Amid widespread concern about the workings of the housing market in the UK, in February 2023 the Competition and Markets Authority (the "CMA") launched a consumer protection project into the rented housing sector, alongside a separate market study into housebuilding, discussed here. Whilst acknowledging that some of the problems in the rented housing sector are not within its remit, it has stated its intention to ensure that ineffective competition or unfair business practices do not increase costs, limit choice or reduce quality for tenants. Following an initial 3 month period of engagement, the CMA has published an update report into the rental housing sector which summarises the feedback it has received from a wide variety of stakeholders, and identifies the four areas on which it intends to focus in the next stage of its project. In this briefing we discuss those key areas, and what these investigations could mean in practice for the real estate industry.

What issues will be addressed in the next phase of the CMA's project?

Reviewing current practices on exit and other event fees in retirement homes

The CMA's report states that, late in their stakeholder engagement process, they were told about concerns that event fees in the retirement homes sector are impacting on the rights and financial well-being of residents and their dependants. The CMA has said that it proposes to review practices in the sector with a view to considering whether further undertakings or guidance are necessary.

The CMA and the senior living /care home sectors

In 2013, the CMA's predecessor organisation, the Office of Fair Trading, carried out an investigation into retirement home transfer fee terms (now more commonly referred to as an exit fee), which resulted in a report setting out (i) the general principles that it would expect all landlords of retirement homes to abide by when enforcing transfer fee terms, and (ii) recommendations for legislative reform. The OFT also took undertakings from some of the providers of seniors accommodation to the effect that although they did not agree with the OFT's views and believed that their transfer fee terms did not breach the Unfair Terms in Consumer Contracts Regulations 1999, they had already voluntarily made changes, or were making such changes, to how they enforced such terms in the leases of retirement home properties.

In December 2016, the CMA launched a market study into care homes for the elderly, to see how well the market works and if people are treated fairly, based on data obtained information from a wide range of stakeholders including care home providers, consumer bodies, local authorities and members of the public. In addition, the CMA commissioned research from Ipsos MORI into the experiences of care home residents and their families when choosing a care home, which fed into a report in August 2017 and an updated report in November 2017 which identified various concerns regarding the transparency of pricing information and the practice among some care home providers of charging upfront administration fees.

Whilst undertaking the 2016 market study, the CMA instigated a number of unsuccessful consumer protection cases into the care home sector, including a case against Care UK regarding admissions fees on moving into a new care home, discussed here.

Updating the CMA's guidance for letting agents

The CMA's report describes various problems encountered by tenants in the current housing market, including: a lack of information available to consumers about landlords and properties in order to help them choose between properties; problems with asking a landlord to carry out repairs; inadequate improvements to the energy efficiency of older housing stock; hardship caused by "no fault" evictions; problems with deductions from deposits; difficulties experienced by vulnerable tenants; and the inadequacy of the redress schemes operated by many letting and managing agents.

In 2014, the CMA issued some guidance for lettings professionals on complying with consumer protection laws, and laws about dealing with other businesses. In the light of the feedback it has received in connection with its current project, it intends to review and revise this guidance in order to reflect recent changes in the law and to ensure that landlords, agents and tenants understand that some market practices, which may reflect conditions of supply and demand, are contrary to consumer protection law.

Investigating potentially problematic practices in the rental market

As referred to above, the CMA is concerned that some aspects of the ways in which the current rental market operates may not comply with the law, particularly consumer protection. The practices it intends to investigate in more depth, and take enforcement action if needed, are:

  • Zero-deposit schemes: these allow tenants to pay an upfront and/or monthly fee to a scheme provider instead of giving a landlord a cash deposit at the start of their tenancy. Zero-deposit schemes are currently unregulated, and the CMA is concerned about some aspects of how they are being used, such as landlords or letting agents failing to give tenants enough information about how they work, using pressure selling tactics and not disclosing any commissions they receive from the scheme provider. The CMA points out that although zero-deposit schemes can be beneficial for some consumers in that they do not have to find the money required for an upfront cash deposit, they can increase the overall cost of renting because at the end of the tenancy the tenant does not get any money back (unlike a traditional deposit) and the tenant remains liable to pay for any damages or repairs that the landlord requires them to carry out.

  • Sham licences: the CMA has been told that some landlords tell their tenants that their rental contracts are licences to occupy whereas they are, as a matter of law, tenancies. This is apparently most commonly encountered where property is let on a 'per room' basis. The CMA has indicated that this practice is likely to have a disproportionate effect on vulnerable consumers, including recent arrivals to the UK such as overseas students and others who may have a limited understanding of English.

  • Unlawful discrimination: the CMA is concerned that the processes of choosing tenants can lead to unfair and sometimes unlawful discrimination. This could be direct discrimination (whereby landlords automatically rule out a class of people such as people on benefits or those with children or pets or who have certain needs as a result of a disability) or indirect (such as discrimination against families, which although it may not directly engage with a protected characteristic, may indirectly discriminate against women).

