The Renters' Rights Act 2025 (the "Act") received Royal Assent in October 2025 and will be implemented in three phases over the course of the next decade. With the first and most consequential wave of reforms due to take effect on 1 May 2026, the Act represents the most significant restructuring of the private rented sector ("PRS") in a generation. Whilst much of the political and media commentary has focused on the rights afforded to residential tenants, the reforms carry equally profound implications for lenders, sponsors and developers who finance the acquisition and ongoing ownership of residential investment property.
This article examines the key legislative changes coming into force on 1 May 2026 and considers the practical and operational consequences for those providing and those seeking loan finance secured against PRS assets.
What changes on 1 May 2026?
The most significant changes coming into force on 1 May 2026 includes, the abolition of Section 21 "no fault" evictions, the end of fixed-term tenancies, the introduction of new and modified grounds for possession, restrictions on rent being paid in advance, and new rights for tenants to challenge rent increases before the First-tier Tribunal ("FTT").
At the heart of the reforms is a fundamental shift in the nature of residential tenancies. Assured shorthold tenancy agreements ("ASTs") will be abolished, bringing fixed-term tenancies to an end. Existing ASTs will automatically convert into, and all new tenancy agreements will be constituted as, assured periodic tenancies affording tenants in the private rented sector considerably greater security of tenure. Tenants will be able to give two months' notice, at any time, of their intention to end an assured periodic tenancy; by contrast, landlords will no longer be able to recover vacant possession by way of a no-fault eviction.
Landlords will instead be required to apply to court to obtain vacant possession of their properties and must demonstrate one of the 21 prescribed statutory grounds for doing so. Those grounds include a tenant's failure to pay rent (Ground 8); a ground which, whilst not new, has been modified so that the rent arrears threshold is now at least three months (or 13 weeks), rather than the previous two months. Landlords may also seek possession where they intend to sell a property (Ground 1A), and lenders will retain the ability to rely on Ground 2, sale by a mortgagee, to obtain possession where a borrower has defaulted on mortgage payments. Depending on the applicable ground, tenants must be given between four weeks' and four months' notice of a landlord's intention to seek possession, to allow sufficient time to secure alternative accommodation.
Further changes taking effect on 1 May 2026 include measures designed to prevent bidding wars between prospective tenants, prohibit landlords from refusing to let to tenants in receipt of benefits, and to confer on all tenants the right to request permission to keep a pet, the Act provides a statutory definition of what constitutes a "pet".
Implications for lenders and their borrowers
Income stability, cashflow and financial covenants
Many of the reforms will directly affect a borrower's certainty as to the rental income generated by a property or portfolio of properties, giving rise to legitimate concerns for lenders in respect of borrower cashflows and the ability of borrowers to service existing and future interest cover covenants.
Lenders and borrowers should anticipate a period of structural adjustment. Borrowers may find it necessary to seek variations to existing financial covenants. In new transactions, interest cover covenants may soften in the short term and lenders may initially elect to test only historic operating income. However, lenders are likely to require additional protections, such as interest reserve accounts, cash traps or guarantees, in order to smooth potential fluctuations in income.
From a practical standpoint, there are steps that landlords can take to mitigate the risk of income disruption. Proactive engagement with tenants ahead of proposed rental increases, and the maintenance of detailed records regarding the size, condition and location of units or properties, may assist landlords in demonstrating that any proposed increase is consistent with the local market for comparable properties - a consideration which will be relevant should a tenant challenge an increase before the FTT.
Loan-to-Value covenants and valuations
Loan-to-Value covenants in new loan agreements are unlikely to be affected at the point of origination, as these are set on day one. However, given the prevailing uncertainty surrounding the Act's impact on property valuations, existing borrowers may find themselves in breach of their loan-to-value covenants when their lender next calls for a periodic valuation. Valuers should be stress-testing any rent assumptions incorporated into valuations in order to reflect the changed legislative landscape.
Information covenants and lender oversight
Most, if not all, loan agreements contain a broad suite of information covenants enabling lenders to monitor the performance of their borrowers. The scope and nature of such covenants, in both new and existing loan agreements, can be expected to evolve as lenders and borrowers seek to ensure that the information flow provides the lender with sufficient visibility as to what is occurring at the property level.
