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2025 will see a significant legal disruptor to the Living Sector

According to research by Savills, the third quarter of 2024 saw over £800 million invested in UK Build To Rent (BTR). It is anticipated by Savills that BTR investment will mitigate loss of rental supply and demand in the private rented sector and BTR is expected to remain strong during 2025 with Savills forecasting UK rental growth of 4% over the year. This insight considers the key legal developments which may impact the Living Sector during 2025.

Renters’ Rights Bill

There is a significant legal disruptor to the Living Sector currently making its way through Parliament, in the form of the Renters’ Rights Bill (“the Bill”). It is expected to receive Royal Assent in Spring/Summer 2025. It will primarily abolish fixed term Assured Shorthold Tenancies (“ASTs”) and prevent landlords from terminating tenancies on a no-fault basis by serving a Section 21 Notice. Unless the rent exceeds £100,000 per year or the property is let to a company, the default position will be that a tenant will acquire an assured periodic monthly tenancy. There are a number of aspects of the Bill that are likely to impact the Living Sector and in particular BTR and Purpose-Built Student Accommodation (“PBSA”). For example, landlords will no longer know how long a tenant is likely to remain at the property with the abolition of fixed term tenancies and a tenant can give two months’ notice to vacate at any time. This may lead to some investor uncertainty as to forecasting occupancy levels and may lead to greater churn.

Rent Arrears

Landlords and investors in the Living Sector will need to factor in higher arrears before action can be taken to recover possession. Under current rules, two months’ rent must be outstanding before a Section 8 Notice seeking possession can be served. Under the Bill, three months’ rent must be outstanding both at the date of service of the Section 8 Notice and the date of the possession hearing before the Court must make a possession order.

Obtaining possession

Landlords will need to establish a ground for possession in all cases and it is likely that more matters will proceed to a possession hearing because the accelerated Court procedure will be removed, where there was generally no hearing.  So it may take longer to obtain possession, impacting returns for investors.

Lauren Fraser, Senior Associate in our Real Estate Disputes team comments that “the removal of fixed term tenancies will have a disproportionate impact on the PBSA sector.  So far, the Bill does not include the measures promised to address specific issues this sector faces in relation to obtaining possession at the end of the academic year.” The Bill contains a new ground for possession whereby the landlord can recover possession where the tenant of an HMO meets the student test (i.e. is a full-time student) and the landlord intends to seek possession to let the property to further tenants meeting the student test, provided that all tenants of the HMO are full time students. However, this ground requires landlords to give written notice to the tenants, within one month of the commencement date of the Bill, of the landlord’s intention to recover possession on this new ground.  

In addition, the ability for a tenant to give two months’ notice to vacate could result in longer void periods for PBSA providers where a tenant leaves a property part way through an academic year.

Rent Increases

Rent review clauses will be void and of no effect under the Bill. The only way of increasing the rent will be for a landlord to serve a notice of increase of rent under Section 13 of the Housing Act 1988 and the tenant will have the right to challenge any increase in the First Tier Tribunal (Property Chamber) (“the FTT”). The FTT must determine the open market rent for the premises. Whilst this process currently exists, it is rarely used, as rent is negotiated at the outset of the fixed term. Whilst the Bill does not introduce formal rent caps or controls, there may be some levelling out of rents in particular areas based on the FTT’s open market rent analysis. Francis Ho, Partner in our Construction, Engineering and Projects team warns that “If the Bill becomes law in its current form, a tenant will only have to pay the increased level of rent from the date of the First Tier Tribunal’s order. This may encourage tenants to dispute even reasonable rent increases because they will save in rent, even if the FTT finds against them. And, of course, if the FTT agrees with the tenant, then the FTT’s determination of an open market will effectively bind the landlord for the relevant period. Operators may regard this as a form of rent-capping.”

Private rented sector database

The introduction of the private rented sector database under the Bill will be an additional administrative requirement to be factored into the overall cost of letting a BTR or PBSA unit as it is likely that a landlord will need to comply with certain requirements to remain active on the database to let properties.

Pets in rental properties

Some existing BTR accommodation already permits pets on certain floors, so this won’t be new to the Living Sector. However, providers will have less control because all tenants will have the right to request a pet and a landlord cannot unreasonably withhold consent. It remains to be seen whether restricting pets to certain floors will be considered as a reasonable refusal of consent if the request is made by a tenant on a floor where pets are prohibited.

Commencement of the Bill

The Government will announce a date when the provisions of the Bill will be brought into force.  Existing ASTs will be converted into assured periodic tenancies on a commencement date to be specified by the Government. If proceedings for an order for possession under Section 21 have been commenced immediately prior to the commencement date, the Section 21 Notice will remain valid until proceedings are concluded. If proceedings have not begun, they cannot be started until after six months have elapsed since the Section 21 Notice was given or after three months from the commencement date, if that three month period ends before the six month period from the service of the Section 21 Notice. There are similar provisions regarding existing Section 8 Notices or proceedings.

Construction

There are lots of BTR and PBSA developments in the pipeline and investment in the sector is expected to continue to grow during 2025.

Building Safety

One of the headline issues for 2025 for developers in the Living Sector is the building safety levy, intended to recompense the Building Safety Fund for the costs/future costs of remediating building safety defects in England.  In early December 2024, the Government announced its intention to bring into effect the building safety levy in Autumn 2025, to be charged on all new eligible residential buildings in England. Having completed two public consultations in 2023 and 2024, what isn’t entirely clear at this stage is how the levy will be implemented but it is intended to raise around £3.4 billion over the next 10 years.  

The broadening of liabilities in association with building safety legislation continues to be a major risk area for the Living Sector.

