Out-Law / Your Daily Need-To-Know
Out-Law Analysis 5 min. read
Rent controls may be deterring investment in Scotland’s private rented sector
16 Apr 2024, 3:06 pm
The Scottish government’s proposal to introduce permanent rent controls to protect tenants concerned about rent increases will not sufficiently address the issues facing the private rented sector, as evidence suggests potentially billions of pounds worth of investment into building new homes is being held back due to these measures.
The Scottish government has introduced a transitional rent control framework as a temporary measure to keep rental increases in the private rented sector at bay while the new Housing (Scotland) Bill that will impose permanent rent controls is still being finalised. A draft Housing Bill is expected to be introduced in the Scottish Parliament by summer 2024 and come into force in 2025.
The transitional regulations are set to protect tenants concerned about rent increases following the ending of the emergency rent cap and eviction ban. These were first introduced in October 2022 to help private tenants with the cost of living crisis, and will end on 31 March.
The transitional rent control regime
From 1 April, the process for rent adjudication will temporarily be modified for one year, with the government having the ability to extend this change for a further year.
The transitional regime allows any tenant who wishes to dispute a rent increase notice to apply for rent adjudication. In such cases, Rent Service Scotland (RSS) or the First-tier Tribunal (FTT) will set rent based on the lowest of:
- the open market rate;
- the rent requested by the landlord; or
- a comparator based on the difference between the market rate and current rent, which will be calculated as below.
|
Difference between current rent and open market rent |
Amount by which landlord can increase the rent |
Note |
|
6% or less |
Up to 6%, provided this does not take the rent above the market level |
RSS and FTT cannot set a higher rent than that requested by the landlord |
|
More than 6% but less than 24%
|
6% plus an additional 0.33% for each percent that the gap between the current rent and the market rent exceeds 6%, provided that the total increase does not exceed 12% of the current rent |
As above |
|
24% or more
|
A maximum increase of 12% |
As above |
The medium-to-long term impact
For tenants, while at a superficial level a control on rent may seem beneficial, over the medium to long term these measures are likely to continue to deter much needed investment into the private residential market, which leads to an even greater undersupply of good quality housing stock. This will result in rents being driven even higher, which defeats the aims of the measures.
For landlords, tenants, the RSS and FTT, the challenge posed by the transitional regulations will be establishing what the open market rent for a property actually is. It is not clear how that is to be assessed and there is still a lack of robust and reliable rental data needed to allow these measures to operate effectively. The risk of a backlog being created on adjudicated decisions could add further challenges to the market.
The investors and developers who could help to address the undersupply issue by investing in Scotland and creating hundreds of jobs in the process need certainty on the regulatory framework and reasons to invest in Scotland when compared to other parts of the UK.
Next steps for the Housing (Scotland) Bill
In response to the outcome from the New Deal for Tenants consultation and the Housing to 2040 strategy, the Scottish government has introduced a draft Housing Bill.
The Bill covers:
- a new deal for tenants – to deliver stronger rights for tenants, greater protection from eviction and a national system of rent controls for the private rented sector;
- domestic abuse – a new requirement for all social landlords to have a domestic abuse policy in place; and
- homelessness prevention duty – a new duty will be applied to a range of public bodies and landlords requiring them to take specific actions to reduce the risk of homelessness.
The rent controls in the bill include between-tenancy as well as within-tenancy rent controls. In contrast, the emergency rent cap that will end on 31 March 2024 only covers within-tenancy rent increases.
Whilst the Scottish government is consulting on the contents of the new Housing Bill, stakeholders and investors in the private rented sector have warned that potentially billions of pounds worth of investment is being lost in the meantime, meaning thousands of new homes are not being built. The government should heed the concerns of those that can help solve the housing crisis and take positive steps to stimulate investment into Scotland. The transitional measures and pending legislation on rent controls have led to continuing uncertainty that is exacerbating the problems facing the housing market.
More modern, energy efficient, sustainable and high-quality rented properties need to be built to meet rental demand. Creating a framework which encourages this investment will have the added benefit of helping the country meet its net zero ambitions.
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