Pressing the case for PRS

Owen Talfan Davies and Lucie-Anne Rhodes offer a new form of tenancy for the private rented sector. According to the Department for Communities and Local Government’s English Housing Survey headline report dated March 2017, in 2015 an estimated 63% of all households in England were owner-occupied. Over the same period the private rented sector (PRS) accounted for 20% of households in England, with the social rented sector making up the remaining 17%. By comparison, in 2015 approximately 40% of households in Germany were occupied by tenants paying market rent, with a further 8% occupied by tenants paying a reduced rent and only around 52% owner-occupied (figures according to Eurostat). One of the reasons for the success of the German PRS (an example of which is illustrated in the main picture above) is that German tenancies tend to be longer (often granted for an indefinite term) and offer far greater security of tenure, rent protections and flexibility than tenancies in the UK. The US equivalent of the PRS, the multifamily model, has also proven to be successful. The American Federal Home Loan Mortgage Corporation reported that 306,000 multifamily units entered the market in 2015, the most in a single year since 1989, and the level of new multifamily supply is expected to remain high over the next few years. In their article entitled “Could help be at hand?” Hayley Cole and Anthony Burnett-Scott considered whether a separate planning use class would help to promote greater investment in the PRS. In our view there are a number of additional measures that could also help to drive PRS growth. The difficult market Although owner-occupiers continue to dominate the market in England, the numbers have decreased by 8% from 2003. One possible reason for this reduction is the unavailability of high loan-to-value mortgages, which means that first-time buyers must pay substantial deposits in order to get on the property ladder. This leaves many aspiring property owners with little option but to rent on assured shorthold tenancies (ASTs) that offer short terms (usually six to 12 months), with very limited protection against eviction/rent increases and little-to-no flexibility in terms of assignment, alterations, etc. The significant impact of relatively recent stamp duty land tax and other tax reforms and the uncertainty caused by the Brexit vote have already contributed to a slowdown in market growth in some areas. If this market scepticism continues, or indeed if there is a downturn in the residential property market, it may well trigger significant growth in the PRS as investors opt for more stable, long-term returns on investment (ROI). In a rising market, property developers can generate significant short-term gains by building apartment blocks and selling on individual units quickly. However, a slowdown in the market is likely to result in units taking longer to sell, hitting developers’ profits and tying up capital. Difficult market conditions could therefore prove to be the biggest impetus for growth in the PRS sector – as developers may be minded to reduce their exposure by selling entire developments to long-term PRS investors (eg pension funds) which look for a steady income stream over a long period of time, rather than a quick ROI. Making PRS attractive There is much that can be done to attract more investors in the PRS. Separate planning use classes will assist greatly, but the issues for potential PRS tenants (who will ultimately drive growth in the sector), and the considerable drawbacks for investor landlords, should both be addressed in order to make the sector more appealing. With greater government backing, legislative solutions could counter the issues and drawbacks that presently exist in order to encourage the PRS to thrive in the UK, as it does in other countries. Following the German model, one possible solution to many (if not all) of the above issues is the creation of a new form of statutory tenancy agreement. The PRS tenancy envisaged would provide greater flexibility and security for tenants, for example by granting: longer initial terms (eg 5-10 years); security of tenure, with a landlord right to oppose renewal only in specified circumstances; rights to assign and/or alter; early termination rights; rent review provisions, ensuring market rents, but subject to legislative protections; and grounds-based statutory termination rights for the landlord (as opposed to no-fault termination rights) akin to those contained in section 8 of the Housing Act 1988 (the 1988 Act). A new form of PRS tenancy would allow tenants to make the property their home without the burden, expense or inflexibility of home ownership. This in turn is likely to encourage tenants to take more pride in the property they are renting and adopt greater responsibility for repair and maintenance, reducing the likelihood of damage to that property and associated landlord costs. It might also create a sense of community in areas where PRS tenancies are prevalent. From a landlord’s perspective, the PRS tenancy model would reduce void periods between lettings and would provide certainty of income for the mid to long term. To ensure the success of this model, it would be necessary to ensure that rights to collective enfranchisement and first refusal (pursuant to the Leasehold Reform, Housing and Urban Development Act 1993 and the Landlord and Tenant Act 1987 respectively) do not apply to PRS tenancies. If such rights were not expressly excluded landlords and/or investors may be deterred by the prospect of being forced to sell their interests to their tenants. Housing Act reform The government may be reluctant to introduce legislative changes in this area for policy reasons. However, many practitioners would argue that the 1988 Act is already ripe for reform because, as drafted, it prescribes no maximum length of term for ASTs. The resultant risk is that, ostensibly, long leases (eg 125 or 999-year leases) could be terminated under section 8. Such an interpretation is, of course, highly undesirable for leaseholders (and their mortgagees) who have made large financial commitments to acquire their interests. As this is clearly not what the legislation was intended to achieve, the 1988 Act should be reformed to prevent unscrupulous landlords seeking to interpret it in this way to obtain an unintended windfall. Such reforms could present a welcome opportunity to review the current state of the sector, and to introduce PRS tenancies to the market. Owen Talfan Davies is a partner and Lucie-Anne Rhodes is an associate in Fieldfisher LLP’s real estate litigation team Pic credit: Hans Blossey/imageBROKER/REX/Shutterstock