Among many other changes, the Building Safety Act 2022 (BSA) extended the limitation period during which claims can be commenced to 30 years, retrospectively, for claims concerning dwellings under the Defective Premises Act 1972 (DPA) and the BSA created Remediation Contribution Orders (RCOs) and Building Liability Orders (BLOs). RCOs and BLOs have the potential to lift the corporate veil of companies to allow ‘associates’ to be pursued for the cost of rectifying defects causing building safety risks.  Significant decisions expected in 2025 which will be of interest to those involved in undertaking works for BTR or PBSA units include:

  • URS Corporation Ltd v BDW Trading Ltd [2023] EWCA Civ 772: This case has gained considerable attention, with parts of the BSA being tested in Court including how the retrospective effect of the 30-year limitation period for claims under the DPA should be applied.  The Supreme Court heard the appeal in early December 2024, with the decision most likely published in early 2025. 
  • Triathlon Homes LLP v Stratford Village Development Partnership (1) Get Living Plc (2) and East Village Management Limited (3) [2024] UKFTT 26 (PC): This was the first major case on when it would be just and equitable for RCOs to be awarded and resulted in the FTT awarding RCOs against both the original developer, Stratford Village Development Partnership) and also its parent company, Get Living Plc, notwithstanding that the parent company was not in existence at the time of the Olympic village being built. The decision is being appealed and is listed in front of the Court of Appeal on 19 March 2025.
  • Willmott Dixon Construction Limited v Prater and others HT-2022-000409: These proceedings are expected during 2025 to generate one of the first key decisions on when it is just and equitable for the Court to grant a BLO for the benefit of one of the co-defendants against other co-defendants.
  • BDW Trading Limited v Midgard Limited (1) JRL Group Limited (2) and JRL Group Holdings Limited (3) HT-2023-000337: This is another cladding case under consideration by the Courts and is expected to provide judicial interpretation on when a BLO should be granted.   

Building Safety (Wales) Bill

In England, much of the secondary legislation required to give effect to the provisions of the BSA has now been published.  In Wales, the position is less advanced, with the Welsh Government scheduling the Bill for introduction in 2025, having had the benefit of sight of the recommendations made in the Grenfell Tower Inquiry’s Phase 2 Report. The consultation on the reforms, dealing with dutyholder roles, gateways, golden thread information, mandatory occurrence reporting and compliance and stop notices, is scheduled for Spring 2025, with the intention to introduce the Bill before the summer recess 2025.  

We are already seeing some divergences in the approach being taken by the Welsh and English Governments; notably including the fact that higher risk buildings need only contain one dwelling to be classified as such in Wales; whereas they must include two dwellings in England.  

Payment Practices and Retentions

The draft Reporting on Payment Practices and Performance (Amendment) (No2) Regulations 2024 are intended to come into force on 1 March 2025. As part of the requirement for the UK’s larger companies and limited liability partnerships (LLPs) to report twice in a financial year on their payment practices, these Regulations introduce additional requirements on a qualifying company or LLP to publish certain information about their payment practices and policies with respect to retention clauses in any construction contract they have with their suppliers.  

They are intended to apply to companies and LLPs which exceed two or all of the thresholds for qualifying as a medium-sized company under the Companies Act 2006 (as modified for LLPs) on their last two balance sheet dates with financial years beginning on or after 1 April 2025.  

Planning 

Unlocking development within the UK is one of the key priorities of the current Government heading into 2025. In the Living Sector, this means ensuring that planning applications are dealt with swiftly and where buildings are above 18 metres or at least seven storeys ensuring the Building Safety Regulator can approve new developments under the BSA gateways without significant delay.

The amendments to the National Planning Policy Framework (including new policies for areas of “grey belt” and return to “mandatory” housing targets, alongside proposals for brownfield “passports”) could provide stronger policy support for developments in the Living Sector throughout 2025. We also look forward to a Planning and Infrastructure Bill (anticipated in early 2025) with the aim of streamlining the planning process – expected proposals include legislation to modernise planning committees (potentially through a national scheme of delegation ultimately reducing the number of schemes referred to committee) and facilitation of wider adoption of strategic planning. However, any legislation will likely include transitional arrangements and require detailed implementation, thereby taking time for changes to filter through to the sector.

Minimum Energy Efficiency Standards

In December 2020, the then Government delivered its Energy White Paper: “Powering our Net Zero Future” where the Government expressed a clear intention to tighten minimum standards for Domestic Private Rented Sector buildings to reach a minimum rating of “C” by 2035. Since then, there have been various consultations, and recently the current Government confirmed that it will publish a further consultation, in the first part of 2025, on proposals for homes in the private rented sector to meet improved minimum energy efficiency standards (“MEES”) by 2030 preventing the letting of homes under an Energy Performance Certificate (“EPC”) rating of C or equivalent.  Whilst this is likely to be less of an issue for properties in the Living Sector, which tend to be new builds, compared to other asset classes, it will remain a consideration for those investors in BTR and PBSA, particularly in relation to older properties.

On 4 December 2024, the Government launched a consultation: Reforms to the Energy Performance of Buildings regime seeking views on reform of the energy performance of buildings framework. The proposal is to expand the metrics displayed on an EPC for residential properties to include the energy cost, fabric performance, provide details of the building’s heating source and assess the building’s smart readiness to use smart technologies to reduce energy usage during peak periods.  The consultation closes on 26 February 2025. A second consultation is envisaged during 2025 on the methodology used to estimate the energy performance of homes, with changes to EPCs being made during 2026.  That will then lead to future energy targets being linked to the new metrics once they are introduced. In addition, the Government is considering reducing the validity period for EPCs alongside requiring a building owner to hold a valid EPC for the duration of a tenancy (rather than just at the point of reletting) which could lead to an EPC being required more regularly at additional cost.

Please contact your usual Charles Russell Speechlys contact if you have any queries.

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