Residential Tenancies – The Proposals For Reform

There can be no doubt we have a housing crisis at present - purchase and rental costs have soared in recent years.
Jersey Real Estate and Construction
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There can be no doubt we have a housing crisis at present - purchase and rental costs have soared in recent years. The Housing Minister is now consulting on some radical reforms he proposes in the rental market. Is rent control the answer or should we focus on increased supply of houses? Philip Syvret one of the islands most experienced property lawyers considers the proposals.

Nearly half of Islanders live in a household which is rented. For most, renting a home is not a matter of choice. They either cannot afford to purchase, are not qualified to do so, or have other circumstances which means a purchase of a property is not appropriate. Whether renting from a social housing provider, a private landlord or through some form of lodging, none of those renters have the security that home ownership brings.

The Housing Minister has been considering the protections for tenants and landlords. As a result he has issued the consultation document "Improving Residential Tenancies in Jersey" in which he proposes some very significant reforms.

So often these consultations are a window dressing exercise, designed only to defeat complaint when final legislative proposals are brought forward.

The proposals made however will have a wide ranging effect and proper debate is vital. To assist both landlords and tenants. I have considered a few of the key areas.

Do we need reform at all?

The present Residential Tenancy Law was enacted in 2013. The improvements made in the 2013 Law helped, particularly setting out a more coherent set of reasons why a tenant's eviction could be delayed and improving clarity in leases and tenancy agreements. Subsequent legislation has also improved the condition of rental properties and deposit protection.

The 2013 and subsequent legislation however stopped short of establishing protected tenancies or similar arrangements which exist or will shortly come into force in the UK and other jurisdictions. Where so many of us are living in rented accommodation, has the time now come for Jersey to adopt the protections for tenants that other jurisdictions have seen as commonplace for years?

There are however, risks in changing the present rules. Overly stringent regulation will affect the rental marketplace for the worse. The law of unintended consequences is writ large in this area. From a purely economic view, if we increase the number of landlords we increase competition as to rent and other tenancy terms which will improve a tenant's lot without the need for prescriptive rules.

As one economist put it - if you want to increase the number of marriages you would not set about that by making divorce more difficult. If we are to induce existing good landlords to continue to provide housing, or new landlords to make properties available, then excessive regulation will not achieve that.

Given the sheer scale of the number of rented homes in private ownership it is vital that any new legislation carefully balances the interests of landlord and tenant. With that starting point, let's consider some of the key proposals in the Housing Minister's consultation.

A Tenancy Forever?

The Minister proposes that in future there should be only two forms of residential tenancy. Either an open-ended tenancy (being the default position) or a one year fixed term tenancy for specific circumstances.

The open-ended tenancy is the most radical of the proposals made. In essence the old form of residential lease for say, one, two or three years, will no longer be permitted. After a six month probation period, a tenant will be permitted to remain in the property until they give notice to leave. The landlord will only be able to ask the tenant to leave in a specific set of circumstances specified by the law, or by mutual agreement. The Minister says this is to prevent evictions where the tenant is not at fault in any way.

Unfortunately the consultation has been issued without any indication as to what those specific circumstances will be. It leaves us only considering the principle proposed, guessing at what the details may bring. Until a clear set of proposals is published it can only be said that the list of exemptions permitting a "no fault" eviction will need to be widely drawn.

One can envisage any number of family or personal circumstances which will give rise to a need (as opposed to a desire) for a landlord to recover possession of a property. Perhaps the property needs substantial work which cannot be done with a tenant in occupation. Say a landlord wants sell so as to move on from the Island to be near family. Alternatively capital may be needed to pay for residential or nursing home care. What if a family member wants to return to the Island to live at the property?

None of those circumstances would be at the fault of the tenant, but they could equally be viewed as being as important to the personal wellbeing of the landlord or his family as the need for the tenant to have stability in his or her home.

Any landlord will tell you that there are shades between the definition of a bad tenant and a good tenant. A tenant may render themselves unacceptable by conduct which falls short of a material breach of the lease, or perhaps by conduct which is directly unsocial to their neighbours or landlord. It might be highly beneficial for the tenancy to come to an end, even if the black and white of an exemption to be set out in legislation cannot be met.

Whilst therefore the principle of preventing "no fault" evictions might seem tempting, in reality it will lead to bitter debate between landlords, tenants, neighbours and other stakeholders as to whether one of the exemptions to a never-ending tenancy applies. The present clarity of fixed date for termination on a one, two or three year lease for example, means that tenant and landlord know precisely where they stand from the outset.

The Minister does acknowledge that these never-ending tenancies are not appropriate in all situations. In those cases he proposes that a one year fixed term tenancy will be permitted.

Unfortunately, again, the consultation document does not set out the appropriate situations in which a one year tenancy would be allowed. Again in the absence of any detail it is impossible to comment.

What I can see however, is the potential for abuse to defeat the intent of the never-ending tenancy proposal. I can see every landlord looking to see if they can fit their tenancy into the one year criteria so as to avoid the never-ending arrangement. The Minister will undoubtedly need to consult on all the relevant exemptions that he will eventually propose.

Rent Control

Another key proposal is to introduce limits to the amount and frequency of rent increases, together with a specified minimum eight week notice period for increases.

On this proposal the Minister does give us some detail. He says that the expectation is that increases of rent will be limited to the maximum of the annual retail price index (RPI). Initially this might not seem too dramatic. Most short residential leases simply provide for RPI increase annually. When combined with the never-ending tenancy proposal however, this could be really problematic.

