The RLA manifesto for the Private Rented Sector
1. Introduction
The Residential Landlords Association welcomes many of the proposals of the Rugg Review of the Private Rented Sector (PRS). They mirror our thinking. The Review is the start of a fresh debate on the way forward for the PRS. Although the RLA welcomes much of the Report, there are, as always, a number of concerns relating to specific points such as landlord licensing. Very importantly, the Report at long last lays to rest many of the myths about the Sector. For too long the Sector has been the victim of too many misconceptions, e.g. there are many poor quality landlords providing substandard accommodation. The Report rightly points out that tenant satisfaction is higher than in the social rented sector. The authors of the Report are to be complimented for their hard work and the RLA hopes that across all relevant Departments the Government will look at ways of implementing the recommendations in the Report. As the Government is to prepare a Green Paper there are some further issues raised which are not necessarily covered by the Rugg Report.
2. Overarching issues
(1) All are agreed that there is a need to increase the supply of housing generally. There needs to be a balance in the types of accommodation provided.
(2) There has been too much emphasis on owner/occupation. However, it has to be recognised that that is the aspiration of many in society. Nevertheless, a proportionately larger private rented sector would be in the long term interests of the national economy.
(3) The private rented sector can and should provide more accommodation for the “intermediate sector”, which will often be supported by payment of housing benefit to the tenant. The RLA agrees with the suggestion that where someone is living in the subsidised public rented sector their cases should be reviewed from time to time to see whether their financial means can continue to merit the subsidy. For instance, a lowly paid key worker who has received the benefit of public sector rented accommodation may well have been promoted and be a high income earner.
(4) There needs to be a complete re-think of the approach to regulation of the PRS. Structural changes are needed. The existing system is no longer fit for purpose. We need to work from the bottom up not the top down which is how the current regulatory scheme is working in reality.
(5) The current negative perception of the PRS is unjustified and needs to be changed. Proposed measures should be considered by asking the question as to whether they would help improve this perception.
(6) The PRS helps to ensure that there are balanced communities because lettings tend to be dispersed around different types of accommodation so as to meet tenant’s demands and needs.
(7) The current tax system is a disincentive and needs reform in relation to the PRS.
(8) Whilst there are often complaints for poor quality properties and poor management it has to be recognised that this has resulted from the long term effects of the Rent Acts particularly as they have affected pre-1919 housing stock, as well as the disincentives provided by the existing tax system. Nevertheless, there is a high satisfaction rating from tenants in the private rented sector.
(9) Housing Benefits should continue to be based on market rents. It is important to emphasise that the subsidy is not to the PRS but is a payment to individual tenants to help them meet their own housing needs. Tenants on low incomes should have choice and action is needed to encourage the PRS to accept such tenants. So long as rent is paid many landlords are not concerned at all as to its source.
(10) In formulating any proposals for change, it must always be remembered that many landlords are small businesses and only have limited resources. In particular, we have to avoid burdensome regulations.
(11) Any changes have to be properly resourced. For example, accreditation schemes need sufficient financial support.
(12) A recognition that the PRS is catering for sector specific clientele but these need to be expanded (e.g. provision for the intermediate sector.
(13) The balance as between national regulation and local regulation through local authorities.
3. Topical Issues
(1) The impact of the credit crunch is very much at the fore but we have to plan for the long term future of the PRS.
(2) The PRS is likely to face increasing demand in the short term (e.g. due to an inability on the part of prospective owner/occupiers to purchase and from repossessions)
(3) Purchase to rent by landlords needs to be encouraged not just in the longer term but as a short term measure to help revive the housing market and the construction industry. If ways can be found to help landlords purchase properties (e.g. partly built properties) so that these can be rented out this will assist greatly. We need to remove disincentives to this e.g. reduced stamp duty on portfolio purchases. This could be done in conjunction with local authority leasing schemes so as to provide additional accommodation to help local authorities deal with homelessness. We need to look at lending institutions being prepared to make funds available for this specific purpose (e.g. with low fixed rates of interest). The social sector is not willing at the moment to purchase many of these properties even if funds were available because they say that the properties do not meet to their long term requirements. On the other hand there are potentially private landlords who would be willing to invest in this way so long as the conditions were right.
