§ 7.58 p.m.
§ The Earl of Lytton rose to ask Her Majesty's Government whether they will reconsider their proposals to limit fair rent increases following the Rent Acts (Maximum Fair Rent) Order 1999 (S. I. 1999/6) so that, in addition to necessary protection for tenants, private landlords will be able to obtain a fair return on property subject to regulated rents.
§ The noble Earl said: My Lords, I am grateful to noble Lords who put their names down for this debate. First, I should declare some interests. I am joint landlord of some shorthold lettings and have two Rent Act protected tenants in properties that have been in my family for generations. I am also a shorthold tenant myself, paying, as all tenants think, an outrageously high rent. I must declare an interest as the unpaid non-executive chairman of an advisory service which mainly advises long leasehold tenants. However, I speak not from those interests but as a practising chartered surveyor.
§ The issue I raise relates to the capping of fair rents under the order referred to in the Question. I thank the Minister for allowing me to come to see him the other day. I hope he recognises that my concerns are not personal or political but technical.
§ I know that there are some bad abuses in the private rented sector. However, I wish to concentrate on the philosophy and technicalities relating to fair rents. Also, knowing the problems of inner-city areas, I want to draw away from that somewhat because in the wider world of the counties outside fair rent situations also arise.
I am sure that the House is well aware of the provisions relating to fair rents as set out in Section 70 of the Rent Act 1977 and the role of the rent officer in fixing and registering those rents. I am also certain that the House is aware that fair rents are not defined but are supposed to be fixed,
having regard to all the circumstances",
of which the market must be one. There is an assumption that scarcity is to be eliminated or, put another way, the system assumes that demand does not materially exceed supply. That does not mean demand or supply at any price.
§ For many years, rent officers after 1965 had little evidence to go on beyond their own previously determined rents. The effects of rent control on security of tenure had largely destroyed the private rented sector. That remained the case for about 23 years until 1988 when, under new legislation, landlords could once again let properties at market rates.
§ It became clear, as time went on after 1988, that fair rents and market rents were often far apart. So much so that fair rents were frequently criticised. In the fullness of time, fair rents went up and were felt most acutely in some of the urban sectors where market values had increased most.
§ More recently, there have been court cases such as the Spath Holme case that reaffirmed what was understood in some areas as being market rent less a percentage, compared with the previous basis adopted 203 by rent officers of previous registered rent plus a bit, if I may paraphrase it that way. Arguably, the increases resulting were very severe in some cases. But, equally arguably, it was a process of readjustment caused by years of control of the market. It is interesting to note that rental increases seem now to be tailing off, but perhaps it is too early to draw a firm conclusion.
§ Rent regulation has had the effect of wiping off significant amounts of freehold value. The Government's own figures suggest 40 per cent. Interestingly, security of tenure alone in the commercial sector never did that. Fair rents are reckoned to be about 55 per cent. of open-market rents or, in other words, a 45 per cent. discount. Again, I have drawn on the Government's figures for that. This is quite high, given that in many parts of the country—and I am talking particularly about the counties rather than the metropolitan areas—there seems to be no shortage of residential properties to let, as evidenced by the large number of residential letting agents that seem to be springing up everywhere.
§ Accordingly, we have the anomalous situation where a category of tenant with a large measure of protection pays in general a very substantially lower rent than the unprotected tenant of a similar property is willing to pay in the open market. I find that rather curious.
§ As well as protecting tenants from excessive rent levels, fair rents need to produce a proper return to ensure that the property is adequately cared for. This has to cover not only the recurring costs of maintenance and outgoings but also periodic upgrading and improvement; at least, that must be the case if the accommodation is not to become obsolescent. If in some cases we are dealing with a number of ageing tenants, it seems to me to be right that the general condition and standards of a dwelling have to be kept up for that reason alone.
§ However, the reality is unfortunately that rent officers often attach very little importance in rental terms to such things as double-glazing, insulation, central heating, kitchen modernisation and so on, but are inclined to consider those as being a normal service of the landlord, to be paid for out of the normal rent; that is despite the specific provisions of Section 70(4) of the Rent Act 1977.