The Minister proposes a system where rental increases can only be made on an RPI basis once a year. He will however permit rent increases when a tenant moves on and a new tenant arrives, effectively allowing the negotiation between landlord and new tenant to dictate the rental value at the point when a new tenant comes in.

If however a landlord is engaged in a never-ending tenancy, he or she would never have the opportunity to adjust rental other than on an RPI basis. The open market rental value however could increase significantly over that period and the landlord would be excluded from working up to that market rental.

An inability to raise rental beyond RPI will be an impediment to many landlords who wish to borrow either to buy or improve their properties. Either the banks will not tolerate such a restriction in their lending criteria, or the risk of lending rate rises in the midst of a never-ending tenancy (when rental cannot be raised to offset that cost) will be considered too great a risk for landlords to take.

The Minister describes these proposals as "rent stabilisation measures." He therefore acknowledges that he is delving deeply into the market forces that set rental prices in the Island.

In turn, he acknowledges in his consultation that any new law must not have negative unintended consequences. He says that it is not the intention to pursue rent stabilisation at the expense of a tenant's security of tenure or a landlord's ability to realise a stable and fair rental return. That is going to be a very difficult balance to achieve.

The Law of Unintended Consequences

Although the law of unintended consequences is not a law that I learnt at law college, after 30 years in practice reviewing legislative changes, it is a law that I am entirely familiar with!

Readers of my articles will have read my piece published in the JEP on The Taxing Issue of Stamp Duty, commenting on the vast increase imposed this year in stamp duty payable by landlords proposing to buy a property. That had the laudable intent of creating a price differential between people buying to occupy and rental investors.

The result seen in the last three months however is that the prospective purchasers of properties on a buy to let basis have simply disappeared, this to the detriment of competition in the rental market. It has slowed completion in chains of transactions where an investor purchase would have formed a link in that chain. Ultimately when costs flow through, the additional cost of purchase will have an inflationary effect on rental rates.

Interfering with a heavy hand in the rental market therefore has consequences. I have little doubt that if the present proposals are brought in without very clear and workable exemptions they will act as a very serious disincentive to landlords purchasing new properties or retaining the ones that they have. If a person is precluded from being able to sell their property with vacant possession or unable to receive a market rental, then the number of properties available will undoubtedly diminish.

Of course these new proposals have to be taken alongside all of the other impositions on a landlord. Those include the need for detailed and sometimes expensive condition reports, electrical testing and upgrades to meet to continuously improving standards. Whilst I accept that all of those impositions have validity, they also have an impact on the supply of rental housing.

That said, a person who chooses to invest in a buy to let property is in the privileged position of being entitled to own a home in Jersey, an entitlement that not everyone working hard in the Island's economy has.

Their investment is not the equivalent of buying shares on a quoted stock market or equity fund. Their investment is somebody's home. In return, at present, they receive a yield which is consistent with other stable investments. Further, particularly over recent years, they have seen a dramatic increase in capital values, which capital gain is entirely untaxed in this Island.

If however two key planks of any investment are removed - the ability to realise it by sale and the ability to receive a fair rate of return - then the incentive to make the investment is severely reduced.

It may be that the Minister considers that buy to let buyers have seen such an increase in capital value of their properties, that present proposals to reduce saleability and yield are ones that they will take in their stride. Unfortunately these proposals come at a point where the top of the market in terms of property values seems to have been reached and in the short to medium term little capital gain will arise.

Perhaps the Minister thinks that the short term loss of buy to let buyers will eventually be replaced by new investors who are accepting of the rules that he proposes. There is however a serious risk in interfering in the market supply at this moment.

Is Supply the Answer?

The proposals for rent control are the Minister's answer to the gap between supply of homes and excess demand. In Jersey the constant demand for rental homes, combined with global cost of living rises, increased build costs and interest rate rises has pushed rental rates to new highs. Most of those factors however are outside of Government's control.

If more units are available for rent however, then basic economic theory says that rental prices should come down. Of course the difficulty in increasing supply of homes in Jersey is the limited area of land available and objection to over development.

It seems then that the issue at the heart of this consultation is this - do we attempt to control rents with all the risks inherent in that, or do we sacrifice green fields and open urban space to increase supply of homes? An answer to that question will inform this debate.

Some Conclusions

I have not commented on other important matters raised in the consultation, including the establishment of a new Housing Tribunal and requirements relating to social housing providers. Those are perhaps less controversial than the matters I select for comment above but will still need debate alongside the wider aims of the consultation.

I have from time to time been a landlord, a homeowner and a tenant. As a tenant I faced the prospect of a no fault eviction and can understand the heartrending circumstances that tenants can find themselves in. Ultimately a balance between landlord and tenant protections will have to be carefully tuned so as to avoid the unintended consequences, particularly a significant reduction in the private rental stock.

The absence of specific proposals on the exemptions for the never-ending tenancy is a serious defect in the consultation. Presently the consultation throws up the prospect of never-ending tenancies without any clear suggestion of a route to liquidity for prospective landlords. That of itself (in conjunction with uplifted stamp duty and other recently imposed regulations) will act as an immediate disincentive to buyers to let. Until they know with certainty, or at least have an idea of what is in the Minister's mind, landlords will not buy new units to let, or worse still, may be minded to sell up.

I would therefore encourage two things. First that the Minister set out his proposals with greater detail and clarity, and second that both landlords and tenants properly engage with that renewed consultation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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