Renters' Rights Bill: Implications for Lenders

Change

Implication

Abolition of 'No Fault' Evictions:

Section 21 evictions will be abolished.

The removal of Section 21 limits quick recovery of possession.

Borrowers will only be able to regain possession by relying on Section 8 grounds – such as serious rent arrears, antisocial behaviour, or a genuine intention to sell or occupy the property.

End of Fixed-Term ASTs:

ASTs (new and existing) will be replaced with periodic tenancies (monthly rolling) with no minimum term. Tenants may end the tenancy at any time on two months' notice.

Apart from a two month notice period to end the tenancy, there is no longer a guaranteed fixed-term income stream.

Rent Increase Restrictions:

• No rent increases in the first 12 months
• One annual increase thereafter, subject to fair market value
• Tenants can challenge increases at the First-tier Tribunal, with no risk of a higher rent being imposed. There will be no fee payable for using this service, which incentivises tenants to challenge.. 

Advance Rent Caps:

Landlords can only require up to one month's rent in advance for new tenancies. The Bill does not propose a reduction in the amount of deposit that can currently be requested. 

Landlords can still request a security deposit of up to five weeks' rent (or six weeks for properties with annual rents above £50,000).

Restrictions on rent increases above market value and more than once in a year and limitations on upfront payments may lead to tighter profit margins. With reduced rental income certainty and growing compliance costs, this could constrain your Borrower's ability to service debt, increasing default risk.

Decent Homes Standard (DHS):

PRS properties must meet DHS, ensuring safety, habitability, and freedom from serious hazard. This includes obligations under "Awaab's Law" to address issues such as mould within specified timeframes.

Breach can have significant consequences. Borrowers may face civil penalties for serious breaches without having to go to court. Ignoring penalties or failing to act within the legal timeframe may mean that your Borrower is prosecuted.

PRS Database and Ombudsman:

Landlords must register themselves and their properties on a new PRS database and with the Landlord Ombudsman Scheme (a new redress scheme). Letting without registration will incur penalties.

If your Borrower does not register with the PRS Database or with the Ombudsman, they will not be able to legally let their properties in England.

Stronger Enforcement and Penalties for Landlords:

• Civil penalties of up to £7,000 for minor breaches; up to £40,000 for serious or repeat breaches
• Rent Repayment Orders (RPOs) may now extend up to 2 years of rent. This means if Landlords are in breach, Tenants can apply for the refund of rental income
• Criminal prosecution for repeated or deliberate breaches, particularly where Tenants' health or safety is endangered
• Banning orders issued against the Landlords considered not fit and proper prohibiting further lettings
• Local councils can require information directly from lenders during enforcement investigations

Compliance with DHS may require significant financial investment. Borrowers without sufficient reserves may face pressure to refinance. Non-compliance may trigger fines and RROs, reducing income available to repay your loan. It is important to consider the ability to comply with statute as a CP to funding and throughout the life of the loan.

Failure to act or monitor risk appropriately may expose you to reputational harm as a lender.

Ask your valuer to consider the expected changes in statute when assessing market value – in particular, has the cost of future compliance with statute been considered.

Enhanced Due Diligence. Borrowers should have an obligation (once the Bill has been implemented) to provide evidence of:

• PRS registration
• Registration with the new redress scheme
• DHS compliance
• Deposit protection scheme compliance

Update loan documents to provide for immediate notification of compliance breach by your Borrower and in particular receipt of correspondence from the Ombudsman.

Regular property inspections and Borrower reviews, particularly where risk of penalties or RROs is elevated.

Ensure tenancy terms comply with statute and tighten controls on the ability to amend any precedent form of letting document without your consent.

If your Borrower operates student accommodation familiarise yourself with how the Bill will affect this asset class. The Bill does affect some student accommodation – this depends on the type of student accommodation your Borrower is operating.

Instead of simply relying on the usual compliance with laws provisions in the LMA Facility Agreement, add specific provisions to finance documents which expressly signpost these obligations to ensure your Borrower is aware of their obligations. This allows for monitoring of compliance and flags defaults, allowing you to serve default notices if necessary.