§ I have received information relating to the upgrading of flats, for example, where only tiny increases have been awarded after significant expense. My concern is that it does not reward the care and maintenance of the property or respect the interests of the tenants.
§ As the Minister knows, I had some concerns about the terminology used in the consultation paper that preceded the order being laid. First, it implied that the freeholds of fair rented property had in general been acquired by speculators with the aim of a capital gain. But certainly I could not find any evidence that that was generally the case.
§ Secondly, it identified the problems of fair rent increase as being principally the responsibility of private landlords rather than a complex and interactive web of causes, including the broader economic issues and, not 204 least, the mismatch between the regulated and free market rents. So I felt that the situation had not been presented fairly.
Thirdly—and this goes to the substance of the operation of the order itself—it was suggested that under the proposals fair rents would,
continue to move closer to market rent levels where appropriate".
However, I could not see that that would happen in practice.
§ On the first point, I feel that the Government need to present the evidence. If there is none, then the claims made are wrong. But if there is the evidence, let us have it. I cannot find it. But if speculative activity is frowned on, then it cannot be used as it has been to justify low returns on the ground that there will be a capital gain when the tenant dies or moves. It is impossible to have it both ways.
§ For a true investor, realisable vacant value may have little to do with the current account return on the investment, especially if there is no intention to sell anyway. Not all regulated tenants are that old either; many, thankfully, have 30 or 40 years left to look forward to.
§ So the need is for a long-term sustainable situation that covers both sides. I felt that only one side had been presented. Clearly, when the market is interfered with there will be problems of adjustment later on. The small size of the sector does not make it a legitimate target, nor does it alter the need for balance, fairness and justice when presenting the issues.
§ I shall deal briefly with some of the effects, but as noble Lords will know, the proposals in the order would take the increase in fair rents to a maximum figure initially, on re-registration of existing registered rent, of retail prices index plus 7½per cent., and thereafter RPI plus 5 per cent. on any subsequent re-registration. Obviously, if the fair rent comes out at lower than that figure, it will be the rent that is registered. But if it is the cap, then it is the cap that is registered. Rents can be re-registered every two years. Taking in the longer term a 5 per cent. cap plus RPI, we are talking about RPI plus about 2½per cent. a year.
§ My concern is that after the 5 per cent. is applied and if the cap applies, that forms the benchmark for future calculations as to whether the cap should apply thereafter. So the effects are cumulative, unless I have misunderstood the situation.
§ It must be obvious that the proposals are incapable of converging fair rents and market rents, as suggested in the consultation paper. The British Property Federation, for example, worked out that on the most optimistic count it would take 24 years for convergence to be achieved, assuming inflation only and no real growth in property values. On any other assessment there would be divergence.
§ Increases in rent due to landlords' expenditure on improvements are to be allowed, but it has to be said that they must make more than a 15 per cent. difference in rent. But there must be a great deal of improvement to get any increase in fair rent at all, quite apart from the usual arguments about what constitutes improvement, as 205 I have already suggested. I find it difficult to think of any organisation that will invest seriously on those low levels in something as complex as a dwelling house. It is too chancy with the cost of repairs, renewals, insurance and other factors.
§ That means that if there is a need to invest in a rundown area, it will simply not be worth the while of the private landlord to do it. I must warn that that risks a return to a downward spiral of unwillingness to invest, in other words de facto disinvestment. That is one of my great fears.
§ All that imports into the fixing of fair rents the concept of affordability. The Minister may dispute that, but it is the essence of the phrase in paragraph 2.4 in the consultation paper which states—and I paraphrase— that many tenants are elderly and on fixed incomes. They have planned their affairs on the basis that they would be able to remain in their present homes.
§ I do not doubt the sincerity of the Government's views on social justice. But they seem to be doing that by overriding the principle that the maximum a landlord can receive is a fair rent fixed by the duly authorised officer. They do so by secondary legislation on grounds which specifically override the provisions of the 1977 Act, even to the point of dictating what goes on the rent register. The grounds clearly include some notion of personal circumstances relating to tenants—something that the same Act specifically excludes from consideration.