4. RLA Themes
The RLA strongly believes that the following are the way forward to invigorate and improve the PRS:-
(1) Greater professionalism
(2) Concentrate on management issues and the people involved rather than just property conditions. Property conditions are often the symptom and not the cause.
(3) A consumer orientated approach giving tenants choice.
(4) The need for education and training. This would involve refresher training.
(5) Development of self regulation and accreditation.
(6) As recommended by the Rugg Report to treat property letting as a
proper business activity.
5. Comments on the main recommendations of the Report
(1) More information is needed about the PRS and how it operates.
The Report looks at a whole host of information but rightly recognises that more in depth research is needed. Better statistical evidence is needed relating to the PRS both locally and nationally. This will then help improved decision making. All too often decisions are made based on experience of problems e.g. by an advice agency or a member of parliament through his/her constituency surgery. Inevitably the relatively small number of bad cases inform policy, rather than a considered view in all the circumstances and arguments. As an interest group, the RLA recognises that it is the advocate for its member’s interests but tries to take a balanced and responsible view.
(2) Housing management needs to be improved.
The Report endorses a professional PRS, something which the RLA has been calling for for some considerable time. Likewise, the Report endorses the RLA approach of concentrating on the people involved in managing rented housing; rather than property conditions themselves. Traditionally regulation has been all about the physical state of the property; not the people who are responsible for running it. In particular the Report recommends encouraging the use of managing agents by landlords. The Report also advocates more training, which is again something that the RLA has long argued for. Accreditation is also encouraged, which is something the RLA very much supports.
(3) Licensing of managing/letting agents
The Report recommends the introduction of mandatory licensing for agents who let or manage properties. The RLA supports this believing that proper bonding and financial arrangements are required. However, we do need to look carefully at how landlords who self manage would be affected. In principle they need also to be regulated but not necessarily to the same degree or in the same way where they are only managing their own properties. For example tenants bonding of client monies is not needed. One problem to be addressed when it comes to managing agents is the difficulties which an agent may face if the landlord does not co-operate.
(4) The business of letting
This is the most important recommendation of the Report. The Report wants Government policies to treat residential landlords as active business people rather than just investors. Landlords should be encouraged to expand their portfolios and their businesses. Small landlords are to be welcomed and encouraged. The taxation framework should be reviewed. Proper business planning should be required. The RLA supports those proposals and we look further at the issues arising out of this recommendation later on.
(5) Improving rental choice
The RLA supports the idea that low income households should be able to make a real choice between a social and a private let. This proposal involves the setting up of social letting agencies which is an idea which is worth consideration. However we have doubts about the suggestion that such an agency could offer a management service as it would be better that they concentrated on being a single point to bring low income families and others into the private rented sector. Housing benefit tenants should be assisted with deposits and rent in advance payments, as the Report proposed.
(6) Light touch licensing and effective redress
Perhaps this may be considered the most controversial proposal. However, in principle the RLA supports the idea subject to conditions. The Report recommends that all landlords should have to obtain a licence from a national licensing authority. If there is a serious breach of regulations then this licence could be withdrawn. We agree that a banning order procedure is required and support the Report where it wants to see action taken to force poor quality landlords out of the Sector. The licensing system, which should be called an enrollment scheme, should be simple with no preconditions for entry. A low annual fee should be charged. The Report suggests that there should be a single Property Tribunal but we have our doubts about this idea which are dealt with later on. Local authorities should operate on a worst first policy. This is supported. We comment in detail on this proposal later on.
(7) Tenancy framework
The Report recommends encouraging landlords to offer longer term lets which, essentially means using non shorthold assured tenancies rather than short term assured shortholds. The RLA believes that the idea needs to be encouraged. However, the shorthold should remain as the key letting regime for the PRS.
6. Specific issues
The Review looks at a number of specific issues.
(1) Institutional investors
The Report confirms the low level of institutional investment in the PRS. To date large scale institutional investment has only occurred in the student market or in the case of specialist asylum seeker accommodation. The Report believes that this may grow in time but, interestingly, believes that the small landlord is usually financially sound and currently is well placed to provide rented accommodation for the PRS. We agree that these landlords should be encouraged to expand their businesses. The Report does not see institutional “build to let” as the way forward. Although this is a view which may be challenged in some quarters, it reflects reality.
