Rental and safety reforms spark debate for the UK real estate 'living' sector
Published on 4th May 2023
Investors, developers and operators are assessing the implications of a renters' reform bill and the Building Safety Act
The private rental sector entered 2023 with major reform on the horizon and in motion. The UK government is looking to implement widespread reform in the sector through an anticipated renters' reform bill. Meanwhile, there has been significant change this year in the management and development of multi-residential buildings, in particular for high-rise buildings (HRBs) over 18 metres tall as the main parts of the Building Safety Act 2022 come into force.
Should the reforms be welcomed as a much needed shake up of the current system or a cause for concern? Do we know enough about what is proposed or is this a case of "wait and see"? These are some of the questions being raised across the market in 2023, which specialists from the alternative residential sector at an Osborne Clarke event addressed earlier in the year. Subsequently, their focus remains on the implications of reforms for the private rental market and for projects and collaborations between investors, developers and operators across the real estate "living" sector, as they look to prepare for these significant changes.
A fairer private rented sector?
In June 2022, the UK government issued its white paper on how to achieve a fairer private rented sector. The reforms look to introduce a long-awaited "new deal" that offers "quality, affordability and fairness" for the 4.4 million households who rent from private landlords. The wide-ranging proposals include the abolition of "no fault" evictions, the banning of fixed-term tenancies, rent-review provisions and promising improvements to the court and ombudsman processes.
In February this year, the Levelling Up, Housing and Communities Committee issued its report on the proposals in the white paper, with its key findings and recommendations including the exclusion of student accommodation from the reforms. The UK government's response is expected soon, although the government is yet to announce a date for the bill's introduction to Parliament. The reforms were originally expected within a year of the white paper by July 2023.
Todd Marler, senior director of operations (UK) for international developer and manager Greystar, says the devil is in the detail and the information released by the government to date on the proposed reforms – while well intentioned – has been limited and raises a range of initial concerns, including over fixed terms, "no fault" evictions and "open market" rent reviews.
Abolition of fixed terms
The proposal to abolish fixed terms raises questions as to how this would be managed on a larger scale. Would landlords not have the ability to control or coordinate term expiry dates? Many, including Polly Simpson, head of multifamily development at Savills, argue that this is likely to have an impact on the reversionary value of an asset.
Moreover, there is widespread concern about the disproportionate impact that the abolition of fixed terms would have on private landlords. While certainty for an institutional landlord was preferable, for private landlords, the lack of certainty would be yet another blow to the confidence within the sector, says Oli Pym, group rental and resales director at home builder Lifestory. And this could lead to more parties disposing of their assets and, therefore, less choice for the consumer.
'No fault' revocation
The revocation of "no fault" evictions could make the process much more personal, contends Pym. The impersonal element of the current section 21 procedure has come in for much criticism, but it could be important to retain.
Under the current procedure, notice is served and the parties go their separate ways. However, the reforms would appear to require the indiscretions of the relevant party to be laid out and proved before eviction could be enacted.
The "proof" element of the proposed reforms has the potential to get quite contentious, according to Aidan Malia, head of build to rent portfolio for Get Living. Although the full details of the proposals have yet to be published, compliance with the procedure would likely put an added administrative burden on landlords and an already overstretched judicial system, he adds.
'Open market' rent reviews
The proposals for rent reviews and the tenant's ability to challenge section 13 notices are another concern for the industry. "This is a death by a thousand cuts: if every rent review resulted in a challenge, it would prove impossible to resource," says Pym.
Moreover, a move towards an "open market" review also raises the question of what would act as a market comparable? Marler, on the basis of the information released to date, says the proposed reforms had the potential to do the opposite of their intention, drive participants out of the market and push up prices.
Olivia , senior legal counsel for Get Living, adds that the reforms may appear attractive to a tenant but could lead to unintended consequences. Simpson explained that in Glasgow, rent caps have pushed the demand for build to rent into overdrive, with reports of more than 1,000 enquiries into one asset within the first day going live to the market; meanwhile, the investment market has taken a sharp downturn.
Building Safety Act
Meanwhile, there are significant changes afoot for the development and management of multi-residential buildings, particularly high-rise buildings over 18 metres tall as the main parts of the Building Safety Act 2022, which received Royal Assent in 2022, come into force this year alongside further fire safety legislation.
The new Building Safety Regulator (BSR) is embedded within the Health and Safety Executive (HSE) and will regulate the safety of all buildings in England. Significantly, there is also a new building-control approval regime for the design, construction and major refurbishment of HRBs. The BSR has beefed-up powers to regulate standards for buildings and construction work, including powers to investigate and prosecute breaches.
Another reform is that existing HRBs and those that will be completed and occupied are required to have an accountable person (AP) responsible for the maintenance and repair of a building's common parts – typically the building owner, freeholder or management company. The AP has a duty to assess building safety risk and provide a safety case report, which demonstrates how risks are being identified, mitigated and managed on an ongoing basis.
All occupied HRBs must be registered with the BSR between 1 April and 31 October this year. For buildings under construction, there is a transition period when the existing regime applies; but in the future, on practical completion, BSR certification will be required before a HRB can be legally occupied.
This raises a number of questions. For stakeholders with HRBs, who will be the AP? How will the proposals sit alongside the existing "responsible person" role? Will HRBs be able to coordinate the various roles successfully with no gaps in the proposed timescales?
The consensus is that there is a huge challenge for organisations with large property portfolios and complex ownership structures to register properties accurately before October. Individuals have to be recruited specifically to compile the relevant information in this short timeframe.
The nature of buy-to-rent assets also means that several APs are potentially required, according to Katie Sullivan, senior legal director at Greystar. The new legislation states that, for a building that has more than one AP, then the principal accountable person (PAP) will be the AP responsible for the structure and exterior of the building. In practice, however, this has proved far more difficult to identify and coordinate.
It raises further questions over to what extent a PAP could delegate duties and would they be expected to carry out engagement with occupants? Certainly, the operational cost in complying with these reforms could be potentially very high.
Personal liability not product focus
Greystar's legal director also highlights the personal nature of the responsibilities for penalties for the AP and PAP, who could have no day-to-day involvement with the matter at hand – and how this was making allocation of the roles internally particularly difficult.
The reforms for many appear to have focused on process and personal liabilities rather than the product itself. Charles Forrester, head of project management at Get Living comments: "If the industry continues to build poor quality buildings with inappropriate or untested materials, then nothing will change."
Despite the industry focus on keeping people safe and doing the right thing, tight timescales for compliance with the new regulations and lack of guidance meant that this was getting lost, according to Greystar's Todd Marler.
Osborne Clarke comment
The intention of these reforms has been that there should not be much of a shift in practices for parties already doing the right thing, but there would be more comprehensive scrutiny of existing practices. This raises a slew of questions. Can the regulator facilitate this change? When an application is made to the regulator to occupy an HRB, how long would parties have to wait for a response? Would this response be a yes or no? Would "practical completion" need to be updated to reflect this new approval?
There is an industry consensus that there is a lack of guidance given the timeframe for various elements of the new legislation coming into force, and this has created uncertainty as to what is necessary to satisfy the new regulator. In turn, the BSR's review and authorisation process is likely to create delay, the cost of which may be difficult to predict accurately and to attribute fairly, coupled with the likelihood of delay.
The roundtable event The Big Squeeze: Regulatory Reform of the Private Rental Sector was held in February and led by Anastasia Gorokhova, Matt Kyle, Rebecca Francis and Emma Hannah from Osborne Clarke.