§ There are very good reasons to converge the fair rents and the market rents, not necessarily to make them meet as one but at least to remove some of the discriminatory effects and the divergence which particularly affects classes of property owner and creates anomalies. There are certainly good reasons to insist on higher standards of conduct from landlords, but I think that the effect of the order will, if anything, be to drive the conscientious from the market. If there is no hope of a proper return, then the conscientious move out and the speculators move in, for some entirely improper purpose: they always seem to do so. The matters of which the consultation paper complains will become more rather than less likely.
§ Whatever one's views on fair rents—and I happen to think that they and the rent officer service command a lot of respect—it is curious to have a category of tenure that relies on the professional and statutory fixing of a rent that is fair but then for the Government to decide that the rent is not fair enough or that it ought to be attuned to the means of a financially disadvantaged class of tenant. I did say to the Minister when I went to see him that it looked uncommonly like a housing benefit limitation measure, but I am sure that he will refute it.
§ If the Government believe in intervening in the market for social reasons, they need to explain the rules of engagement for doing so. If a social policy is the objective, they need to explain the justification for that and why the burden should be placed on a particular group of property owners, as opposed, for instance, to the taxpayer at large.206
§ If we are not careful, rental fairness—and there is no definition beyond the normal dictionary version— becomes an entirely movable feast. I think that a balance has to be struck here.
§ In opposition, the Labour Party said that it would not legislate to interfere with the private rented sector. The consultation paper at paragraph 4.1 uses the term, "changing the legislative framework". It is an interesting shift of language, but this will not impress investors; it just switches people off. What is happening here is that the understandings upon which investment in the regulated tenancy sector has started to get going again, after years of neglect, may be frustrated once again. Investors may feel that this is a prelude to the Government interfering in other ways, on the claim that they are not interfering at all but just using regulatory corrections. Property owners are asking themselves "What next?", and this doubt as to whether a return can be made will affect willingness to invest.
§ Most of Europe seems to have a regulated but fair renting arrangement which operates well in both the short and the long term. Other Europeans cannot understand our predilection for the baggage of a mortgage. It puts lending institutions in a monopoly situation, and a few years ago they seemed just as keen on repossession as some rogue landlords were on dispossession beforehand.
§ If we are to build 4.5 million houses by 2016, as is proposed, and as I perceive that there is a rising interest in renting as an alternative to ownership, it is in the public interest that there should be a good-quality private rented sector to provide mobility in the workforce and to provide a direct competitor to the mortgage lenders. It is therefore a grave mistake to send out the signal to the market-place that the limitation on fair rents now does, because the message is going beyond the sector to which it is said to apply.
§ In conclusion, there is a comment in the consultation paper on the subject of expectations: that tenants and landlords could never have expected these high increases in fair rent. I do not think anyone thought, however, that fair rents would trail the market to the tune of 45 per cent. In so far as there are legitimate expectations, they must include, first, that the rent is fixed by an independent officer; secondly, that it will be based on all factors, including the open market, adjusted to take out the scarcity factor—I have no difficulty with that; thirdly, that landlords will be able to charge that rent so fixed and that tenants should expect to pay it; and fourthly, that personal circumstances should be ignored.
§ I applaud much of the position on residential leasehold matters which the Labour Party took in opposition and which, in power, this Government have continued—much to their credit. There was a strong vein of the moral and practical imperative. I can see the force of the arguments. In this measure, however, the arguments have not been substantiated. I see an arguably unfair and partial proposal, and I feel duty bound to point that out, along with its potentially damaging consequences.207
§ 8.14 p.m.
§ Lord Gladwyn
My Lords, I am grateful to the noble Earl, Lord Lytton, for raising this subject but I am bound to say that I see the issue from the opposite end of the spectrum from him, living as I do in a flat in Westminster under a regulated tenancy. In my view, the order in question is the least that the Government could decently do under the circumstances.
