Rent Controls under the Housing (Scotland) Bill 2024

Earlier this year I wrote an article on the Housing (Scotland) Bill 2024; the article concentrated more on the provisions in Part 1 of the Bill which related to the setting up of rent control areas because at the time the Bill was scant in detail on the provisions which would relate to rent controls.  When introduced at the end of March, the Bill merely provided that rent payable under a private residential tenancy (“PRT”) in a rent control area could not be increased by more than an amount to be specified in regulations to follow which might include a specified percentage, an amount falling within a specified range, or an amount calculated with a reference to a number of specified factors or criteria (including a formula).  The Bill also provided that rent rises would be capped both during and in between tenancies and that rent could not be increased more than once in every 12-month period with no rent increase being permitted during the first year of any lease.

Part 1 of the Bill has, since its introduction, certainly created the most controversy – tenants are understandably proponents of the provisions, whereas landlords are concerned about the impact the proposals may have on their investments.

Since the introduction of the Bill and my article, the political landscape in Scotland has changed considerably – the Green Party (who were great supporters of the rent control area and rent cap proposals in the Bill) are no longer part of the Government as a result of the Bute House Agreement falling apart and the First Minister at the time of the introduction of the Bill, Humza Yousaf, has now been replaced by John Swinney.  The leanings of the political landscape certainly appear to be moving towards a more central ground in terms of considering the provisions in the Bill relating to rent control and that was evidenced by the statement made by the Housing Minister, Paul McLennan, on 31 October – in that statement to Parliament the Minister stated that he sought to provide further certainty on how rent controls will be implemented and capped in areas where rent controls are to be applied.  He reiterated that the Government remained committed to delivering long-term rent control to stabilise rents where needed to protect the social and economic interests of tenants who rely on the private rented sector for a home, but recognised that that had to be dealt with in a balanced way that provides appropriate protection for the property rights of landlords and in a way that continues to support investment into private rented housing.  He therefore proposed an amendment to the original terms of the Bill to be brought forward at Stage 2 of the Bill passing through Parliament to recognise the need to strike a balance between the interests of both tenants and landlords.

The proposed amendments at Stage 2 are set out that, where a rent control area is designated, a cap would apply to rent increases, to be set at a level of CPI + 1%, to a maximum increase of 6%.  The Minister went on to state that this rent cap would apply to rent increases both during the term of a tenancy and also between tenancies.

Not surprisingly, the proposed capped rent increases have still not satisfied everyone – the Scottish Greens criticised the size of the proposed cap, stating that it did not give tenants in the private rented sector the stability they had been promised and that they did not believe that the proposals would “tackle the significant unaffordability of rent in many areas across the country”.  Landlord organisations were generally happier with the statement made by the Minister, with the Scottish Property Federation stating that “the statement by the Housing Minister offers a welcome clarification on the amendment to the rent control measures in the Housing Bill.  The index related measure with a cap aligns closely with the suggestions made by us and several other organisations in May”.  The Association for Rental Living (ARL) however stated that “the ARL opposes rent caps in any form.  Such controls lower investor confidence and inhibit the ability to deliver customer community and investor value” and went on to say that “investors require the certainty of stable returns to enable the substantial investment they can bring to deliver quality homes in Scotland.  If rent control is in play it can disrupt and harm the certainty of those returns”.

So, the Minister’s statement has brought some much-needed clarification and added meat to the initial bare-bone proposals for rent control set out when the Bill was introduced back in March, but clearly there is still resistance against the whole prospect of rent control areas and rent increase caps.  Beyond that generic argument around the basic principles of what is being proposed by the Bill in Part 1, there are a couple of further issues which still require clarification and discussion – the first is the proposal that rent increases will still not be permitted beyond the capped amount in between leases of private residential properties and the second is the question of what types of properties will be exempt from any proposed rent control areas and rent caps.

In respect of the first point, landlords remain concerned that the rent restrictions proposed in the Bill will apply between tenancies – that gap between leases is normally when a landlord will incur potentially significant capital expenditure in redecorating/upgrading their properties in readiness for a new incoming tenant.  If the provisions for rent control apply so that no increases can be made in between tenancies, then that potentially could lead to landlords being less willing to incur that capital expenditure which in turn would potentially lead to a housing stock in poor condition.  It may be that the Government will have to look at bringing in some additional provisions allowing some level of rent increase in between tenancies to ensure that landlords are not deterred from incurring expenditure in between tenancies.

