Yesterday the Scottish Government published the much anticipated Private Housing (Tenancies) Bill and at the same time key figures in the private rental sector met in Edinburgh for a day long conference. While the prospect of more regulation for this sector has been on the cards for some time, the publication of the Bill has given us a broad outline as to what to expect. The Housing Minister, Margaret Burgess, is hopeful that the changes will give tenants “security and stability in their home and community” and that landlords will be reassured that “their tenants will treat their property as a long term home”.

At the PRS seminar yesterday in Edinburgh, much of the known detail of the Bill was discussed and it was clear that whilst there are concerns, the prospects for PRS in Scotland are strong and there are a lot of serious players already involved or looking to become involved.

The highlights of the Bill include:

  • The removal of the “no fault” ground for repossession at the end of the term of a lease.
  • Modernising the grounds for repossession. This will now include 16 grounds, some of which are new to the Bill.
  • Introducing a model tenancy agreement.
  • The Scottish Ministers will be able to declare an area a “Rent Pressure Zone” which will limit rent increases in that area.  The limit cannot be less than CPI plus 1%. The local authority must apply to the Scottish Ministers in order for them to use this discretionary power.
  • Rents can only be increased once in every 12 month period and only with 3 month’s notice.
  • Tenants will be able to refer rent increases that are above average market rents to an adjudicator.

So, should the industry be concerned?

There are many who feel that regulation that interferes with the freedom to contract is generally a bad thing and it can have unintended negative consequences.  In this instance the main concern of the industry (and voiced in my article last month) is that additional regulation could make Scotland less attractive for investment compared to the rest of the UK, resulting in less construction, less homes and higher prices.  This remains a very real concern as does the uncertainty it creates for investors.

It is important to be mindful that by its very nature PRS deals with individuals’ homes and lives, and their security and wellbeing is of paramount importance.  We would argue that the best way to ensure high quality homes and reasonable rents is not through regulation, but by having an active, well funded and competitive sector.  However it clear that regulation is coming and it is unavoidable. It is therefore necessary to look at the terms of the Bill as it stands and some of the potential consequences.

Security of Tenure

Long term leases are on the face of it no bad thing for investors. Long leases are after all a positive thing in the commercial sector – generally the longer the lease the better the investment value.  In the private rental sector, in practice, most landlords would not wish to kick out good tenants and with the ability to raise rents annually there should be no issue with rents becoming stagnant. Of course, the position as set out in the Bill is not really analogous with a commercial lease, as under the Bill we now effectively have a tenant-only break option, which could allow leases to run in perpetuity. In Scotland a residential lease cannot run for more than 20 years (with some limited exceptions); a rule which we have recently been discussing with clients in the public and private sector, which we believe is outdated and prevents fairly standard funding models that are commonplace south of the border. We feel the Scottish Government have missed a real opportunity to remove this outdated and unnecessary rule at the same time as they impose further regulation on residential tenancies. Instead we have a situation where, in theory at least, a residential tenancy could now last for more than 20 years, but only at the instance of the tenant.

For the student housing operator this level of security of tenure presents significant issues. A student accommodation operator will generally rent units for the academic term relying on the fact that a tenancy will terminate at either the end of term (to allow summer lets) or at the end of the summer (to allow new lettings for the coming year). Student lets are not exempt from the new rules around security of tenure – therefore how can a student operator advertise and let units prior to the commencement of a new term, when they do not know if they will be vacant?  What if a student decides to stay on for the summer and then a couple more months at the start of a new term, before moving in with some friends? The operator will be left with a void they cannot fill as they will be midway through the academic term. This goes to heart of the student accommodation model, which has been working well for years.

The solution should be straightforward and obvious - a 17th ground for repossession specific to student lets that allows the landlord to get the property back at the end of the academic year.

Rent Controls

The anticipated introduction of rent controls was spreading fear and alarm throughout the sector; however the localised rent increase caps that are coming appear to be less harsh than what could have been.

As always the devil will be in the detail, but we are fairly optimistic that this level of control will not dissuade investment in Scotland. However we do wonder whether it will make any practical difference and in fact could have the opposite effect and increase rent for 3 main reasons:

Firstly it has been suggested that most landlords often do not raise rents during a tenancy, but if rents are capped to CPI +1% in an area this could be seen as a licence for landlords who would not normally increase their rents, to raise them to the level of the cap;

Secondly new lets are not subject to any cap, so if a landlord is in a rent pressure area or an area that it likely to be designated as one, it is perhaps likely that they will seek to impose as high a rent as possible at the outset, given their inability (a) to remove tenants and (b) to raise rents beyond the cap; and

Thirdly it could cause developers to shy away from the rent control areas due to the limited prospects for rental growth, resulting in less supply and thereby exacerbating the original problem.

In fact I wonder if the very act of publishing the Bill has encouraged landlords to look to push up their rents as a matter of priority.

Finally to finish on a positive note - whilst not a part of the Bill the Scottish Government yesterday also promised to work with the private rental sector to explore the introduction of a rental income guarantee mechanism. It is early days and once again there is very little detail, but this is something that should certainly be welcomed.  In this respect the Scottish Government has clearly listened to the sector, and hopefully they will continue to do so as the Bill makes its way through parliament.

We will, of course, be following the progress of the Bill closely until it is enacted in law and as we continue to advise new entrants and established players in what is still an exciting and emerging sector.