The Government must reconsider how to provide a stable framework for small landlords and tenants
A cliff-edge abolition of Section 21 could lead to rent hikes and the exclusion of tenants most in need
In my days as a trainee estate agent in York in the mid-1980s, renting a house was seen as a last resort. There being no straightforward means for a landlord to evict tenants in virtually any circumstances, few considered investment in the private rented sector (PRS). Rent controls prevented eviction by the ‘back door’ route of hiking rents and if a landlord wanted to reoccupy they had to prove they had no other residence. If they wanted to redevelop they had to find the tenant an alternative property. Consequently, homes to rent were few and far between and those that were available were usually dark, dingy, damp terraces.
The Housing Act 1988 changed that. This introduced the Assured Shorthold Tenancy (AST) agreement, which gave landlords the right to terminate tenancy after a fixed period through Section 21 of the Act. The PRS boomed from around 10% to 20% of the market over the next 30 years, now numbering around 4.6m homes.
“If you want to rent a three-bed suburban semi or a detached home in a rural location, you’re usually reliant on a smaller landlord”
I’m very concerned that proposals to scrap Section 21 will have unintended consequences for supply, driving up rents and excluding from the market those tenants most in need. Landlords are already reeling from a succession of piecemeal regulatory changes that have hit smaller businesses particularly hard. Section 24 of the 2015 Budget was the most pernicious, effectively restricting landlords’ ability to offset interest against their rent. Unfairly, this only affected landlords who held their properties in a sole trader or partnership structure – not those who had used a limited company. Overnight, many faced the prospect of profits turning into losses. The Association of Residential Letting Agents recently reported that 58% of members are seeing rent increases compared to 31% in 2018. Agents Hamptons report that there has been a 10% reduction in the number of UK landlords over the last seven years.
The introduction of Section 24 and the scrapping of Section 21 both favour large landlords over an SME owner. Most institutional landlords already use a corporate vehicle for their portfolios. The Residential Landlords Association states it currently takes an average of 30 weeks to regain possession from a bad tenant. If your portfolio contains 1,000 properties, the odd rogue tenant who dodges paying rent for months is simply a cost of doing business, but for a small landlord with a handful of homes this situation could be a catastrophe.
These changes will also affect choice. Large landlords often favour trendy flats in city centres. If you want to rent a three-bed suburban semi or a detached home in a rural location, you’re usually reliant on a smaller landlord.
I appreciate the desire to professionalise the sector, but restricting opportunities to big business is not the answer. Restricting loan-to-values on buy-to-let mortgages would have achieved a similar objective without wrecking some business models.
I understand the plight of tenants, many of whom can’t or don’t want to purchase, and lack security of tenure. It’s true that some countries do not have a similar Section 21 provision, but their systems were created like this; many have rent controls.
I fear a cliff-edge Section 21 abolition will damage SME landlords and tenants alike. Better to look again at how we can provide a stable framework for landlords and greater security of tenure for tenants – perhaps a minimum 12-month or 24-month notice period to at least allow a tenant time to find a new place. Or perhaps financial incentives, such as the forgoing of a Section 21 provision if the landlord can once again set off mortgage interest against rental income.
We must develop a strategic approach for investors in the PRS or it won’t be just landlords that lose.
Kevin Hollinrake is Conservative MP for Thirsk and Malton