(2) Studentification
There has been a loud clammer from anti HMO lobbies because of some concentrations of student housing in certain areas of large cities and towns close to universities and colleges. There have been calls for a clamp down. Rightly, the Report rejects calls to change planning laws and calls to disperse student tenants. This agrees with the RLA view. This is very welcome. The Report rightly believes that specific problems, e.g. anti social behaviour or problems with rubbish collections, can be addressed and dealt with without changing planning laws. Experience shows that this can be done.
(3) Retaliatory eviction
There have been calls from the Citizens Advice Bureau for restrictions on the right to use Section 21, the no fault ground under which landlords can evict an assured shorthold tenant at the end of the tenancy (subject to a six month minimum). Again, the Report rejects these demands, in line with RLA calls not to water down Section 21. Rightly, the Report is opposed to changing the law based on the limited evidence which the CAB has assembled. Section 21 is one of the cornerstones of the PRS and it must not be watered down.
7. Other issues
The Report puts forward a number of specific issues for consideration:-
(a) The current exemption limit for assured tenancies of £25,000 should be increased. The RLA is concerned at this proposal and we believe that this limit is still realistic.
(b) Selective licensing requirements should be relaxed so that selective licensing is not just confined to areas of low demand and/or anti social behaviour. We are opposed to the concept of selective licensing. Landlord banning orders would make it unnecessary.
8. What next – the RLA view
As stated in the introduction, the RLA endorses many of the recommendations of the review, particularly the emphasis on the need to treat residential landlords as businesses. However, we do have a number of issues which are considered in the following sections.
9. The Tax Regime
Rightly, the review urges a fresh look at the tax regime. The RLA fully endorses this approach which is absolutely vital. Traditionally, residential landlords have been regarded purely as investors. They have therefore not been eligible for many of the reliefs available to other businesses. The Report gets to grips with these tax issues. The RLA’s view is that residential landlords should be treated in the same way as furnished holiday lets. This applies to both furnished and unfurnished residential accommodation. The consequences would be:-
(1) Capital Gains Tax Rollover Relief.
(2) Capital Gains Tax Entrepreneur Relief
(3) Ability to carry any losses from rental income against the types of profit to offset them.
(4) Full relief on pension contributions
Capital Guns Tax rollover and enterprise relief are vital to getting poor quality properties sold and renovated.
There should be inheritance tax business relief as well for residential rented properties.
Additionally, and very importantly, the RLA believes that there should be a system of capital allowances both for improvements and conversions /extensions etc. This should include energy efficiency improvements. Currently, only basic maintenance/repairs can be set against income tax. Otherwise, they can only be used up against capital gains which may never materialise. To encourage improvement to properties as well as conversions there should be a system for capital allowances to set expenditure against income for income tax purposes. A percentage of expenditure could be set off over a number of tax years.
Reduced VAT rates are needed in respect of repairs, improvements and conversion to help improve the general state of the stock in the PRS. This idea needs to be looked at against the background of the relevant EU Directive.
The RLA supports the Reports suggestion that portfolio sale should not be aggregated for stamp duty land tax purposes but instead stamp duty should be on individual property values.
We also need to look at getting some form of transparent tax vehicle to allow investors to club together to buy and rent residential properties. This will assist the development of larger property portfolios.
SIPPS should be introduced to residential property as originally proposed. This would give an impetus of capital injection to help reinvigorate the housing market.
10. New Supply of properties to let
Quite rightly, the Report identifies the important role of the small landlord and raises concerns as to whether the institutional investors are likely to move into the sector (other than in specialist situations such as the student market). Nevertheless, in view of the overall housing shortage (both main political parties agree that 3 million new homes are needed by 2020), action does need to be taken to increase the supply of new rented houses, whether by way of new build or conversion. The problem is that many who cannot really afford to do so are being forced into owner/occupation. If new properties come into the housing market it is essential that the proportion within the private rented sector is not only maintained but grows relative to other sectors. Recent experience has shown that, otherwise, loans are forced on to people who feel compelled to get on to the owner/occupation ladder but who cannot afford it. We need to look at things like whether Section 106 Agreements requiring affordable housing should be attached to new build for the private rented sector as these increase costs and are a disincentive. Experience shows that at the moment on a small scale new build in the PRS does take place but there has to be ways and means of encouraging this. We have already looked at this as a topical issue. The PRS has a major part to play by carrying out conversions which the Report does not really recognise.
