A perfect rental storm in Scotland

On 6 October, radical emergency legislation was passed by the Scottish parliament to support tenants through the current cost of living crisis. It introduces a rent cap and a moratorium on evictions across the private rented, social housing, and student accommodation sectors in Scotland. The Cost of Living (Tenant Protection) (Scotland) Act 2022 will, with limited exceptions, fix rent increases for existing tenancies at 0%, effective from 6 September 2022 until 31 March 2023, with the possibility of two further six-month extensions until 31 March 2024. The Act requires the Scottish ministers to undertake three-monthly reviews to consider the extent to which the measures remain necessary and proportionate in connection with the cost of living, taking account of representations from those affected – and to report their findings to the Scottish parliament in respect of any proposals to modify the measures and before any extensions can be made. Limited exceptions and safeguards for landlords Landlords in the private rented sector can apply to increase rents above the 0% cap by up to a maximum of 3% – but only where they can prove that the rise represents up to 50% of increased “prescribed property costs” in the six months before the date of application. These prescribed property costs can be modified by regulations, but they currently include mortgage increases and insurance costs (although general buildings and contents insurance are excluded, which questions the merit of including insurance costs at all) and service costs (undefined) paid for by the landlord but for which the tenant is responsible under the tenancy agreement. Any increase needs to be approved by a rent officer, and both tenants and landlords can appeal the rent officer’s decision to the First-tier Tribunal for Scotland for a final decision. There are also limited exceptions to the moratorium on evictions. Permitted grounds for eviction include anti-social and criminal behaviour, as well as substantive rent arrears of six months or more in the PRS. Property owners in the PRS can also apply to the FTT for an eviction in order to sell or live in their property (as their only or principal home), but in each case only to alleviate proven financial hardship. Student housing again in the spotlight The UK’s student housing sector has undergone an extraordinary transformation to become a mainstream asset class – but the pandemic hit the sector hard, with Scotland’s purpose-built student accommodation sector dealt a particularly harsh blow by emergency Coronavirus legislation entitling students to terminate their tenancies on 28 days’ notice. 2022/23 has been a bumper year for university applications, but Scotland now faces a student housing crisis as a consequence, with students forced to live in hostels and Airbnb accommodation, face long commutes, or even abandon their studies due to the chronic shortage of available accommodation – now amid warnings that this new legislation will only fuel the crisis. That said, the Act introduces different measures for student tenancies. The rent cap provisions apply from royal assent (not 6 September) and, while they also apply only to existing tenancies (not starting rents under new tenancies), PBSA rent prices are already fixed for the current academic year. PBSA landlords are not entitled to increase rents by up to 3% to cover increases in prescribed property costs, but few (if any) PBSA providers make “in-year” rent increases anyway. Exceptions to the moratorium on evictions are restricted to anti-social and criminal behaviour – but other exceptions for landlords in the PRS (such as the need to live in the property) do not apply. However, the all-inclusive nature of its rents exposes the PBSA sector to having to fund spiralling energy and other operational costs, with in-year recovery restricted to “excessive use of utilities”, which is not defined. Impact As its title suggests, the new legislation is heavily weighted in tenants’ favour, providing them with stability – but with very few safeguards for landlords and new investors. The feedback is stark. While some investors pause for reflection, many owners of existing rental properties are already leaving the market, and pipeline new build projects are being abandoned where the measures are seen as a significant threat. Whatever your view, there is no question that this Act puts Scotland’s purpose-built rental sector at a clear disadvantage. And this at a time when demand for rental homes and student accommodation in Scotland is at an all-time high, with government housebuilding targets far from being met, and in spite of research that rent controls seldom work as intended and that the interests of tenants are best protected by increasing supply. What next? With the ink barely dry on the Act, there are already calls for urgent consultation and a full and proper scrutiny when its provisions are first reviewed at the end of this year – particularly as the Q3 Scottish housing market review (published a week after the Act was passed) shows the estimated average rise in PRS rents to be less than highlighted during parliamentary debate on the new legislation. Our PRS and PBSA sectors have proved their resilience many times over – but with the scars of the pandemic unhealed, they are now wrestling increased debt build and energy costs, fast-evolving building safety regulations, net-zero cost and reputational pressures, and the (as yet) unknown outcome of Scotland’s PBSA sector review. And while this new legislation is only temporary, the current uncertainty as to how long it will bite and unease as to what might happen next will further test that resilience. Margaret McLean is a real estate partner at CMS, practising in the specialist living and student accommodation sectors  Image © Rick Colls/Shutterstock