Regulating the Private Rented Sector?

Andrew Arden QC and Annette Cafferkey consider the first report of the Communities and Local Government Committee on the Private Rented Sector.

Introduction

The Communities and Local Government Committee recently published its first report on the private rented sector. The report makes for fairly exasperating reading, particularly for those who have been advocating the need for change for some time.

Context

At the beginning of the last century, owner-occupation was still very much in the minority and private renting the norm. Rent control, initially a war measure to protect ship workers from exploitation by landlords in 1915 but continued in 1920, slowed the growth in owner-occupation until decontrol by the Rent Act 1957 led to the largest recorded decline in the private rented sector and a substantial rise in owner-occupation – from under half in 1961 to 70% in 2005. Since then, however, it has fallen back to less than 65%, at the last available figures (2011).

A new form of private sector control was re-introduced in 1964 and continued until 1980, since when there have been repeated moves to revive private renting, starting with the protected shorthold tenancy and the first version of the assured tenancy, which was a provision designed to encourage newbuild for rent. Neither was effective but the Housing Act 1988 – which introduced the new form of assured tenancy at market rents – boosted by the presumption in favour of shortholds by Housing Act 1996 – have been. Thus, in 1961, private renting was at 31%; it had dropped to nearly 12% in 2005; but by 2011 it had risen to nearly 18%.

As for social housing, local authority stock was up to 24.5% in 1961 but had fallen to less than 10% in 2005 and has remained fairly constant since. Housing associations were too small a part of the stock to be recorded separately in 1961: in 1981, they accounted for just over 2% of the stock – by 2005, it was just over 8%; by 2011, it had risen to just under 10%. Between local authorities and housing associations, they held just under 18% of the stock in 2005, broadly the same as in 2011.

What this analysis shows is that during the latest stage – 2005 to 2011 – private renting has been drinking at the trough of owner-occupation: that is from where it has drawn its increase, not the social rented sector. What this also tells us is that the number of dwellings which are privately rented is now, more or less, the same as those in social housing, but – while there is abundant regulation and control or the (non-profit-making) social rented sector in the (profit-driven) private sector, it is negligible.

This is the backdrop against which the CLG Committee began its inquiry into the private rented sector, giving rise to the a somewhat natural expectation that the Committee would make recommendations to fill this gap.

The Committee’s recommendations (well, some of them, at least)

Re-casting landlord and tenant law and tenancy agreements

The first point made in the report is that, in order to have a credible private rented sector, both landlord and tenant need to be aware of their respective rights and responsibilities. Unsurprisingly, the Committee went on to conclude that this was currently not possible in the UK, in view of the complicated state of our landlord/tenant law. It recommended that the Government undertake a wide-ranging review of all relevant legislation, with a view to producing something much simpler. In addition, it should consult with all relevant agencies in order to produce a “plain language tenancy agreement on which all agreements should be based” and proposals to introduce an “easy-to-read fact sheet for landlords and tenants” should be brought forward.

If you think you’ve heard this before, you have. The same, or similar, recommendations – fully explained and developed into draft legislation – were made by the Law Commission in Renting Homes: The Final Report (2006), following a five year intensive programme of study and consultation led by Professor Martin Partington, and formally rejected by the Labour Government in 2009 (albeit now being taken up by the Welsh Assembly, currently consulting before implementation). The first peak of exasperation is that the answers have all been provided, now quite long ago, and should be brought back to the table rather than beginning the process of reconsidering from scratch.

Security and rents

We turn next to the approach taken to security of tenure by the Committee. Having considered the evidence, it concluded as follows:

“The demographics within the private rented sector are changing. No longer can it be seen as a tenure mainly for those looking for short-term, flexible forms of housing. Whilst some renters still require flexibility, there is also an increasing number, including families with children, looking for longer term security. The market, therefore, needs to be flexible, and to offer people the type of housing they need.”

This point is not wrong. The recommendations based on it, however, are ineffectual. The Committee concluded that the flexibility presently offered by assured shorthold tenancies was the key, essentially, to meeting all the needs of those looking for a home in the private rented sector. All that was needed was a “change in culture”, so that landlords would be encouraged to offer longer fixed-term tenancies where appropriate. Accordingly, the Committee made the following recommendations.

  • The Government should convene a working party to examine proposals to speed up the process of evicting tenants who do not pay rent promptly or fail to meet other contractual obligations. The current court process takes too long and discourages landlord from granting longer fixed-term tenancies.
  • Mortgage lenders should be encouraged not to make mortgage funding conditional on a maximum one-year initial fixed-term tenancy
  • Letting agents should be obliged to make tenants aware of the full range of tenancy options available and, where appropriate, broker discussions about tenancy length between the landlord and tenant
  • Whilst there is no perfect way of setting rent in longer tenancies, linking rent increases to inflation or average earnings, or voluntarily agreeing a fixed uplift each year, merit consideration and could provide both the landlord and the tenant with some stability.

Given that almost 20% of all households now live in private rented accommodation, and that those households vary enormously in their character, the recommendations summarised above are not so much weak as tame, not so much unimaginative as minimalist, not so much liable to achieve nothing of substance for tenants as intended to assuage landlords. In particular, the hope that absence of security will be overcome by a “change in culture” seems not so much nebulously aspirational as ignorant of housing history, e.g. post-1957.

