Communities and Local Government CommitteeWritten evidence submitted by the National Landlords Association

Background

1. The National Landlords Association (NLA) exists to protect and promote the interests of private residential landlords.

2. With more than 20,000 individual landlords from around the United Kingdom and over 100 local authority associates, it provides a comprehensive range of benefits and services to its members and strives to raise standards in the private-rented sector.

3. The NLA seeks a fair legislative and regulatory environment for the private-rented sector (PRS) while aiming to ensure that landlords are aware of their statutory rights and responsibilities.

NLA Evidence Summary

4. The National Landlords Association welcomes the Committee’s inquiry, which we hope will encourage vigorous debate and lead to a wider understanding of how the sector works. A thriving private rented sector is essential in the current housing market, and we hope that the Committee’s recommendations will focus on how best to ensure a fair balance for between landlords, agents and tenants.

5. Our evidence concentrates on the following areas:

(i)Regulation of activity, individuals and organisations within the PRS.

(ii)Tenure, characteristics and stability.

(iii)Access to accommodation.

(iv)Quality of stock and management & the discharge of homelessness duties into the PRS.

6. The NLA contends that:

The PRS is subject to extensive regulation, although this is not enforced effectively.

Licensing of HMOs and discretionary licensing cannot be judged or expansion justified without proper evaluation of what has already taken place.

A lack of supply of housing relative to demand across all tenures is at the root of the high cost of housing

Intervention in rent levels will damage investor and financier confidence to such an extent that it would affect supply.

Landlords would not be able to absorb the financial impact of rent control.

The existing tenure legislation provides much greater flexibility and variation than is commonly realised. Much more can be done to provide suitable tenancies without the need for statutory changes.

Engagement with landlords and tenants through initiatives such as landlord accreditation will help improve standards and confidence in the PRS.

(i) Regulation of activity, individuals and organisations within the PRS

General

7. It is frequently stated that the letting of private residential property is unregulated. This assertion appears to disregard the existing legislation, regulations and guidance which empower a range of enforcement agencies to intervene in the sector.

8. While much of the restrictive tenancy regulation of the 1960s and 70s was indeed liberalised by the Housing Acts 1988 and 1996, these Acts did not provide property investors and private landlords licence to ignore the quality of their stock, the comfort and safety of their tenants or their financial responsibilities.

9. Failure to comply with regulation in the PRS often leads to criminal sanctions. For example, unlike any other area of private business in the UK, the ability of private landlords to end their contractual relationship with a client is restricted by the necessity of involving the courts in the possession process.

HHSRS

10. The quality of all privately rented-property is assessed and evaluated against the Housing Health and Safety Rating System (HHSRS) which is designed specifically to allow local authorities to protect against harmful deficiencies in residential dwellings. HHSRS is underpinned by a simple principle: “Any residential premises should provide a safe and healthy environment for any potential occupier or visitor”.1

11. The system identifies 29 potential hazards, classified as:

Dampness, excess cold or heat.

Pollutants, including asbestos, radon, lead.

Environment, including space, security, lighting and noise.

Hygiene, ie sanitation and water.

Accidents, the likelihood of shocks, fires, falls, burns etc.

Collisions, explosions or structural failure.

12. Failure to maintain the standards required by HHSRS, or respond satisfactorily to an enforcement notice can result in significant sanctions, including prescriptive improvement notices and immediate repair works, emergency prohibition notices and ultimately prosecution.

13. However, we question whether enforcement is being undertaken at an appropriate level to ensure that standards are maintained across the board.

Licensing

14. Larger properties, which house a greater number of residents and present a risk which is generally higher than an average residence, are further regulated by mandatory HMO licensing introduced by the Housing Act 2004.

15. Every privately let property comprising of three or more floors and housing five or more individuals is required to hold a valid license granted by the relevant local authority. Landlords of these properties are required to pass a “fit and proper person” test and the building is inspected for safety and suitability.

16. The Housing Act 2004 sets out in detail the tests of fitness, suitability and management which should be applied when deciding whether a property may be let by an individual landlord, as well as conferring the authority to impose conditions and prescribe certain standards which must be satisfied in order to obtain a license.

17. While most landlords of large HMOs accept and understand the need for additional measures in relation to fire safety and amenity in these properties, there is a growing awareness that there has been very little review or assessment of the effectiveness of mandatory licensing since its implementation.

18. As one of the most visible and distinct elements of regulation present in the sector, a comprehensive review of licensing would be greatly welcomed by those investing in shared accommodation and could assist in guiding policy making in the future.

19. The 2004 Act also provides local authorities with discretionary powers to license particular types of property and/or specific “selective” areas within their jurisdiction beyond large, mandatory licensable HMOs.

