PRS Reform – Possible Rent Control and the Challenges for the Student Accommodation Sector

The Scottish Government has recently published a draft Bill (the Private Housing (Tenancies) (Scotland) Bill) which, if passed, will radically reform the law relating to the letting of residential property in Scotland. This article focuses on two proposed reforms: Rent Control and the Abolition of the “no fault” ground for regaining possession.

14 October 2015

The Scottish Government has recently published a draft Bill (the Private Housing (Tenancies) (Scotland) Bill) which, if passed, will radically reform the law relating to the letting of residential property in Scotland. 

The Bill follows a series of public consultations on the proposed reforms, but the publication of the Bill now provides us with the detail of what is proposed.

In the lead up to the publication of the Bill, the focus of the media and industry bodies has been firmly placed on two main proposed reforms, namely:-

  • The possibility of future “rent control” on rents payable under residential tenancies; and
  • The abolition of the “no fault” ground for recovering possession from a residential tenant after the expiry of the agreed lease term.

This article will focus on these two proposed reforms.  

Rent Control – The detail
Under the proposed reforms, a landlord of residential property will have the right to review the rent to the open market rent, but not more frequently than once in any 12 month period. 

This right to review the rent is, however, subject to the possibility of the Scottish Government in future introducing a “cap” on rent review increases within a designated “rent pressure zone”.  We will look at the steps that would first need to be undertaken before such rent controls could be introduced, however in the first instance it is important to note that the controls would only apply to the review of rent by a landlord under an existing lease (i.e. the cap would only protect a sitting tenant).  The cap would therefore not limit the rent which might be agreed on a new lease with a new tenant (where, in the normal way, the parties would be free to agree any rental level they desire).

The “Steps” to Rent Control
Before rent control arrangements could be introduced to restrict rent review increases, various steps would first need to be followed:

Step 1: A local authority (and only a local authority) would first need to make an application to the Scottish Ministers asking that all or part of the authority’s area be designated as a “rent pressure zone” (to which the cap would apply). 

Step 2: The Scottish Ministers would (subject to Steps 3 and 4 below) then have the power to designate the area in question as a “rent pressure zone”, and determine a “cap” to apply to any proposed increases of rent by landlords within the rent pressure zone.

This “cap” would be:  “CPI + 1 percentage point + N”.

In the above formula, “CPI” is generally the percentage increase in the Consumer Price Index over the period from the date of the last rent increase under the tenancy in question to the date of the proposed new rent increase. Where there has previously been no rent increase, “CPI” is generally the percentage increase in the Consumer Price Index over the period from the start of the tenancy in question to the date of the proposed new rent increase.

The figure to represent “N” in the above formula is the number of percentage points (if any) that the Scottish Ministers deem appropriate in respect of the rent pressure zone.  It can therefore be seen that any future cap on rent review increases would be no lower than CPI plus one percentage point.   

Step 3: Before introducing any cap on reviewed rents as above, the Scottish Ministers would first need to undertake a consultation process with representatives of both landlords and tenants.

Step 4:  Finally, the Scottish Ministers would need to exhibit to the Scottish Parliament evidence which leads them to believe that:

  • rents payable within the proposed rent pressure zone are rising by too much,
  • the rent rises within the proposed zone are causing undue hardship to tenants, and
  • the local authority within whose area the proposed zone lies is coming under increasing pressure to provide housing or subsidise the cost of housing as a consequence of the rent rises within the proposed zone.

It can therefore be seen that the circumstances in which rent controls could apply are limited, and that in the “worst case” scenario (from an investor’s perspective), rent review increases would be limited to CPI plus one percentage point. Any “cap” introduced via the four steps mentioned above would endure for a maximum period of five years (if not revoked sooner).

The reaction from the property market is awaited. 

