Hotting Up
The private rented sector is hotting up, with a deluge of new legislation and consultation coming out.
This includes the draft tenant fees legislation, minimum energy efficiency standards guidance and even a proposal that private landlords may have to join a redress scheme.
Looking at the legislation recently introduced or announced, the private rented sector has certainly been in the spotlight for legislative attention in the last two years. Greater clarity has been brought to the Minimum Energy Efficiency Standards (MEES) with the launch of the guidance
document explaining how the scheme will work.
This clarifies it will only apply to the Housing Act 1988 tenancies, Rent Act 1977 tenancies and certain agricultural tenancies. This means
that properties let to companies or where it is not the tenant’s only or principal home are not covered and can still be let on band F or G.
Other than this, if the property is in band F or G, but finance is not available to improve it, or consent cannot
be obtained to do the works and some other conditions, then by April 2018 it will have to be registered on the exemptions register before the property can be let or re-let. Exemptions generally have to be renewed every 5 years and whilst there is no direct cost for being on the register there may be indirect costs of showing the exemption still applies (for example some exemptions need a surveyors valuation).
Properties on a fixed term tenancy continuing beyond 1 April 2018 will not be allowed to run statutory periodic if they are still in band F or G and do not have an exemption, so consideration should be made now as to how the works will be done.
In April 2018 we will see the second stage of the section 24 tax changes coming into force. This
will mean that landlords will only be allowed to offset 50% of their mortgage payments at the higher rate of tax and the rest will attract only basic rate relief. This will increase the tax cost to higher rate tax payers and increase the number of people caught in the higher rate tax rate (as the effectively the gross rent is added to income to establish if higher rate tax is payable, not the rent net of costs).
The draft of the tenant fees ban legislation was released in early November 2017 and essentially bans all fees not listed in Schedule 1. Schedule 1 contains four fees that can be charged: rent, deposit, holding deposit and “default fees”.
The latter is very important as to be able to charge any of these they must be listed in the tenancy agreement. These four can be changed later by regulations with the exception that rent cannot be removed from the list. This is interesting in that they have created a power to ban deposits without a further act of Parliament.
Tenancy deposits will be limited to 6 weeks’ rent and holding deposits limited to one week’s rent. There are new specific rules about holding deposits in Schedule 2.
In October 2017 the Department for Communities and Local Government (DCLG) put out a ‘call for evidence’ on “protecting consumers in the letting and managing agent market”. Whilst the objectives may be laudable, the understanding is not. Paragraph 2 states: “Those paying and benefiting from the service often have no say as to who their agent is”.
This is a complete misunderstanding of the lettings market where the landlord engages the agent and the agent works for the interest of the landlord, not the tenant.
They asked for evidence on if minimum standards should apply to those working in the private rented sector, including a fit and proper person test, qualifications, membership of professional bodies or a standard code of conduct. Such changes should benefit landlords and tenants by raising standards.
Para 24 clarifies that there is an intention for all landlords to have to join a redress scheme, similar to the current requirement for all agents to be a member of a redress scheme. As stated, it has not been made clear if this will only be landlords that manage their own properties or if it will cover those who let their properties through agents. Logic would suggest it will not cover those where redress is already available through the agent.
A DCLG working group have also recommended the introduction of 5 yearly mains testing so expect this to come in too.
Tenant Fees
In the Autumn 2016 Budget Statement the Chancellor announced the intention for the Government to ban letting agent fees to tenants. This was confirmed in the Queen’s speech after the election.
The Government logic on this is worth understanding and it has two main points.
Firstly they want to make it easier for tenants to move properties. The consultation they ran, which finished on the 2 June, specifically said this was one of the intentions. The idea is that if a tenant has to pay a lot of money to move home then they are more likely to stay put. If there are less costs to moving, then if a landlord is not responsive to repairing requirements, the tenant will be more likely to move.
This is an interesting angle of the tenant fee ban that all landlords need to be aware of. Whether or not it will “work” will have to be seen but it is not difficult to guess that this might have a positive effect in areas where there is enough property available to give the tenant the choice of moving, but in areas where there is a chronic shortage it is unlike to have any significant effect.
Secondly, as the landlord chooses the agent (and does not usually need more than one agent to advertise in order to let the property) it is unusual for the tenant to be able to have any significant influence in the negotiating position. If they want ‘that’ property they can only get it through one agent and they have to pay the fees demanded. This is made worse in areas of high demand where tenants have to compete for the property.
On the other hand, landlords have a range of agents to choose from in any area and so are in a much stronger negotiating position.
Considering all the legislative requirements, landlords should not choose an agent based simply on the amount they charge, as a cheaper commission rate will often mean a reduced level of service.
Considering the landlords liability for things not being done correctly, and generally the landlord remains liable even if they appoint
an agent to carry out the task, it is important for the longer term protection of the landlord that the agent is doing a professional
job and is resourced to do so.
There have been proposals that tenants should pay for the referencing and also that tenants should remain liable for fees incurred as a
result of the tenant’s default, including things like interest on late paid rent, charging the tenant for replacement keys if they were lost or possibly even issues around seeking possession in court. At the moment, without yet having access to the proposed legislation,
one can only surmise quite how far reaching the restriction will be. It does seem clear from their statements that the ban will prevent
landlords, as well as agents, from charging.
MEES
MEES stands for Minimum Energy Efficiency Standards and is part of the Government plan to reach its energy reduction targets. With buildings being one of the largest consumers of energy, it was clear from the outset that improvements in this area would be needed in order to reduce energy consumption. The problem is that the life of a building is a very long time and simply building new energy efficient properties would not be enough.
MEES addresses this by requiring existing buildings to have work done to them to bring them up to a minimum standard. The first steps in the process are clear and any property that is to be let after April 2018 will have to be a minimum of a Band E EPC rating. Note that a statutory periodic tenancy arising is a new lease granted to the tenant so if this happens after April 2018, then the minimum E rating applies. If you have a property below Band E it may be worth considering if you want to arrange a renewal before April 2018 in order to give more time to improve the energy rating.
Properties with existing tenants will have to be minimum Band E by April 2020, even if it has the same tenant in the property as before 2018 and no renewals have been agreed.
There are exemptions to the requirement for Band E, including those that cannot be raised above this threshold in a cost effective way or
where the works required would negatively affect the appearance of a listed building.