I was not a Member of your Lordships' House when the Housing Act 1988 went through Parliament. At the time, however, it was widely reported in the media that this major reform of the rental system was of no concern to existing regulated tenants because they would continue to enjoy the full protection of the 1977 Rent Act. I remember being deeply impressed by the assurances given on television by William Waldegrave, the Minister in charge of housing, in that regard. It may be that some of the Conservative leadership were unhappy at that exception to their reforms, but they accepted it in the interests of social equity as well as political common sense. The noble Earl who raised this debate today, however, was one of those who disapproved. In the Committee stage he complained that the Bill would create a two-tier system—one for lettings before it comes into force and another thereafter. He said that he could imagine nothing more divisive. The then Minister—the noble Earl, Lord Caithness—said in respect of the noble Earl, Lord Lytton, that he wished to go very much further than the Government had done.
Introducing the Bill in another place, Nicholas Ridley himself emphasised the difference between market rents and so-called "fair" rents, which were not fair to the landlord in relation to giving him a return on his investment. It was on the interpretation of this word "fair" that the rent protection for regulated tenancies broke down. In July 1994 Mr. Justice Harrison delivered his judgment in the Spath Holme case, in which he ruled that a fair rent does not mean a reasonable rent but it merely denotes the market rent, adjusted for the scarcity element.
This is very different from what had generally been supposed before, even by Nicholas Ridley. It reminds me of another recent judgment about the interpretation of a single simple word that likewise had immense implications for many private individuals. This was the American ruling that the word "sudden", which qualified many of the Lloyd's insurances respecting chemical pollution, did not mean something that happened quickly but something that was unexpected, even if occurring very slowly.
Had the parliamentary scrutiny of the Housing Act been sharper, this anomaly might have been recognised and the wording of the previous Rent Act could have been adjusted. It was altogether ignored on all sides, however, and the result has been an explosive effect on registered rents awarded by the rent officers and the rent assessment committees. That has been particularly marked in the case of private tenants in central London, where property and rental values have escalated so dramatically, boosted by the demand for so-called assured or short-hold tenancies by businesses for the use of their directors or employees, often foreign. The 208 protection provided by the 1988 Act for the regulated tenants has largely evaporated in respect of rents; it remains solid only in respect of tenure.
The social equity which impelled that protection in the first place is all the more needful now, 11 years later. This is because many private tenants, being effectively misled about the implications of the 1988 Act. decided to stay on rather than move and perhaps buy freeholds or leases elsewhere. They are now all 11 years older and far less able to alter their arrangements. The explanatory text of this present order reveals that in 1996–97 over 60 per cent. of the regulated private tenants were retired, so I dare say that that will have risen to over two-thirds by now. All of them, whatever their private circumstances, will have been faced with rents which have upset their financial calculations, in many cases causing acute personal distress.
The main trouble with the order which the noble Earl would like to have annulled is not that it mitigates this plight but that it has been so slow in coming. During the course of last year particularly registered rents shot up still further, following the Curtis case of 1997. In many instances, therefore, it is shutting the stable door after the horse has bolted. Those fortunate enough to be on rental timescales which involved no review last year will be more likely to derive greater benefit from this capping order. That in itself seems grossly unfair. If the Government had tackled the issue immediately on coming in to office in 1997 the order could have been in place at least six months earlier. I feel that they have dragged their feet. The issue had been aired for some years in another place, specifically in 1992 by Dudley Fishburn, the Member for Kensington; but in 1993 Sir George Young declined to act.
The regulated tenants are constantly declining in numbers as they leave or die. If their rents are lower than market rents, that was the price that landlords were obliged to pay under the terms of the deregulation of the rental market in 1988. It is a price that diminishes every year with the reducing number of protected tenants and the easing upwards of the capping. The press release announcing the order specifically states that the Government have no intention of imposing any such future restriction on assured or shorthold tenancies under the Housing Act 1988. I cannot see how landlord interests can complain about it, and I trust that the noble Earl will reconsider his Question.
§ 8.20 p.m.
§ Baroness Maddock
My Lords, I am very grateful to the noble Earl, Lord Lytton, for giving the House this opportunity to debate housing matters once again. It is a matter that is very dear to my heart. The two speeches that we have heard so far come from opposite directions. That highlights the whole problem of the present issue.