Nor is much comfort offered in relation to rising rents: the conclusion is to leave rent levels to the determination of supply and demand, i.e. market rents. The Committee did not “support rent control which would serve only to reduce investment in the private sector at a time when it is most needed….[The] most effective way to make rents more affordable would be to increase supply….”, yet another aspiration substituted for substance.

 

Housing standards and management

The next recommendation to look at proposes a move away from the Housing Health and Safety Rating System (in effect from April 2006). This is downright astonishing. HHSRS was developed – with considerable input from Warwick University School of Law’s Professor David Ormandy, the leading figure in the independent housing environmental health movement since the early 1970s – over many years of detailed research, designed to allow us to abandon the mid-19th Century simplistic concept of unfitness which had effectively only enjoyed one overhaul, in 1954, which had barely if at all advanced its fitness for purpose.

This new, hard fought for, risk-based assessment of housing conditions has rightly enjoyed huge support from housing professionals. The Committee, however, wants to revert to a so-called quality standard which would be easier for all to understand – putting comprehension way above effectiveness and comprehensiveness (not that HHSRS is difficult to understand: most people can follow fairly easily the notion that you look at the features of a dwelling and ask how high is the level of risk its defects cumulatively pose to its occupiers – rocket science it ain’t).

The Committee also noted a variance in the approach of local authorities; some, it noted, were better at taking enforcement action than others: it is difficult to find words sufficiently scathing to describe such a trite observation, one that could have been made at any time in the last – say – 150 years and that will still be true through the next 150 years. It recommended that the Local Government Association should, as part of its sector improvement role, ensure that mechanisms are in place to encourage councils to follow good practice, as if the LGA did not already work as part of the Local Government Group alongside – among others – Local Government Improvement and Development and Local Government Regulation  (previously LACORS – Local Authorities Coordinators of Regulatory Services) to do precisely that sort of work, as it and its predecessors have for many years.

The enforcement of housing standards does, however, depend on resources, which are ever-diminishing. To overcome this, the Committee made the following recommendations.

  • Enforcement arrangements should pay for themselves; the burden of payment should be placed on landlords who flout their responsibilities.
  • There should be consultation on the implementation of penalty charge notices, without recourse to court action, for breach of minor housing conditions which are not remedied within a finite time, subject to a right of appeal to a court.
  • Local authorities should be given the power to recoup housing benefit/universal credit from a landlord convicted of letting property below legal standards.

The Committee also concluded that improvements could be achieved in the private rented sector if local authorities had more freedom of when and how selective licensing schemes (Housing Act 2004, Parts 2 and 3) could be implemented, although it noted that the fees levied under any such scheme should not be such as to discourage private investment.

This of course contradicts the previous set of recommendations for penalties and cost-recovering charges. If housing history tells us one thing, landlords – letting, let us remember, on non-secure terms – will, if confronted with fines and increased charges, evict before they can be penalised (a subject which this blog has previously visited Retaliatory Eviction) : you cannot secure real change without security. Indeed, the Committee acknowledges concerns about retaliatory eviction in relation to complaints, including asking for repairs, but was “not convinced that a legislative approach was the best or even an effective solution” harking back instead to its proposed change in letting culture and encouragement of longer lettings.

 

Letting Agents

The growth of the private rented sector has brought to greater prominence the role of letting agents, and, in particular, bad practices in parts of this unregulated industry (a subject this blog has also previously visited, see Student Lettings and Fraud and the Private Rented Sector), such as the mishandling of deposits and hidden or opaque fees. Concern about letting agents prompted a provision (not yet in force) in the Enterprise and Regulatory Reform Act 2013, conferring an order-making power to require letting agents to belong to an approved redress scheme, to be presided over by an Ombudsman.

The Committee called for the secondary legislation to be brought forward, that it is accompanied by a robust code of practice with which agents will be required to comply and that they are subject to the same regulation as estate agents on sale of properties. In relation to the code of practice, this should require agents to publish a full breakdown of their fees and to explain them fully to tenants before showing them any property, failure to do so rendering the fees “illegal”, presumably meaning irrecoverable (or refundable) although it does not spell this out.

There’s nothing wrong with this – we are glad the Committee has found something useful to say, if it isn’t its own original thought.

Conclusion

We do not think highly of this report – in case the reader has not noticed. In conducting its inquiry, the Committee was more concerned to “find ways to bring [the private rented sector] to maturity and encourage it to grow” than to recognise that its deficiencies are inherent and will not be redressed otherwise than by regulation and control. If by “maturity” it means that the market must be encouraged to become stable and reliable and fair, the recommendations – particularly in relation to security and rent – will not achieve this goal. Hoping that the free market will confer settled conditions, with security and reasonable rents, on – for example – young families who are unable to buy, is as hopeless an aspiration as is its plea for a “change in culture”.

Private landlords – individuals or corporations – ought not to enjoy the enormous power over the lives of others, their tenants, that they do without controls: too many of them have abused it for too long; too many of them always will.

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One response to “Regulating the Private Rented Sector?

  1. Pingback: Landlord Law Blog roundup from 29 July

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