Landlords have reacted with considerable concern to the proposals for the Private Rented Sector (PRS) contained within the Housing 2040 and A New Deal for Tenants documents published by the Scottish Government. These documents lay out the government’s objectives to enhance accessibility, affordability, and standards within the PRS.
There was a consultation with the results published in August 2022. Following this consultation, a number of these proposals are being progressed further. Some are for the private rented sector (PRS) only, some only for the social rented sector (SRS), and some for both sectors.
There is a further consultation on the proposed changes which closes on the 27th of October and can be accessed here for those who wish to respond:
We will go through the current proposals below:
Local authorities would be required to carry out an assessment of rents in their area and make a recommendation to MSPs about whether to impose rent controls in all or part of that area. There would be a statutory requirement to consult the local authority and representatives of landlords and tenants before a rent control area can be introduced. The final decision would be made by MSPs.
Any rent control area would be in place for a fixed time. If a local authority wanted to extend this, they would have to carry out a further assessment showing a continued need for rent control.
HOW CONTROLS WOULD WORK
The controls would be in the form of a restriction on the amount rents could be increased – either via a rent cap based on a fixed percentage or a formula that could be used to calculate the increase.
WHEN A RENT CAN BE SET
The controls would apply both to increases during a tenancy and to the rent set for a new tenant. Currently, tenants with a private residential tenancy cannot have their rent increased more than once in a 12-month period.
The Government now proposes that rent increases in areas where rent controls are in place would be limited to one increase per property in any 12-month period, even if the tenant changes within that time.
The Scottish Government acknowledges that this may result in the rent being increased early in a tenancy depending on when the earliest date of increase arises.
SAFEGUARDS AND EXEMPTIONS FOR LANDLORDS
The Scottish Government says they are considering exceptions to rent caps, for example when a landlord has invested in certain improvements to a property.
It is also proposed that ‘new to market’ tenancies would be exempt from controls under certain circumstances, including
- The first tenancy of a property that has not been let as a principal home before.
- The first tenancy of a property following it being purchased with vacant possession by the current landlord.
- The first tenancy of a property that has been empty for a prolonged period.
- The first private residential tenancy of a property where the previous tenancy was a regulated tenancy under the Rent (Scotland) Act 1984
The tribunal would be required to consider whether it is reasonable to delay the enforcement of evictions to prevent particular hardship or harm to tenants. Some grounds would be exempt from this requirement such as anti-social/criminal behaviour and abandonment. The tribunal has always had the power to delay the enforcement of evictions but has rarely used that power in the past.
This measure would apply to all types of tenancies, in both the private and social rented sectors i.e. those under The Rent (Scotland) Act 1984, The Housing (Scotland) Act 1988, The Housing (Scotland) Act 2001, and The Private Housing (Tenancies) (Scotland) Act 2016.
The plans would introduce a specific requirement on both the First-tier Tribunal for Scotland (Housing and Property Chamber) and the Scottish Courts, that where an eviction order/decree is granted, they should consider whether a delay to the enforcement of that eviction should occur due to the circumstances of the case.
Factors that the Tribunal and Court would consider in deciding if it is reasonable to delay enforcement could include
- Whether any seasonal pressures apply, including but not limited to winter, or other relevant circumstances.
- Whether enforcement taking place during a particular period would cause financial hardship or a negative impact on the health or long-term disability of a tenant or a member of the tenant’s household.
- Whether a delay to enforcement would detrimentally affect the landlords’ health or long-term disability or cause financial hardship.
GREATER FLEXIBILITY TO PERSONALISE RENTED HOMES
Proposals put forward to allow tenants more freedom to make their rented home their own would result in two categories of changes that private tenants with a PRT could make to personalise their home:
- Category 1: No approval from landlord required – private tenants would be allowed to make certain minor modifications to the let property without prior agreement from their landlord. For example, putting pictures and posters on walls.
- Category 2: Right to request and landlord cannot unreasonably refuse – private tenants would have a new right to request to make certain larger changes to the let property and for their request to not to be unreasonably refused, where they had lived in the let property for a set period of time. For example, painting the walls inside the property a different colour. In agreeing to a change, a landlord would be able to set conditions for approval but only where it is reasonable for them to do so.
Tenants would still be able to ask for more substantial modifications to the property’s fixtures and fittings, but these would continue to be at the discretion of the landlord as is currently the case. This means the landlord could refuse modifications that did not fall into either category 1 or 2 above without any test of reasonableness.