Lenders are likely to require more granular reporting around rental income generated by residential units within a property but will equally wish to avoid being inundated with copies of FTT claims submitted by tenants challenging proposed rent increases. Similarly, consideration will need to be given to the scope of existing covenants requiring borrowers to provide copies of any application, order or notice served by any public or local authority, given the risk that lenders could find themselves receiving a significant volume of orders and notices relating to minor property issues once the powers to issue improvement notices and other enforcement orders under the Act come into force. Careful and considered drafting of information covenant provisions will be essential to ensuring lenders remain informed without the relationship becoming operationally unmanageable.
Enforcement, vacant possession and security realisation
One of the most commercially significant issues for lenders is the enhanced difficulty and likely extended timeframe of recovering vacant possession of a tenanted property in the event of borrower default.
Lenders will be keen to ensure that borrowers are providing tenants with all requisite information about their tenancy arrangements and that, when the relevant provisions come into force, they are registered on the PRS database and with the landlord ombudsman. Borrowers can expect new or amended conditions precedent in loan agreements requiring delivery of tenant information sheets, approved proforma tenancy agreements and evidence of all relevant registrations.
Should a lender need to enforce its security and recover vacant possession, it will be required to proceed by way of the Section 8 procedure under the new Act and establish one of the 21 prescribed statutory grounds. The principal grounds available to lenders are expected to be Grounds 1A and 2. However, lenders and any receivers appointed by them should be acutely aware that, when account is taken of the required notice periods, anticipated court timetables and the potential need to instruct bailiffs, the process of obtaining vacant possession could take in excess of 12 months.
Rent arrears: Modified thresholds and operational consequences
Where a tenant falls into arrears, from 1 May 2026 a landlord seeking possession must demonstrate that the tenant owes at least three months' rent (or 13 weeks' rent where payment is weekly or fortnightly) and must serve four weeks' notice before making an application to the court. Critically, the requisite level of arrears must be maintained both at the date notice is served and at the date of the court hearing. Where a tenant reduces the arrears below the threshold by the hearing date, possession cannot be ordered. Equally, a tenant in receipt of benefits cannot be evicted solely on the grounds of arrears attributable to delays in the payment of Universal Credit.
These modified thresholds have direct consequences for lenders' security. Given the likely increase in the time it will take landlords to recover vacant possession where a tenant is in arrears, claims under loss of rent insurance policies which most lenders require as a condition of lending may increase in frequency, potentially causing loss of rent insurance to become more expensive for landlords over time. Lenders may also need to reconsider whether it remains appropriate to mandate annual increases in the level of cover required under such policies.
Rent in advance: Restrictions and their impact on income planning
Landlords will no longer be permitted to require payment of rent in advance, though if a tenant voluntarily offers to pay more than one month's rent in advance, a landlord may accept this. In such cases, however, the landlord will be required to refund any unused advance rent if the tenancy is terminated before it is fully utilised.
The practical implications of this restriction are particularly acute in certain sub-sectors of the residential investment market. It is not uncommon for tenants relocating to the United Kingdom on a temporary basis to pay rent in advance, enabling landlord/borrowers to build up income reserves capable of smoothing cashflow fluctuations or covering unanticipated capital expenditure costs.
For landlords with significant student populations, a feature of certain operational Build-to-Rent portfolios which lenders have historically sought to limit through loan covenants, this change is particularly material. It is not uncommon for overseas students to pay rent in advance. The removal of such income certainty must be weighed against the further consequence that students, enjoying the flexibility of assured periodic tenancies, may now serve notice of their intention to vacate seven months into the academic year. Landlords could face considerable revenue losses at key points in the calendar year that are not easily backfilled.
Conclusion
The Renters' Rights Act 2025 represents a watershed moment for the private rented sector in England. The consequences of the changes introduced by the Act are, in some cases, as yet unknown. What is clear, however, is that the Act will fundamentally reshape the risk landscape for those lending against, or investing in, residential rental property.
For lenders, the priorities are clear: reviewing and, where necessary, renegotiating financial and information covenants; stress-testing valuation assumptions; revisiting the adequacy of insurance requirements; and ensuring that conditions precedent and ongoing compliance obligations reflect the new regulatory environment. For borrowers, early and open engagement with lenders, supported by proactive tenant management and meticulous record-keeping, will be essential to navigating the period ahead.
What we can say with a degree of certainty is that the relationship between lender and borrower has never been more important, as both parties strive together to navigate the implications of the Act. Those who approach that relationship collaboratively, and who prepare now for the changes ahead, will be best placed to manage the challenges and opportunities that the Act brings.