This is a good opportunity to ask the Government to get to grips with how they view the private rented sector. There are two sides. Landlords need to be able to make their businesses a success but tenants also need good quality accommodation at a price that they can afford. To get the balance right between protecting those 209 who cannot afford large rent increases and assisting the private rented sector to flourish is not an easy task. As we heard from the noble Lord, Lord Gladwyn, if we add to it the history of rent regulation we see just how difficult is that task.
If we look at some of the views expressed, those who represent landlords tell us that intervention in market rents deters investment, that existing businesses may well be damaged, that there will be an ever-growing gap between market and regulated rents and that perhaps the recent confidence in the private rented sector will be reversed. It has also been said that during the consultation period the Government discounted all of the arguments put forward by the supply side. But if one considers the views of organisations concerned with tenants, particularly elderly people on low incomes, the response is rather different. I am aware that Shelter and Age Concern welcome these regulations because they believe they will help those people about whom they are concerned and stop very high rent increases. Shelter had asked for an even lower limit to be set. Nevertheless, it is pleased that the Government have reduced the original limit.
As we have heard this evening, the majority of tenants with fair rents are retired and on low fixed incomes. I understand that, before housing costs, the mean net income of pensioner households in this group living in regulated tenancies in the private sector is little more than £120 per week. That gives us some idea of what we must deal with. If rent increases for that group are not restricted there is a view—I have sympathy with it— that there could be many more elderly tenants who will end up losing their homes and facing financial hardship. That is the dilemma facing both sides in this debate. That has been clearly set out this evening by the two earlier contributions.
There are two particular statements that I believe emphasise the conflict between the two sides. The British Property Federation states that this will damage businesses that have set their investment strategies and business plans on the assumption of continued rental growth. On the other hand, Shelter uses a similar argument to suggest that elderly tenants on low incomes would have planned their affairs on the basis that they could remain in their homes and could not have foreseen that the levels of fair rent increases would be as high as some have been. One can see that there is a dreadful dilemma.
In mitigation—we have heard the argument put forward by the noble Earl—landlords say that because of previous rent regulation there were some large increases when landlords tried to catch up, but that it is unlikely to happen again. But we are where we are. We are talking about tenants who are particularly elderly, but also about landlords who are running businesses. I believe that tonight the Government should at least tell the House that they understand the importance of the private rented sector. Perhaps they should look at other ways to help that sector. I would very much have liked to see in the Budget today tax incentives to help landlords in the private rented sector business, 210 particularly in relation to the repair and upkeep of properties and, in the area of energy efficiency—the insulation of properties.
Obviously, too much regulation will not help businesses. The housing sector business by its very nature is very different. Therefore, this is a matter that we should look at very carefully as part of the much wider picture. If we want a flexible housing market and flourishing rented sector we must take care to strike a balance between our desire to protect the community and our desire to help landlords. We need a variety of affordable housing. I believe that over recent years we have had a real problem because of the difficulty in moving in and out of sectors. It is difficult to provide affordable housing where people want it. With the ever-changing jobs market and the insecurity of income it is important to expand the private rented sector to enhance flexibility.
I believe that tonight we deserve from the Government a little explanation as to how they view the whole area, whether they want a thriving private rented sector and, if so, how they can assist it. I believe that the Government would gain a little more sympathy from private sector landlords if at the same time as they restricted rents in certain sectors they introduced fiscal measures to assist in raising standards in the private rented sector and the running of successful private rented sector businesses. In failing to do so the Government lay themselves open to the further charge referred to by the noble Earl, Lord Lytton; namely, the suspicion that this is much more to do with the worry about the housing benefit bill than looking at how to deal with the various housing sectors. I end on that note in the hope that the Government will give an indication of their stance on this important issue. This order has highlighted the dilemma that faces us in the provision of affordable housing and where it comes from, and achieving a flexible housing market.
§ 8.28 p.m.
The Earl of Courtown
My Lords, first I thank the noble Earl, Lord Lytton, for giving the House this opportunity to debate the consequences of the Rent Acts (Maximum Fair Rent) Order 1999 which will have a wide-ranging effect on the residential and letting sector. We heard one view from the noble Earl and another from the noble Lord, Lord Gladwyn. The dilemma described by the noble Baroness, Lady Maddock, is quite correct. My experience in this industry is limited largely to the residential lettings sector in rural areas. From my past professional capacity I know that trying to make tenants accept rent increases that they are unable to pay is in nobody's interest. Bad relations between landlord and tenant are counterproductive. Increased costs and valuable time are always the consequence; and at the last resort litigation between parties, although sometimes inevitable, is never satisfactory.
