or use it for their own purposes? To answer that question, we can look to the commercial property sector and the grounds of possession that commercial landlords have at their disposal under the Landlord and Tenant Act 1954.
Any property litigation lawyer will tell you that of those grounds, the most heavily litigated are the ones that require the landlord to prove their intention to demolish and redevelop the premises at the expense of the tenant’s lease, or, to occupy the premises themselves. Just a few years ago in fact, the question of whether the landlord had devised a ‘sham’ scheme of redevelopment to drive its tenant out of occupation had to be settled by no less than the Supreme Court.
And so far from being a reassurance for landlords when it comes to recovering possession of residential properties under the new model, this is actually a recipe for lengthy and expensive litigation.
There are arguably some sound policy reasons behind the Bill. The level of homelessness in the UK is an issue which has to be addressed. And families need the confidence of knowing their homes are not at risk at the same time as trying to deal with the rapidly accelerating cost of living.
But the redesign of a property model which has been in place for over 30 years has to be incremental. The rapid pace of the proposed changes poses a significant risk to the UK property market in several respects, any one of which could easily defeat the objective of creating greater security for tenants.
The first is investor flight in the buy to let market. As well as the loss of Section 21 and the introduction of indefinite periodic tenancies, the new model will curb landlords’ ability to review rents in line with inflation. It will impose the more restrictive system of review under Section 13 of the Act instead (and raise the prospect of yet more litigation, this time in the form of a tenant’s challenge to the increase in the First-tier Tribunal). Investors are unlikely to be beating down the door to acquire portfolios of rental properties with compressed rental yields.
And investors may be deterred by a loss of flexibility in being able to deal with their asset including the certainty of being able to recover possession in the context of redevelopment or onward sale. It will be interesting to note lenders’ views on the effect of the proposals in terms of investment risk and the terms of commercial lending on PRS schemes.
That could then have a knock-on effect for developers of mixed-use and new generation residential developments (build to rent). If the demand for long leases of units within those developments falls away as a result of loss of investor confidence in the sector, then not only will those developments become less profitable, obtaining funding for them could become more difficult as well.
Lastly, there is the risk of existing PRS landlords making use of Section 21 while they still can and selling their properties while the property market remains at a high. There are already reports in the media of a 'get out now' philosophy beginning to gain traction. If it does, that could lead to a dramatic reduction in the number of properties on the market and drive up the cost of renting as a result (i.e. as the landlords who are left start to ‘price in’ the risks posed by the coming changes).
The proposed repeal of Section 21 of the Housing Act 1988 could easily do more harm to the PRS sector than good.
Section 21 is the source of the flexibility that has underpinned the residential property market in the UK for more than 30 years. Replacing it with an inflexible model, in stark contrast to what the market is accustomed to (as well as increasing the level of litigation risk for landlords) is bound to cause uncertainty and at precisely the time when more confidence is needed from investors and developers, not less.
There are more nuanced ways to shift the balance between security for tenants on the one hand and flexibility for landlords on the other. Introducing statutory minimum terms for certain types of tenancy is one example. Extending the relevant periods for Section 21 notices (as was implemented during the height of the COVID-19 pandemic) is another. But repealing part of a long-established statute altogether is a hammer blow with the potential for unintended, yet nonetheless serious consequences for landlords and tenants alike.
We will continue to monitor and report on the progress of these important reforms. In the meantime, if you would like to know more about what these reforms could mean for your specific property or portfolio, please contact a member of our Real Estate & Construction Team.