Mortgage industry view: Barriers to longer-term tenancies

The MHCLG recently consulted on a proposal for a model for three-year tenancies for private renters in England and UK Finance responded.

We responded on behalf of buy-to-let mortgage lenders, who provide £240 billion of lending which supports landlords’ acquisition of privately rented property.

Currently, most tenancies in England are on assured-shorthold terms. Renters are typically held to a six- or twelve-month minimum lease, after which the contract reverts to a periodic month to month agreement which they can leave after giving one month’s notice. Landlords, at this point, do have substantial leeway to evict tenants and are typically required to give their tenant only two months’ notice. Despite this, tenants typically stay in their lease contract for just over four years.

The new proposed tenancy model would both lengthen the fixed-term of a tenancy agreement and change the nature of the initial break clause period. Under the proposal, tenants and landlords would start out on what is essentially a six-month probationary period, after which either party could withdraw from the contract for any reason. Assuming neither party withdraws at the end of this period, the contract then becomes binding for three years. Tenants would be permitted to leave during these three years, but they would need to give the landlord two months’ notice. Rent could be raised, but only in line with the terms agreed in the original contract.

Buy-to-let mortgage lenders are supportive of measures which enhance security for tenants. However, lenders believe that a few additional points need to be clarified for the new tenancy model to deliver the desired outcome.
One concern lenders have is that the proposal has the potential to shift risk of eviction for tenants from late in the tenancy to early on. Landlords may be reluctant to continue tenancies beyond six months for any tenant they perceive to be problematic, which could ultimately exacerbate the problem of housing insecurity for certain tenants.
Additionally, tenants could see increased rental costs as a result if landlords seek higher rents to cover the contingency that their costs may increase during the term of the tenancy.

A third concern with the proposal is that the existing legal enforcement mechanisms are less than ideal. Currently, there is little legal recourse for renters in England who have problems exercising their rights. Likewise, landlords seeking eviction and possession orders must go through costly and slow court proceedings.

If the MHCLG would like to enhance the security of renters, they may wish to consider Scotland’s new tenancy model. In late 2017, Scotland implemented a requirement that all new tenancies must be open-ended. Crucially, the introduction of this requirement coincided with the expansion of the jurisdiction of the First-tier Tribunal for Scotland (Housing and Property Chamber). Both landlords and tenants can now submit cases to this tribunal for eviction and repossession orders, to contest a tenancy which has been terminated unlawfully, and to raise issues if the terms of the tenancy are not being met. Mortgage lenders would like to see a similar system established in the rest of the UK as it would help assure that both parties in the tenancy are held to the terms of their contract.

Over the past year, UK Finance has been approached by several external stakeholders asking what our mortgage members have been doing to support tenants who are seeking longer-term tenancies. A review of our members’ BTL mortgage terms and conditions suggests that most new lending now permits borrowers to take on three-year tenancies. However, lenders report that three-year tenancies remain uncommon because landlords and tenants rarely seek them out.
Would a government initiative change this? We will have to wait and see.

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