The impact of the order on the industry has to be considered. It has been said that the court judgments which led to the introduction of the order corrected the system of fair rent increases that were intended by the original legislation and, to quote the Institute of Rent 211 Officers and Rental Valuers, to cap increases now appears to be shutting the stable door after the horse has bolted, as the noble Lord, Lord Gladwyn, said.
I have also been informed that some tenants have been faced by earlier rent reviews to beat the deadline that allowed a period of three weeks between the introduction of this order and its coming into force. Why was this period agreed to, particularly after consultation had already taken place? With reference to the consultation period, how many responses were received and how many had concerns about the order?
My contacts in the industry tell me that the capping of the rents under the new formula will deter future investment in the area, as the noble Baroness said. I have spoken to a property company with a large portfolio which tells me that confidence in the industry is being badly hit. I know that the Government have stated on a number of occasions that there is no intention to change the legislative framework of the Housing Act 1988; but those suspicions remain.
I understand that the order involves changing primary legislation by secondary legislation. From my brief experience of your Lordships' House, I think that this is a relatively rare occurrence. Should not this change have been carried out by primary legislation, which would have enabled debate in both Houses of Parliament? If nothing more, it would demonstrate open government in practice.
This is a crucial time for the private rented sector. There is increased demand for housing and there are problems over the development of greenfield sites. Surely the Government should see this occasion as an opportunity to seize.
The consultation paper states that the effect of the order would enable the Exchequer to benefit only from small short-term housing benefit savings. How long is short term; and how much would the benefit amount to? Have Her Majesty's Government any intention to review the effect of the order over the next year?
I am of course aware that some people need help and protection. But, taking account of the ever-decreasing numbers of these tenancies, are there not other agencies available to help those who need it most? I look forward to hearing the responses of the Minister.
§ 8.32 p.m.
§ Lord Whitty
My Lords, I thank the noble Earl, Lord Lytton, for initiating the debate, for coming to talk to me and my officials about what lay behind his concern and for being co-operative in not moving the Prayer due to other business at an earlier stage when the order was before the House. It is important that the Government explain their position on the order. Clear concerns were expressed by noble Lords in the debate. However, I need to nail one myth immediately. The noble Earl, Lord Lytton, the noble Baroness and, by implication, the noble Earl, Lord Courtown, expressed fears that our measures under the order would be seen as a prelude to wider rent controls traversing the whole of the private rented market. That is not the case. Let me lay those fears to rest.
212 Our measures are intended to address a transitional problem in a small and declining part of the rental market sector. They apply to the tenants within that sector who have different rights from other tenants by definition. It does not affect unregulated, unregistered tenants. The limits that we are introducing under the order will not apply in any circumstances to 90 per cent. of private lettings because the factors that led us to introduce them simply do not apply in the deregulated sector. Landlords and tenants were aware in other parts of the private rented market that when the Housing Act 1988 was introduced market rents would be charged for new lettings and that rent increases would follow market trends. The order in no sense alters that change. We have given repeated assurances that we have no plans to change the wider legal framework for deregulated private tenancies. I am able to repeat emphatically those assurances today.
The noble Baroness, Lady Maddock, tempted me into discussing a range of housing policy issues; to some extent, the noble Earl, Lord Courtown, sought to do the same. It would be proper in the debate to concentrate on what the order provides rather than going into the wider areas. Therefore I move to the proposals under the order.
When the Housing Act 1988 introduced market rents for all new lettings, the right of existing regulated tenants to a fair rent was not changed by the government at that time. These tenants and their landlords may still apply to have a fair rent registered for the tenancy every two years by an independent rent officer. They can appeal against the rent officer's decision to a rent assessment committee.