GREATER FLEXIBILITY TO KEEP PETS
This change would give tenants with a private residential tenancy the right to request to keep a pet and not be unreasonably refused.
Reasonable grounds for refusal would be:
- The property is unsuitable for the type or number of pets requested
- The animal is listed in the Schedule to The Dangerous Wild Animals Act 1976.
- The animals are being kept for commercial purposes
Landlords would be entitled to set conditions for approval, such as requiring an additional amount of deposit.
CHANGES TO ENDING JOINT TENANCIES
The Private Housing (Tenancies)(Scotland)Act 2016 set out that a joint tenancy could be ended so that all joint tenants must agree to give notice. This has resulted in situations where people can be trapped in a tenancy if an agreement cannot be reached. The Scottish Government is considering altering this to allow a joint tenant to give the other joint tenants 2 months’ notice of their intention to end the tenancy. At the end of the 2-month period, if no agreement has been reached, the tenant who wants to leave could then serve the required final notice to leave (28 days) to the landlord. This would then end the tenancy for all tenants.
UNCLAIMED TENANCY DEPOSITS
Monitoring of the three approved deposit schemes in Scotland highlighted that there are around £4 million of unclaimed tenant deposit funds. The Government wants to ensure that a tenant can reclaim their funds wherever possible, and so they propose a requirement for deposit schemes to collect alternative contact details when a deposit is lodged and to set out a process for funds to be safeguarded if they cannot be returned within five years, so the tenant can reclaim them later.
These proposals have been viewed by many as a direct attack on the PRS in Scotland with rent controls being the most contentious. They are portrayed as severely impacting the abilities of Landlords to generate a return from their investments.
So, at this point perhaps it is worth adding some context and perspective. It is very easy to focus on the hype and negatives rather than standing back, removing the emotion to arrive at a properly informed view of the situation.
We will focus on Edinburgh as this is our core market, but the situation across Scotland is much the same as that of the capital.
Let’s start with rents, according to data from Citylets the average rent in Edinburgh in Q1 2008 was £747 it now stands at £1,372 this equates to an increase of 83.6%.
Up until around the beginning of 2013 the av rental uplift figure for new tenancies tracked inflation based on the CPI (Consumer Price Index). Since then rental inflation has accelerated way beyond CPI and although landlords’ costs have certainly increased rental increases continue to run far above inflation. Rental price growth for new tenancies in the capital currently stands at 13% year on year (YOY) while CPI stands at 6.7%.
Now let’s take look at house prices, according to the Registers of Scotland the mean residential property price for Edinburgh in 2007 was £212,336 it now stands at £333,000 so an uplift of nearly 57%.
Up until recently interest rates had dropped to historic lows, this means that until relatively recently landlords have experienced very low borrowing costs while rents have risen to historic highs.
Historical UK Interest Rate
It is perhaps worth noting the average mortgage rate over the last 25 years is 5.62%. The low rates we have seen over recent years are an anomaly.
The current market situation is one of an ongoing supply-demand imbalance, this has driven competition for rental property amongst tenants to feverish levels driving the average void time in the city down from circa 30 days to 18.
So, in short over the last 10 years or so landlords, we would argue, have actually seen an increase in their margins.
Let’s also consider the situation for tenants, In May to July 2023, annual growth in regular pay (excluding bonuses) was 7.8%, the same as the previous three-month period and the highest regular annual growth rate since comparable records began in 2001. According to Homelet tenants are spending 25.9% of their income on rent in Scotland and this is rising.
Affordability is becoming a critical problem and one that really should concern all landlords. Further rental inflation on this trajectory would make the market unsustainable for tenants. The risk is the market becomes too volatile for landlords to rely on receiving rents as a direct result of unaffordability. This is neither good for tenants nor landlords.
In our opinion, the majority of the proposed changes seem to be workable as long as there are protections in place for landlords.
We would like to see mechanisms in place for rent increases linked to inflation where required. Added to this there also needs to be an ability to increase rents post improvements so landlords remain incentivised to improve stock.
As we have seen Private Sector Rents across the UK and especially in Edinburgh have increased hugely over the last decade or so and have outstripped inflation. There have of course been increases for landlords which must be taken into account. But where properties are currently achieving rents in the upper quartile for the type of property and area then we firmly believe the market remains a good place to invest. This is especially true when the rental yield plus capital appreciation on the property is taken into account.