20. Such discretionary schemes take the form of Additional Licensing, which defines a type of property to be subject to license conditions in addition to those defined in the Act, while “Selective Licensing” identifies a specific geographical area within which all privately let property must be licensed.

21. The NLA is aware of at least 34 local authorities currently managing discretionary landlord licensing schemes and a further 17 formally considering doing so in the near future.

22. In order to justify Additional Licensing, the relevant local authority must be able to demonstrate that a significant amount of the shared housing in a given area is poorly managed and likely to give rise to problems for the occupants or wider community. Selective Licensing may only be implemented where an area can be identified as subject to low housing demand, or:

(a)that the area is experiencing a significant and persistent problem caused by anti-social behaviour;

(b)that some or all of the private sector landlords who have let premises in the area (whether under leases or licences) are failing to take action to combat the problem that it would be appropriate for them to take; and

(c)that making a designation will, when combined with other measures taken in the area by the local housing authority, or by other persons together with the local housing authority, lead to a reduction in, or the elimination of, the problem.2

23. We acknowledge that discretionary schemes can be useful in tackling specific localised problems in particular areas and communities. However, there is minimal evidence to demonstrate that the schemes currently in place are achieving their objectives or doing so more effectively than would have been possible by more traditional monitoring and enforcement.

Landlord Accreditation

24. The NLA strongly advocates landlord accreditation as an alternative to licensing. The Association attempts wherever possible to work with local authorities to address local issues by using the council’s existing powers and encouraging greater engagement with the landlord community.

25. Landlord accreditation is by no means a substitute for proper enforcement against those who flaunt the rules, but it can make the job of enforcement bodies much simpler. Developing a landlord’s property management skills and knowledge will enable them to improve their approach to their portfolio. This raises standards across the entire sector, helps identify compliant landlords and empowers tenants to identify good practice. It should also enable local authorities to target their enforcement resources more effectively.

26. The NLA provides a landlord accreditation service, which includes a comprehensive online library of information and guidance, impartial complaints process and searchable database of accredited landlords to local authorities at no charge. We are currently working with 32 local authorities as exclusive accreditation partners, while all bar three authorities in England and Wales recognise the scheme.

(ii) Tenure characteristics and stability

27. In order to function adequately, the PRS requires a clear, transparent and equitable balance between the needs of the property owner and those occupying the property. However, we do not need to look very far into the history of housing legislation to see the impact of getting the balance wrong.

28. The first “Increase in Rent and Mortgage Acts” were a necessary reaction to an almost complete lack of tenant rights and the abuse of position by land owners. However, the sequence of legislation which culminated in the Rent Acts 1965 and 1977 focussed too heavily on the desire for security and price intervention without sufficient consideration of the needs of the supply side.

29. The Housing Act 1988 introduced the Assured and Assured Shorthold Tenancy (AST), the latter of which became the default private-rented tenancy following the Housing Act 1996. The principle underlying the 1988 Act was set out in the 1987 White Paper which preceded it, which clearly outlined the balance which had to be achieved for the new tenure legislation to be effective:

“It is right that landlords should be able to secure a reasonable return on their investment when they let property. It is equally important that tenants should enjoy reasonable security in their own homes.”

30. Given the scale of the recovery of the sector since the AST became the default tenancy, from a low point of only 9% of housing stock to today’s figure of 17.5%,3 we believe that overall a working balance has demonstrably been achieved, and this has led to viable investment and the provision of homes.

31. The key to this recovery was the ability of a landlord to be confident in a return on their investment, which had been limited prior to 1988 by the combination of rent control and secure tenure.

32. The 1987 white paper described the situation as:

“Rent controls have prevented property owners from getting an adequate return on their investment. People who might have been prepared to grant a temporary letting have also been deterred by laws on security of tenure which make it impossible to regain possession of their property when necessary.”4

The relaxation of tenure legislation made the investment in residential property more appealing to a small investor. Crucially, it also resulted in a significant reduction in the perceived risk of financial institutions which were reluctant to lend on rental property without the reasonable expectation of vacant possession should repossession become necessary. But the mortgage industry only revised its approach to private rented property after the Housing Act 1996 with the development of the modern buy-to-let mortgage which plays such an important part in financing private housing today.

33. It remains vitally important that landlords, and lenders, can be assured of vacant possession should things go wrong because of the way in which residential property is valued. Unlike some forms of non-residential property, or even residential homes in other countries, a tenanted property is likely to achieve a considerably lower sale price than one which can be marketed vacant. This is mostly due to the fact that the majority of demand for residential property continues to come from owner-occupiers rather than investors, thereby reducing the potential market and suppressing prices.

34. A property which cannot be sold for its “full” value represents a major investment risk by many landlords and most potential mortgage lenders.

