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A Perfect Storm

To Let sign on terrace houses Print publication

20/12/2016

First published in Rent Magazine on 30 Nov 16.

The beginning of 2017 is likely to give Buy to Let landlords a post-festive hangover as their thoughts are likely to be increasingly focused on whether the Private Rental Sector is the best place for their money, both in the short and the long term.

Storm clouds have been gathering over the Buy to Let sector over the last 12 months, largely due to the stance taken by the Government towards the sector.

Judicial Review Failure

In October landlords suffered a reverse in their attempted Judicial Review challenge to the changes to the tax treatment of mortgage interest paid by residential landlords who are in the 40% income tax bracket or higher. The application was made on behalf of a group of 150,000 landlords who had crowd funded their claim to the High Court.

Higher Tax Bracket

In April 2017 the phase changes commence in respect of Buy to Let landlords’ ability to deduct mortgage interest payments and other finance related costs for their rental turnover before declaring taxable income. According to the National Association of Landlords, the new tax rules will push the taxable incomes of around a quarter of the UK’s two million Buy to Let landlords who currently pay basic rate tax at 20 per cent, into the higher-rate tax threshold of £45,000 for 2017/2018.

Stress Test Finance and Stamp Duty Levy

The Government have also recently announced the introduction of tough new mortgage affordability tests starting in 2017, which will require Buy to Let investors to prove that they can make a 25% profit from tenants, even if interest rates rise as high as 5.5% making their mortgages more expensive.

On 1 January, these new minimum affordability thresholds will be imposed by the Bank of England’s regulatory arm.  The stated aim is to prevent a mass failure of Buy to Let portfolios.

Nationwide Building Society has already tightened up its lending criteria by imposing a minimum lending threshold.

The above changes are on top of the stamp duty levy introduced by the Government earlier this year which required investors in property to pay additional stamp duty of 3%.

Moves to Sell

The signs are that many landlords are looking to sell their investments. A recent survey carried out by the Residential Landlords Association found that a quarter of Buy to Let investors are planning to sell their rental properties as a result of Government tax changes.

The Final Straw?

The proverbial “straw that breaks the camel’s back” in the minds of Buy to Let landlords might well be the financial strain that their tenants will inevitably find themselves under during the last quarter of the financial year.

The pressure to spend over the festive season is overwhelming and often paying the rent is overlooked and arrears start to mount. This is borne out by the Ministry of Justice figures for the number of PRS arrears possession claims issued in the County Court in the years 2008 to 2015.  The chart  confirms that in six out of those eight years the highest number of claims during each calendar year were in the first quarter.  The situation may well be exacerbated in the first quarter of 2017 as some tenants are likely to be struggling to pay higher rents introduced by landlords in response to the above mentioned tax changes.

 Sluggish Possession Process

It should not be forgotten that the process to recover possession takes time. The mandatory possession ground (Ground 8) is available to landlords once the rent is equivalent to two months in arrears (or eight weeks arrears if the rent is payable weekly).  A Section 8 Notice needs to be served on the tenant prior to the issue of possession proceedings. This notice gives the tenant at least two weeks from when it is served to address matters before the landlord can commence possession proceedings.  The Court Rules also state that a tenant must be given at least 21 days notice of the possession hearing and also that the hearing of the possession claim will normally take place between 4 to 8 weeks from the date of issue of proceedings.

At the possession hearing, if mandatory Ground 8 still applies (i.e. at least 2 months/8 weeks arrears), a 14 day possession order should be made by the Court (unless the tenant can show “exceptional hardship” – in which case the date for possession given by the Court can be delayed by up to 42 days).

If the tenant remains in possession on expiry of the possession order a landlord has to instruct the County Court Bailiff or a High Court Enforcement Officer to lawfully recover possession.

The writing is often on the wall when a rent payment is missed at this time of year, particularly from tenants who already have a chequered payment history. If landlords are to minimise the pain of their exit from the sector, it is important that the recovery of possession process is dealt with as expeditiously as possible. The importance of a good letting agent or property manager, along with an efficient and experienced legal advisor, cannot be over emphasised in these circumstances.

There may therefore be an influx of former Buy to Let properties coming onto the market for sale next spring and summer, many of which might well be vacant possession sales.

A Word to the Wise

Landlords should be warned that the only lawful means of recovering possession is via a Court Order, if a tenant will not vacate voluntarily. If landlords change locks or try other means to “persuade” tenants to vacate without the assistance of the Court, they can face criminal sanction under the Protection from Eviction Act 1977, as well an injunction requiring reinstatement of their tenants into possession and also an order to pay punitive damages.

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