11. The Regulatory Regime
As recommended by the Report, there needs to be a sea change in our attitudes as to how the PRS is policed. The current system with its limited resources is not working. The small minority of bad landlords are not being rooted out. Despite what Government says “good” landlords certainly do not welcome the current regulatory impositions in the hope of them dealing with problem landlords. This is not happening. There is far too much emphasis on dealing with the good generally compliant landlord and too much bureaucracy associated with this. The best incentive is to encourage self regulation and accreditation so we need to take accredited landlords out of direct local authority control, replacing this with self regulation. At a stroke, this would free up local authority resources and concentrate on those landlords who provide a lower level of service. Accreditation schemes need to be verified to provide the necessary public confidence for such a move. This would be the role of the central regulator. The RLA has argued that the current licensing is a dead end. A first change would be to take accredited landlords out of licensing but HMO licensing and selective licensing need to be abolished.
The Report advocates licensing for all landlords, saying that it should be light touch. This idea is well worth considering in principle. The RLA has a number of concerns with this proposal. Firstly, unfortunately, experience shows that what starts out as light touch can soon become heavy handed. Secondly, we need to have the required resources to ensure it works. Thirdly, the cost could be yet another “stealth” tax.
Fourthly, we should not have both property licensing and a system of universal enrolment. It has to be a single system. Persuading landlords to accept the concept will anyway be a mammoth task.
If there is to be licensing it would be better termed enrolment. Licensing is misleading particular so far as tenants are concerned. The idea of there being effectively no hurdles is welcomed but there needs to be a training obligation for those involved in management. Enrolment can be web based but must cater for those who are not computer literate. Inherent in the concept is some kind of “banning order”. A Court or Tribunal could make such an order on the application of the local authority or self regulating body. It would disqualify the person concerned from being involved in the management of property. In such a case, however, the property should not necessarily be taken out of the PRS; rather new management arrangements need to be made which should be done via “super” approved managing agents. They could step in either temporarily or in the long term. If long term arrangements were not possible the local authority could make a compulsory purchase order and re-sell the property management orders not being viable.
Unfortunately, there is a long standing perception on the part of landlords of hostility by local authorities and their officials, as well as past experience of heavy handed application of regulations. We need to break away as much as possible from local authority’s day to day control of the sector although clearly as local housing authority they have an important role in local policy and strategy.
The RLA supports the Law Commission idea of a single over-arching regulator, coupled with a Stakeholder Board. Such a regulator would be required to oversee any system of self regulation. Such a regulation should be separate from the TSA. The social sector and the PRS are wholly different animals with different regulatory requirements.
The RLA detailed model would be this. All landlords and those involved in the management of rented residential accommodation would enrol on a central register. The managing agents (and letting agents) would have their own self regulatory system which would be compulsory. Landlords who were not involved in management would not be required to be part of any regulatory system. They would not be obliged to undergo training. Obviously, they would be able to rent their properties out via managing agents. Landlords who were involved in management would have the option of joining an approved accreditation/self regulatory scheme. These schemes could be operated by national landlords associations, other interested stakeholders and local authorities on a local basis. There would be a fit and proper person requirement for entry into such a scheme but this would be operated in a light touch way. For example, if there were concerns, provisional membership could be accorded while those concerns were addressed. The presumption would be that a member of such a scheme would opt out of local authority control and would not be obliged to do so. On the other hand those landlords/managers who were not a member of such a self regulating organisation would be subject to local authority control. However, the expectation would be that in accordance with the principles set out in the enforcement concordat that at least initially this would be essentially light touch control with statutory powers only being resorted to where necessary.
