A change for buy-to-let mortgage lenders in Scotland: The private residential tenancy
An overhaul of the forms of tenancy for private rented housing in Scotland is on the near horizon and mortgage lenders in the Scottish buy-to-let sector will need to update their documentation and processes in preparation for the new regime.
Private Residential Tenancy
The existing types of tenancy for private rented housing in Scotland are due to be replaced later this year with a new form – the private residential tenancy – under legislation enacted by the Scottish Parliament.
Introduced by the Private Housing (Tenancies) (Scotland) Act 2016, this modernised form of tenancy rebalances the rights and responsibilities of landlord and tenants, with enhanced protection for tenants, and will have a notable impact on the buy-to-let sector in Scotland.
The Scottish Government is expected to bring the Act into force this December. Once commenced, it will no longer be possible to create the existing types of tenancy – the most common form being the ’short assured tenancy’ – and all new tenancies of private housing in Scotland will have to be created as private residential tenancies.
Lenders who provide buy-to-let mortgages in Scotland will need to revisit their origination and servicing processes and implement any necessary updates to their legal documentation ahead of the new requirements coming into force.
Greater security of tenure for tenants
One of the most important differences under the new regime will be the absence of the ‘no fault’ ground for removal, which previously gave landlords the option to remove a tenant at the end of the tenancy solely on the basis that the agreed contractual term of the tenancy had come to an end.
Under the new legislation, landlords will have to satisfy one of 18 grounds for recovering possession that are set out in the Act, in order to bring a private residential tenancy to an end. These include, for example:
- if the property is required for one of a limited number of other specified purposes, such as where the landlord intends to sell or refurbish the property;
- if justified by the tenant’s conduct, such as where the tenant has breached the tenancy agreement or been in rent arrears for three or more consecutive months; or
- if there are legal impediments to the tenancy continuing, such as where a landlord registration or licence lapses or is revoked.
Of key importance for mortgage lenders is the eviction ground which allows the recovery of possession where the property is subject to a heritable security (i.e. a legal mortgage) and the mortgage lender requires the tenant to leave the property in order to dispose of it with vacant possession under the lender’s power of sale.
Restrictions on landlords increasing rent
When a landlord under a private residential tenancy wishes to increase the rent payable by the tenant, they will have to serve a ‘rent-increase notice’ on the tenant. The new legislation will only allow landlords to serve such a notice once every 12 months. If the tenant does not agree to the increase, then they may refer the increase to a rent officer who has the power to determine the rent.
The Act will also introduce a mechanism for local authorities to put the brakes on spiralling rents by asking the Scottish Government to designate an area as a ‘rent pressure zone’. A designation lasts for up to 5 years and during that period landlords in that area will only be able to increase the rent payable by a tenant under a private residential tenancy by a set percentage. The relevant percentage for each area will be prescribed by statutory instrument when designating that area as a rent pressure zone, but will not be less than the Consumer Prices Index (CPI) plus 1%.
Rebalancing of rights and responsibilities
The policy goal behind these changes is to provide tenants with additional security and greater certainty over the rent that they will pay when taking a tenancy of a property.
The removal of the ’no fault’ ground for eviction is a marked increase in the protection for tenants and a clear departure from the status quo where landlords can recover possession under short assured tenancies at the end of contractual term of the tenancy.
Impact on borrowing
Landlords whose properties are in areas which are designated as rent pressure zones will have limited ability to put up rents in order to counteract increases in their outgoings – including any changes in monthly payments resulting from interest rate movements under variable-rate mortgages.
In addition, buy-to-let portfolios with significant exposure to properties in areas designated as rent pressure zones could experience a decrease in capital value, although the time-limited nature of such designations combined with the ability of landlords to recover possession and re-let at a higher rent, if one of the 18 eviction grounds is met, will be a mitigating factor.
Updates to product documentation
At present, mortgage offers, terms and conditions, and other associated legal documents, such as consents to let, will commonly require that borrowers under buy-to-let mortgages enter into tenancies in the form of a ’short assured tenancy’ if the property is a private house in Scotland. These requirements will need to be updated ahead of the legislation coming into force and, to ensure a smooth transition to the new regime, lenders should now be turning their attention to the process of identifying where updates to their product documentation will be needed and taking steps to implement those changes.
For further information or advice on any of the issues discussed in this briefing note, please get in touch with your usual Shepherd and Wedderburn contact.