  • The scope of guarantees: concerns have also been expressed that requiring tenants to provide guarantees may disadvantage those who are less well-off or who lack a support network. The CMA has also been alerted that the terms of some guarantees are excessively wide, for instance in student accommodation a guarantor might be required to guarantee the obligations of all the tenants of a flat, not just the particular student to whom they are connected.

The Renters (Reform) Bill

The CMA considers that various aspects of the forthcoming Renters (Reform) Bill will assist with some of the concerns set out above. It therefore intends to engage with the Department for Levelling Up, Housing and Communities in the development of its new Privately Rented Property Portal service, and will establish contact with the new Property Ombudsman to share its views on the application of consumer law to tenancies.

The CMA aims to provide a further update on its rented housing project before the end of 2023.

What are the key provisions in the Renters Reform Bill?

  • The abolition of the section 21 'no fault' evictions. This will end the use of ASTs and replace them with periodic assured tenancies

  • The introduction of new possession grounds to enable landlords to recover vacant possession if they wish to sell their property or move close family members into it, and to provide grounds for landlords to repossess properties where there has been anti-social behaviour or repeat rent arrears.

  • Tenants will be permitted to appeal above-market rents. The tribunal will continue to be able to determine the actual market rent of a property.

  • The introduction of a new Private Rented Sector Ombudsman which will provide fair, impartial, and binding resolution to many issues and prove quicker, cheaper, and less adversarial than the court system.

  • A Privately Rented Property Portal will be set up to help landlords understand their legal obligations and demonstrate compliance, and provide better information to tenants to make informed decisions when entering into a tenancy agreement. It will also support local councils to target enforcement activity where it is needed most.

  • Tenants will be able to request a pet in the property, which the landlord must consider and cannot unreasonably refuse although they will be able to require pet insurance to cover any damage to their property.

What does this report mean for the UK's residential real estate sectors?

In contrast to the CMA's market study on the housebuilding sector, which we discuss here, this project is unlikely to lead directly to a market investigation reference. Instead, the CMA is likely to use the feedback it has gathered to as the basis for work on updating guidelines (such as those involving letting agents) and decisions on whether to investigate certain practices further with a view to taking enforcement action. In relation to the allegations of unlawful discrimination, we note that the lead regulator under the relevant legislation (the Equality Act 2010) is the Equalities and Human Rights Commission (EHRC). Although the CMA does not mention this in its report, it may look to involve the EHRC in any further investigation of these issues.

Investors into student accommodation and their operators/managers should take note that the CMA thinks that the practice of taking upfront deposits can have an impact on social mobility if it hinders students from less affluent families from pursuing higher education, and considers that the scope of guarantees can be too wide in tenancies of this form of accommodation. The sector has put in place three codes of best practice: the Universities UK/ Guild HE Code of Practice for the Management of Student Housing, the (ANUK)/Unipol Code of Standards for Larger Residential Developments for student accommodation managed and controlled by educational establishments, and the ANUK/Unipol Code of Standards for Larger Developments for student accommodation managed by private sector organisations. These may require revision once the CMA finishes its project.

Similarly, the seniors housing sector, the IRC sector and the care home sector will want to demonstrate to the CMA that the majority of event fees in retirement accommodation and care homes are not high or unpredictable, contrary to the reports received by the CMA. The importance of this sector to the happiness, health and longevity of an ageing population is well recognised, and the sector will play an increasingly important role to make up for shortfalls in available public funding but, against ever increasing operational costs, event fees have an important role to play in making the sector a viable commercial proposition. The sector has made significant efforts to implement the OFT's guidance, and their own industry guidelines (including the Arco Consumer Code and the Consumer Code for Home Builders) exceed these requirements in many respects. As we have discussed in our previous briefing, the industry has changed its funding models to adapt to the ban on ground rents in the sector pursuant to the Leasehold Reform (Ground Rent) Act 2022 which impacted on the sector earlier this year. Most providers now offer consumers a choice between either paying a smaller premium upfront combined with larger event fees, or paying a larger upfront cost plus lower event fees. There are also more choices of tenure available to consumers, such as short term rental models or shared ownership, as described here. Any providers who do not yet comply with one of the consumer codes referred to above should take steps to do so.

Landlords and agents in the BTR sector will want to stay abreast of any guidance the CMA issues in due course regarding the use of zero deposit schemes, and in the meantime should ensure that their tenancies are accurately described and that their advertising and selection processes are demonstrably non-discriminatory. There are a number of codes of practice for letting agents, including the National Residential Letting Agents' Code of Practice and the Property Ombudsman's Code of Practice for Residential Letting Agents. These may need to be revised once the CMA has updated its own guidelines for letting agents.

When the Digital Markets, Competition and Consumers Bill comes into effect, the CMA will have a lot more clout. This is likely to change the dynamics of how the CMA approaches consumer protection issues, as described in this briefing. In particular, if real estate businesses want to bring investigations to a close quickly, they may find that they need to offer more than they have in the past. If no settlement can be reached, the stakes will be higher because the CMA will be able to impose fines, make redress orders and also use its newfound powers to push through its own preferred options for how problems should be resolved.

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.