When setting fair rents under these procedures, rent officers and committees are required by the Rent Act 1977 to take into account the age, character, locality and state of repair of the property but to disregard, as the noble Earl said, any premium resulting from a scarcity of similar accommodation in the locality. That principle was first established long before that—in 1965.
In the past, rent officers tended to decide rents by referring to fair rents previously determined for other comparable properties in the locality. Before 1989, when there was little evidence of market rents, this was the only practicable approach. As the noble Earl indicated, more recently a number of landmark court cases have held that rents officers and committees should give more weight to market rents for comparable properties now that there is a growing volume of open market evidence. The starting point should generally be the comparable market rent which is then adjusted to take account of scarcity.
However, changing to this method has caused fair rents to rise very steeply in recent years. Fair rent increases have been well above increases in the retail prices index over the same period. There are specific problems in particular areas; but, on average, there is a problem. In Merseyside, the average increase on re-registration has recently been around 45 per cent. In London, as the noble Lord, Lord Gladwyn, indicates, some tenants have faced substantial rent increases of 60 per cent. or more in two years. For example, a tenant in Hammersmith and Fulham faced an increase in rent 213 of 65 per cent. in 1998, taking the rent to £7, 750 per annum from £4, 700 per annum only two years previously.
The noble Lord, Lord Gladwyn, drew attention to the particular vulnerability in areas of scarcity in central London. Indeed, the noble Earl, Lord Courtown, acknowledged that. This evening I have been told of substantially higher increases in rent than had been mentioned in my original briefing.
When the previous government introduced market rents for new lettings in 1989 they deliberately left the fair rent provisions for existing tenants intact. We do not believe that at that time anyone could reasonably have expected rent increases of the magnitude to which I now refer under a fair rent system.
That is as true of landlords as it is of tenants. The existence of fair rent controls has not prevented a brisk trade from taking place in the freeholds of properties occupied by fair rent tenants. Investors have paid a price reflecting the expectation that there would be little or no real growth in rental income. For their profit, they have looked forward to the prospect of sales when the tenancies come to an end at a much higher price reflecting vacant possession value. For them, the recent explosion in fair rents has thus been an unlooked-for bonus.
The noble Earl made the reasonable point that many landlords did not acquire their tenanted properties as speculative investments or indeed in some cases for investment reasons at all. They may have inherited the property, built it or acquired it to house employees, or purchased it as part of a much wider property portfolio. That is all very true, but none of it alters the fact that the original acquisition, and the assumption when the 1988 Act was coming in, will have taken place against the background of the fair rent controls as they were understood by landlords and tenants and expected to work at the time. The idea that growth in rental income might massively exceed the rate of inflation will not have entered the heads of any of these landlords at the point of acquisition or at the point of those tenancies being confirmed.
When we were faced with the increase in rents and the concern expressed by tenants and other operators in the property market, we considered that there was a strong case for the Government to intervene to moderate increases for the small and declining number of tenants with existing fair rents. I have to stress that the number of tenancies affected is small; some 120, 000 private tenancies in the sector as a whole, not all of which will be affected, plus 235, 000 secured tenancies of registered social landlords. Many of those tenants are elderly, as noble Lords have indicated. They have made assumptions about the rents that they will be paying for the rest of their lives.
That is not the central issue. The order does not change the way in which fair rents are determined under the 1977 Act; it simply limits the exceptionally high fair rent increases under the Act. By linking rent increases to the change in the retail prices index, they will follow the trend of market rents. But additionally, in 214 recognition of the fact that fair rent increases were artificially low in the early 1990s, we have allowed a further premium; that is, an uplift of 7.5 per cent. for the first application made after the order came into force and 5 per cent. for subsequent applications. Therefore, contrary to what the noble Earl suggests, that will ultimately, except in the most extreme cases, allow fair rents to reach the level they would have done if we had not introduced the premium—but at a slower rate and depending on the future pattern of market rents. The convergence will exist and, except in extremely unlikely circumstances, there will be a large and growing divergence between market rents and the rate of inflation.
