As the Renters' Rights Act 2025 (the Act) transforms England's private rented sector Katharine Lewis and Nikita Asher take a quick look at some of the amendments that lenders may wish to make to loan agreements in order to protect their security position and manage emerging risks.
The Act introduces a range of new obligations that landlords must comply with. Failure to comply with those obligations results in penalties for landlords and whilst some of those penalties are financial, others will operate to prevent landlords exercising their rights to, for example, obtain possession of a property. But regardless of the penalty imposed, lenders will want to ensure that their landlord borrowers are complying with the Act and this may mean the introduction of additional obligations in loan agreements.
All landlords will be legally required to register themselves and their properties on the private rented sector database, and all private landlords must join the new Landlord Ombudsman Service. Critically, landlords in breach of the duty to register cannot obtain possession orders except for tenant anti-social behaviour grounds so funders are likely to require proof of database registration and ombudsman membership as conditions precedent to drawdown of loans.
Landlords will be prevented from gaining possession if they haven't properly protected a tenant's deposit, making deposit protection certification essential meaning lenders are likely to want to see that the appropriate arrangements have been put in place before they lend.
Most loan agreements already require borrowers to comply with all applicable laws and to notify their funders of any potential litigation which may have a material adverse effect or result in a default under the loan agreement. Nevertheless we may see lenders requiring some specific, additional, obligations which relate to the requirements imposed on them under the Act.
The Act introduces a Decent Homes Standard for the first time in the private rented sector, with local councils able to issue improvement notices and civil penalties or criminal prosecution for non-compliance. Lenders may well require borrower landlords to agree to specific, on-going, covenants which require compliance with the Decent Homes Standard. Lenders' requirements may also include annual declarations of compliance as part of the property monitoring regime and they may also require maintenance of additional capital expenditure reserves for property improvements.
The Act requires landlords to address hazards such as damp and mould within specified timeframes, with tenants able to challenge non-compliance through court for breach of contract and where landlord borrowers are required to remedy issues such as damp and mould or are served with improvement notices, lenders may require notification of this together with a plan for remedying the underlying issues within the mandated time limits.
Given increased compliance costs, landlords will be required to pay to register on the Private Rented Sector database and will likely pay a small annual fee per property for ombudsman membership, funders may increase minimum debt service coverage ratios. Lenders may also require enhanced reserves, requiring borrowers to set aside funds in a blocked account to cover any capex costs arising from a requirement to remedy hazards or to meet the cost of rent repayment orders. The maximum rent repayment order amount doubles from 12 to 24 months, creating substantial potential liabilities. Civil penalties range from £7,000 for initial breaches to £40,000 for serious or repeat non-compliance.
Tenants benefit from a 12-month protected period during which landlords cannot evict them to sell the property, and landlords must provide 4 months' notice when using these grounds. Lenders may, as a result, look to adjust loan-to-value ratios and build extended possession timescales into security valuations.
And it is likely that we will see some additional events of default. For developers who are financing the build of new private sector rented accommodation, those defaults may include failure to register on the Private Rented Sector Database at the appropriate time or register with the ombudsman; for borrowers who own or are looking to acquire existing properties defaults may include failing to remedy within the mandated time frame hazards or to comply with improvement notices and in both cases we will likely see a default where a borrower loses its ability to gain possession due to non-compliance with the Act.