The second point that still requires clarification was recognised in the Minister’s October statement and relates to the question of what types of property will be exempt from the rent control measures.  It is clear from the terms of the original Bill that they are designed to refer to PRTs, but in the Minister’s October statement he commented that “recognising the role [that] social landlords play through offering properties at mid-market rent levels to support those in low incomes, it has been helpful to hear….how rent controls will affect those registered social landlords who offer mid-market provision”  and went on to state that “to respond to the calls for further clarity in respect of these aspects, a consultation on how these powers [to exempt certain types of property] may be used will be brought forward in the early spring of 2025”.

This declaration of a further consultation on potential property exemptions means that those potentially wanting to invest in building properties in Scotland still face uncertainty as to whether or not their properties once completed will be subject to the rent control rules and so may well stifle investment in the property sector until the consultation process in Spring next year is completed and we have clarity as to what will or will not be considered an exempt property for the purposes of the rent control provisions in the Bill.  The Minister’s specific references in his October statement to mid-market rental (“MMR”) properties does seem to suggest that that category of property is likely to be exempted from the rent control provisions, which seems reasonable given that such properties are already leased at a rent below open market levels.  In support of a potential exemption for such MMR properties, the ‘lead’ committee on the draft Housing Bill, the Local Government, Housing and Planning Committee, has now published their official report into the Bill. Among its recommendations, they conclude: “[T]here is an existing strong case for mid-market rent properties to be excluded from the rent control provisions in the Bill and recommends that the Scottish Government brings forward appropriate amendments at Stage 2. Once again, the Committee would reiterate the importance of providing certainty about the Bill’s measures in order to mitigate negative consequences for the rental property sector, and ultimately tenants themselves. The Scottish Government should provide transparency about its policy decisions as soon as possible and not wait until Stage 2 or 3 of the Bill process”.

The question of what is to be an exempt form of property is also a particular concern for those potentially interested in developing build to rent (“BTR”) schemes in Scotland – a number of investors who have already successfully invested in BTR properties in Scotland have put further schemes on hold or abandoned them altogether according to the Association for Rental Living who go on to state that “around £2.5 billion of investment is now viewed as at risk”.

At the time of writing this article I note that NUS Scotland and supporters are to be sending an open letter to the Housing Minister, asking him to take action to ensure the consideration of potential exempt properties in the Bill takes account of the interest of students and apprentices so that the rent controls and tenant protection regulations in the Bill should be applied to purpose built student accommodation (PBSA) on an equal basis to the private rented sector – NUS UK is releasing a survey stating that in Scotland, 19% of respondents have had to use a food bank and over 56% have gone without a meal to pay housing costs.  However, as with BTR properties, if at the end of the consultation it is decided not to exempt PBSA properties from the rent control provisions in the Bill that may well lead to diminished interest in investing in such forms of property, which to date has been a boom sector in Scotland due to a significant lack of quality student accommodation being available.

In summary, the Housing Minister’s statement confirming the proposed method of calculating rent increases by CPI and with a cap has certainly given increased confidence to both tenant and landlord organisations, where the original terms of the Bill were bereft of detail.  The question of whether rent increases should apply between tenancies still remains an issue for landlords and if not addressed will potentially mean that they will not invest in improving their stock between tenancies which in turn will have an adverse impact on tenants who, although having the benefit of lower rents when taking on a new lease,  will suffer from a poorer condition of housing stock to choose from.  With regard to exemptions from the rent control provisions, certainty as to what will or will not be an exempt property will assist the market moving forward and as such the consultation in Spring is welcome, although it perhaps would have been better if that had been carried out at an earlier stage; the question of what properties should be exempt from the provisions in the Bill has been part of discussions from the Bill’s initial introduction in March, but as it is quite possible the Bill will be enacted before the results of the Spring consultation on this point are known then that sadly means that details of any exemptions may have to follow post-enactment of the Bill, through secondary legislation.