Abolition of the “no fault” ground for regaining possession
As mentioned above, another proposed reform attracting significant attention is the proposal that a landlord of residential property will no longer have the ability to regain possession of their property simply because the tenancy has come to its end date (otherwise known as the “no-fault” ground for recovery of possession).  Instead, a landlord will be required to identify one of sixteen specific “eviction grounds” to justify removing the tenant.  If the landlord cannot identify one of these “eviction grounds”, then the tenant cannot be asked to leave the property (notwithstanding that the agreed lease term has ended).  The specific eviction grounds are broadly as follows:

  • The landlord intends to sell the property;
  • The landlord’s lender intends to sell the property;
  • The landlord intends to carry out significant disruptive works to the property;
  • The landlord or a family member intends to live in the property;
  • The landlord intends to use the property for another purpose other than housing;
  • The property is required for religious purposes;
  • The tenancy was given to an employee and the tenant is no longer an employee;
  • The property is purpose-built student accommodation and the tenant is no longer a student;
  • The tenant is not occupying the property as their home;
  • The tenant has materially breached their tenancy agreement;
  • The tenant is in rent arrears for three or more consecutive months;
  • Criminal behaviour;
  • The tenant has acted in an anti-social manner;
  • The landlord’s local authority registration has been withdrawn or refused;
  • The landlord’s HMO licence has been revoked; or
  • An overcrowding statutory notice has been served on the landlord.

The above list of eviction grounds is intended to represent all of the reasonable circumstances in which a landlord might seek to recover possession of a residential property from its tenant.

The law of unintended consequences – The student accommodation sector
One of the main objections that landlord bodies have made to the proposed abolition of the “no fault” ground for repossession is that this may lead to unintended consequences.

For example, one can see that the inability to agree with a student a finite nine month tenancy (to align with the university academic year) will present challenges for private investors operating in the student accommodation sector. The following issues may arise in this context:

  • As can be seen from the above list of eviction grounds, there is no ground which allows a landlord to recover possession from a student tenant simply because the landlord wishes to rent the property out as a “holiday let”  during the summer (e.g. during the Edinburgh Festival).  This may result in the loss of important premium rental income for some landlords.  In their Final Business and Regulatory Impact Assessment for the Bill, the Scottish Government recognise the risk of this possible loss of income to private landlords, but note that “We cannot quantify this cost as there are no robust statistics available on the number of landlords that operate in this way”;
  • Many private providers of student accommodation look to secure lettings several months in advance of the start of an academic year (whether by way of advertising “direct lets” with students or nomination agreements with universities).  For example, some student housing providers will be looking now to secure rental income for the 2016/2017 academic year.  However, the proposed reforms, if implemented today, would mean that the existing student tenants could not be asked to leave at the end of the 2015/2016 academic year (unless the student accommodation is “purpose built” and the tenant in question is no longer a student). As a consequence, the student housing providers would be unable to guarantee to new incoming students or universities the availability of a set number of beds in their accommodation at the start of the 2016/2017 academic year.

It is worth noting that the Bill allows universities and colleges to grant finite short term tenancies to their students which align with their academic year. In contrast to private investors, universities and colleges will therefore be entitled to remove their student tenants at the end of the agreed lease term (i.e. at the end of the academic year).  Education institutions will therefore be provided with the flexibility to properly manage their properties whereas private student accommodation investors (who often work alongside such education institutions) will not be provided with the same level of control.

It remains to be seen how the student accommodation sector will react to the detail of these proposals, however it is anticipated that the sector will press for adjustments to the proposals.  If the proposals do not adequately accommodate the letting of student accommodation by private investors, then this may not only adversely affect private investment in the sector, but it may also have a consequential adverse effect on education institutions (who rely on privately owned student accommodation to accommodate their students). 

Calls for views on the Private Housing (Tenancies) (Scotland) Bill
It should be borne in mind that the Private Housing (Tenancies) (Scotland) Bill is, at this point in time, only a “Bill”.  It is not yet law.

The Scottish Government has now invited further comments on the Bill, with submissions being made no later than Thursday, 19 November 2015.  If you are interested in hearing more about the proposed Bill or would like our assistance with a submission to the Scottish Government on the proposed reforms, please do not hesitate to contact one of our real estate team.