35. Currently, a tenant’s security of tenure is balanced against the landlord’s need to mitigate these risks. Their security is assured throughout their fixed term tenancy, which can be any period up to seven years (leases longer than this carry different rights and responsibilities, and are generally considered outside the PRS). The only reason a tenancy may be brought to an end during the fixed term is breach of tenancy, judged against 17 grounds for possession outlined in the Housing Act. Only a Judge may order possession or eviction.

36. Outside a fixed term tenancy, both parties may choose to end the tenancy at any time by serving the prescribed notice period. Tenants are expected to provide one month’s notice, landlords two months.

37. It is this flexibility makes the PRS attractive to those who want a relatively flexible housing arrangement without the need to make a long-term commitment. It also reduces the risks to lenders, giving them the confidence to offering the investment products which have enabled the sector to respond to the changing circumstances of recent years.

38. We are aware of calls for changes to this tenure framework to create more long-term tenancies to give a greater sense of security and stability as more people and families expect to remain in the sector for longer. The existing tenancy structure is more flexible than many realise, and the NLA believes that this can be achieved without new legislation. However, we do recognise that there is a lack of understanding in all quarters about what can be achieved with the Assured and Assured Shorthold Tenancy.

39. The majority of tenancies established in the UK are of relatively short duration, ie six or twelve month initial fixed-terms. However, NLA research indicates that once established they last much longer. A recent survey of private tenants found that while 74.7% of tenants initially signed either a six or twelve month agreement, 80.1% had been in their current home for more than 13 months and 42.4% had not moved in four years or more. 5

40. Approximately 45% of respondents would have preferred a longer initial tenancy, but only 24.5% had actually made such a request. Of those who did negotiate, 78.8% were granted a longer fixed term.

41. We are concerned that letting agents very rarely discuss the possibility of longer fixed-terms with their landlord clients or applicants.

42. There is a need to educate the market to create a better understanding of the potential and benefits of tailoring tenancies to meet the needs of landlords and tenants. This is a challenge for industry organisations such as the NLA.

43. Many buy-to-let lenders prohibit the establishment of tenancies longer than 12 months in their lending conditions. This has the obvious effect of restricting the number of landlords who are able to offer longer tenancies.

(iii) Access to accommodation

44. The principal barriers to accessing decent accommodation in the private sector, whether the household wishes to purchase their own property or rent from a private landlord are financial. In the rented sector, this generally means the ability to raise a security deposit and to satisfy a landlord or agent that household income is sufficient to meet the rent.

45. Rent levels in the PRS are dictated by market forces, which can vary in local and niche markets. Calls for intervention to control housing costs are understandable, given the exceptional demand experienced by some parts of the country, particularly London and South-East England . However, every housing market experiences demand differently, depending on its needs, and that the cost issues present in a small number of expensive areas are not replicated elsewhere.

46. Most private residential landlords set rents based on their fixed and variable costs and an expectation of a return. There may be some scope for negotiation with potential tenants. This informal formula results in a net yield roughly equivalent to an alternative financial investment, although it carries considerable extra risk and workload. Very few landlords make sufficient net profit from their portfolio to absorb the losses which they would face if rents were restricted or to cope with the risk of being unable to regain vacant possession.

47. Any form of price control is a potential short-term solution to the symptoms of the housing crisis. They cannot address the root cause, the disparity between the demand for and supply of housing in general. Nor do they take into account the potentially damaging consequences for the supply of rented housing. The culture amongst landlords and investors is such that any intervention will be seen as the first step towards full re-regulation. This would derail efforts to encourage new investment in rental housing, particularly from the institutions, and could prompt a landlord exodus.

(v) Quality of stock and management & the discharge of homelessness duties into the PRS

48. As explained in section (i), the quality and safety of property is regulated by legislation which provides significant sanctions for failing to comply. However, local authorities in particular are frequently unable or unwilling to use these powers to their full potential. This is often due to funding or capacity issues which are becoming more prevalent as central funding is reduced.

49. The NLA supports industry-led landlord accreditation as the most effective means of improving management standards. The Mayor of London’s proposal to link accreditation to a recognisable brand or “kite-mark” which tenants can recognise and look for when searching for a new home, could provide the impetus towards more landlords coming forward for accreditation.

50. The discharge of authorities’ homelessness duties into the PRS is a positive step. It shows that the Government sees the PRS as part of the housing solution rather than part of the problem and that the PRS is no longer a short-term stop-gap but a source of long-term housing. It represents progress towards improving the perception and reputation of the sector.

January 2013

1 HHSRS Operating Guidance, ODPM, February 2006

2 Housing Act 2004, s80(6)

3 English Housing Survey, Headline Report 2010-11, Department for Communities and Local Government, February 2012

4 Housing: The Government’s Proposals, CM214, HMSO, September 1987

5 NLA Tenant Index, wave 2, October 2012

Prepared 16th July 2013