The limit will not apply to a substantial number of regulated tenancies where no fair rent is registered because the landlord and tenant have agreed a rent that has not been registered. We also felt that there should be an incentive for landlords to carry out major works to the property. The order therefore exempts landlords from the limit where a substantial rent increase of more than 15 per cent. is due because of an improvement in the condition of the property as a result of repairs or improvements by the landlord.
In formulating that exemption, we had on the one hand to provide an incentive to landlords to carry out major works, as described by the noble Earl, which would benefit tenants but, on the other hand, to ensure that the exemption would not allow landlords to circumvent the limit simply by carrying out running repairs and minor improvements. Minor works should be included in the annual management and maintenance plans.
As the noble Baroness, Lady Maddock, indicated, we must balance the objectives, providing incentives to landlords to make improvements and providing a fair return to the landlord, given the expectations on which such properties have been acquired or continued and a reasonable protection for the tenant. We believe that we have come up with a reasonable balance in both parties' interests.
The noble Earl objects in part to the tone of the consultation paper. Whatever his views on its tone, our proposals were clear. I cannot give precise figures, but we received a number of responses from landlords' and tenants' organisations, individual landlords and others. In the light of responses, we considered that there was some support for the approach. We decided that the case had been made for a small change to our original proposal. The initial uplift to the rent limit formula was reduced from our original proposal of 10 per cent. for the first term to 7.5 per cent. That was as a result of representations made from tenants' organisations that many landlords had already benefited from large increases.
I say to the noble Earl, Lord Courtown, that the provisions we are introducing do not alter primary legislation. We have the power, but it has not frequently been used, to provide limits. Modification already exists within the primary legislation and we are simply utilising that power. Clearly, some landlords have taken advantage of the timescale it has taken us to introduce 215 the order to increase their rents. Of course, they were entitled to do so under existing legislation. All legislation takes a little time. Most legislation, once introduced, has a timetable for its coming into effect. I understand that there are a few examples of people taking advantage of that. It is a natural consequence of the parliamentary process and we cannot do much about it.
I do not accept the noble Earl's point that we were overriding the principle of a fair rent. Most landlords and tenants could never have anticipated increases of the size which have been imposed in certain areas. The noble Earl suggested that we had introduced an element of affordability into the fair rent system. We have done no such thing. We have referred to the situation of tenants on the basis of something under which they and the landlords were operating when the previous legislation was passed. The fair rent will continue to be determined on exactly the same criteria as under the original Rent Act principles. It is only in cases where the increases in fair rent would have outstripped inflation by a very generous margin that the order will slow the increase to a level which is manageable for the tenants and is consistent with what would until recently have been the high point of the landlords' reasonable expectations.
The noble Baroness and others raised the ignoble theory that this is all in order to save housing benefit. I can assure your Lordships that there is no such motivation for the change. Compared to the bill for housing benefit, any such benefit would have been extremely small, unpredictable and short term. I cannot give noble Lords the precise figures, but we are talking 216 minuscule amounts compared with the problems of expenditure on the housing benefit front. I ask noble Lords to discount that as our motivation.
I hope that what I have said will reassure the noble Earl and noble Lords that the order we have laid is designed simply to ensure that the protection which has long been afforded to regulated tenants works as it was intended to. This is a limited measure and has no implications for other parts of the housing market. It is to address a small and transitional problem; it is not the prelude to wider rent control. We seek to extend the area of housing choice and do not believe that the measure will in any sense restrict that.
I suppose that, strictly speaking, the answer to the noble Earl's question could have been put shortly with a simple "No". Nevertheless, I believe that the House deserved a full explanation of the reasoning behind the order. It is to protect a group of tenants who have been protected from excessive increases by successive governments. The noble Lord, Lord Gladwyn, referred to the late Nicholas Ridley, who was not normally seen as an opponent to the free market. Like successive governments, he clearly saw the need to continue the protection and expectations held by tenants in various circumstances of this type of tenure. I believe that the measure will be appreciated by those tenants. It is fair and it continues to provide a reasonable return for landlords and a reasonable incentive for them to improve their properties.
I hope that in view of that explanation the noble Earl will feel it appropriate not to press his Question further tonight. If he wishes to raise any other points, no doubt we can deal with them in writing.
§ House adjourned at thirteen minutes before nine o'clock.