What would be the powers of the local authority in relation to properties owned by or managed by those who were members of a self regulatory organisation (including those operated by letting/managing agents)? The presumption would be that issues relating to those properties would be dealt with by the appropriate self regulating organisation; not the local authority. However, where there were serious and imminent problems (of a kind such as would be dealt with by an Emergency Prohibition Order or an Emergency Works Order) then the local authority would have the power to intervene and take action. Otherwise complaints and problems would be referred to the appropriate self regulating organisation.
Self regulating organisations would operate an appropriate inspection/disciplinary procedure. If they were then dissatisfied they would then have the sanction of removing the person concerned from their scheme in which case they would revert to local authority control.
There would need to be a proper protocol in place to ensure liaison between the self regulating organisations and the local authorities.
Obviously considerable thought needs to be given to the precise workings of such a new scheme because of its revolutionary nature but it is vital that it is endorsed in principle so that the detailed work and consultations required can then be undertaken.
Resident Landlords and owner/occupiers letting their own homes should be outside the scope of registration schemes.
It will take a great deal of effort to persuade most landlords to agree to enrolment. There must be carrots The opportunity of opting out of any local authority control is vital. If we are to convince individual landlords then property licensing must be abolished. This simply deals with symptom not cause. The present regime is a self serving bureaucratic nightmare. The RLA opposes suggestions of it being extended further. The vital thing is that we improve management and we do not need HMO or selective licensing to do this.
12. A National Standard
Unfortunately, the review does not address the pressing need for national standard to define the standards of management. This is vital; otherwise how can you judge performance? This is not a code of practice which would become a substitute for legislation.
13. Training
Alongside any new system of regulation there must be mandatory training for those involved in management as we have already pointed out. There needs to be compulsory training for all managers. The Report identifies that the problems arise more from ignorance than wilful non-compliance. It is a not easier to take action to deal with a problem landlord/manager if it has been explained previously what is required of him/her.
14. Tenancy Arrangements
The Report expresses reservations regarding the Law Commission’s proposal for new tenancy arrangements which do seem overly lengthy and complex. The Report rightly raises the question of giving tenants more security. The option is already there in the form of a non shorthold assured tenancy. However, landlords need to be sure that they can evict tenants due to rent arrears or for tenancy breach anti social or similar behaviour. Rent arrears is already catered for by mandatory Ground 8. The economic valuation consequences of long term security of tenure so far as it concerns the landlord’s interest (and the mortgage lenders) need to be addressed. Many landlords in practice prefer to rely on Section 21 and the accelerated possession procedure where there are arrears. One improvement to the non shorthold regime would be to remove the need for the Court to be satisfied that it was reasonable to make an order for possession (other than Ground 10). So long as breach/misbehaviour was made out (unless it was trivial) a possession order should follow as of right. Similarly, provision would have to be made for landlords to obtain possession where they required the property to be vacant so that it can be sold or on the landlord’s death. A tenancy demotion process could be introduced. One incentive would be for direct payment of housing benefits in cases where a non shorthold is granted. These measures could encourage landlords to give more security to tenants in certain segments of PRS.
15. Fire Safety
The Report makes no mention of fire safety legislation. This is one example of complex legislation which needs simplifying so that there is one regulator for fire safety in residential accommodation.
16. Housing Court
The Report suggests a specialist housing tribunal. The RLA is concerned about this suggestion and how workable it would be. What the RLA believes would be a better approach would be to have ticketed Judges who are properly trained to deal with this type of work but within the existing Court system. We do not believe that sufficient resources can be made available to set up what would, in effect, be a parallel system of Tribunals. As we argued in our Submission to the Law Commission on this issue, there are certain particular aspects that could be passed over to the Residential Property Tribunal (e.g. defended disrepair claims) but, it is our view that the bulk of the work has to remain within the existing Court system. Courts already have staffing, Court houses and the enforcement machinery in place. However, in saying this, the RLA does have very considerable concerns about the speed with which possession claims in particular are dealt with by the Courts. More effort needs to be put into speeding up the process. More consideration could be given as to the use of paper “hearings” e.g. for mandatory Ground 8 arrears cases.
