The end of free movement: what SMEs need to know
The government has launched a consultation, inviting comments on their proposals to introduce a minimum term for residential tenancies.
Assured Shorthold Tenancies (“ASTs”) do not currently have a minimum fixed term (though rules on orders for possession mean there is effectively a minimum 6 month term). If the government’s proposals are implemented, a minimum term of three years would be enforced.
The government suggest that this is in the interests of both tenants and landlords. However, media reports have suggested that the proposals are a disaster for landlords. But, is it all bad news for landlords?
ASTs allow landlords to let property whilst retaining the right to repossess the property at the end of the term. In other words, the tenant has no security of tenure. A landlord does not have to provide a reason for the termination and the tenant does not have to be at fault.
ASTs were introduced in 1988, when private renting was in decline. However, private renting has increased dramatically since this introduction and 81% of all tenancies currently granted are for an initial fixed term of 6 or 12 months.
The lack of security and power afforded to tenants in ASTs is deemed by some to be unfair. The government suggest that tenants are unable to call the property their home, feel unable to raise disputes regarding poor standards and are unable to plan for the future. As part of the government’s promise to tackle the housing crisis, the proposals aim to make the tenant’s position more secure and aid quality and affordable private rental options.
Research by the National Landlords Association suggests that only 40% of tenants actually want longer terms. The new proposals include a six month break clause, allowing either party to bring the tenancy to an end after six months. The tenancies will, of course, also continue to be terminable by mutual agreement or where the tenant breaches their obligations (e.g. fails to pay the rent). As such, in reality the position in many cases may not change.
A high turnover of tenants means increased costs in finding new tenants (e.g. Agency fees) and increases the possibility of vacant properties. Empty properties do not generate income for landlords and therefore increased terms for tenants will provide increased financial security for landlords. The government also suggest that tenants who spend longer in a property will take better care of the property. This means that less would be spent in repairing and professionally cleaning property between tenancies (where this cost cannot be recovered from the tenant’s deposit).
The new proposals will still allow for rent increases during the minimum term. Rent can only increase once per year (in line with the majority of current tenancies) and the landlord must make it clear how the rent review will be calculated from the outset. This means that landlords can still ensure that they receive market rate for their property.
The new proposals will not affect current agreements and as the proposals are only at the consultation phase (and with the government’s immediate priorities elsewhere), the change is unlikely to come into force any time soon. Indeed, even if the amendments are made there is no guarantee that they will be in this format.
The new proposals are undoubtedly favourable to tenants and it remains to be seen how the proposals would affect other contract terms and mortgage conditions. That said, it is not all doom and gloom for landlords and whilst landlords can continue to review rent, there are advantages for landlords in increasing minimum terms. Furthermore, whilst demand for rental properties continues to be higher than supply, landlords will continue to have the lion’s share of the bargaining power.
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