Another considerable problem is the ease with which defendant tenants obtain legal aid particularly with regard to cases involved anti social behaviour. Their denials, even though the landlord may have overwhelming evidence (for example supported by police evidence) justifies the grant of Legal Aid at the moment. Often one arm of the State is urging a landlord to take possession proceedings but another is providing the financial wherewithal for the tenant to resist those proceedings, without there being any merit in the tenant’s case. No wonder private landlords want to hold on to the assurance of being able to rely on Section 21 in such cases and are reluctant to enter into longer term tenancy arrangements giving tenants security of tenure. Unfortunately, these problems do not necessarily arise in the early stages of a tenancy. There are cases where after a number of tenancy renewals anti social behaviour of this kind has occurred e.g. because the tenant has become addicted to drink or drugs.
We need to look at the way in which evidence is presented at Court. Neighbours are often reluctant to become involved. There may well be police logs which could be produced without the need to insist on evidence from reluctant neighbours. It has to be appreciated that sometimes a reign of terror can occur and this then brings down the whole neighbourhood. More help is needed for the private rented sector to deal with these issues.
17. The volume of regulation
There are over 60 pieces of legislation which regulate the private rented sector. We need simplification, clearer language, and consolidation. One way of raising the profile of PRS would be a Private Rented Sector Act which would bring together all of the relevant legislation as it affects the private rented sector. We need one point of reference clear guide to the legislation and regulation as it affects the sector.
18. The role of housing benefit;
Whilst the Rugg Review rightly focuses on various issues connected with housing
benefit, as there is a separate review of this, thought does need to be given to the
role of housing benefit. As already pointed out elsewhere, it is vital that housing
benefit is linked to market rents. This has been accepted by successive Governments.
There are complaints from time to time of landlords receiving excessive payments of
housing benefit. However, it has to be stressed that the local housing allowance is
paid as an individual entitlement to tenants so that they in turn can pay for their
accommodation. It is not a subsidy as such to the PRS. There are many
complaints about problems with regard to the payment of local housing allowance and
the complexity of the system. Undoubtedly at the moment there is an unwillingness
on the part of many landlords to accept housing benefit claimants. Delays and
complexity are one of the elements in this. Another problem is direct payment to
tenants who in turn do not pay the benefit to their landlords. Vulnerability policies
need to be carefully monitored to ensure that they are working. The RLA supports the
calls of the Community and Local Government’s Select Committee to abolish the
single room rate system.
19. Cold and insulation
Much emphasis is being put at the moment on the need to upgrade properties to insulation and fuel efficiency. Energy Performance Certificates will focus minds on this. Unfortunately for historical reasons a great deal of the private rented sector is in pre-1919 housing and it is often technically complex to improve this. Grants are available where tenants are in receipt of various benefits under the warm front scheme. However, in many instances this assistance is not available and we need to look at ways of upgrading stock. This is particularly relevant for the smaller landlord who may only have one or two properties. Grants are not available. We need to bring forward a loan system. The RLA suggest that where grants are not available there be a loan scheme operated by all local authorities. They would lend the money (likely to be £3,000 to £4,000 per property in many instances) for the work to be carried out and in return the authority would receive an equity share proportionate to their loan to be repaid when the property was sold or earlier. As this are equity share loans they could be provided without interest payment. In this way properties would be improved but in due course the public purse would receive the benefits (coupled with any benefit resulting from an increase in the value of the property) is proportionate to its contribution.
20. Conclusion
The RLA endorses much of what appears in the Rugg Review. In particular, the RLA welcomes the Report’s recommendations that Section 21 does not need to be changed to deal with retaliatory eviction. At long last we have had an independent review that has looked at the PRS without prior misconceptions. We need a more professional PRS which treats tenants as consumers. In many respects the review has vindicated the views which the RLA have been expressing on behalf of landlords for some time. It is vital that as part of any ongoing discussions the Treasury, the Department for Work and Pensions and other relevant Government Departments are fully involved and supportive. The RLA looks forward to talking constructively with Government about ways in which recommendations of the Report can be implemented. There needs to be a fresh look at existing legislation. There are a number of concerns, as always, which the RLA has set out in this paper. In particular, however, the RLA endorses the Report’s proposal that residential landlords should be regarded as businesses coupled with the call for both national and local policies endorsing the importance of the PRS as a crucial element of the overall housing market.