Housing (Scotland) Bill: consultation

Chapter 2: properties subject to modified rent control area restrictions

This part of the consultation relates to the provision in the Bill which would enable Scottish Ministers to specify the circumstances in which a landlord of a property in a rent control area could increase the rent by more than the level of the rent cap. This would be done in regulations and those regulations could also specify whether a landlord would be required to obtain approval for such an increase and any approval process.

The purpose of this power is to ensure that the individual circumstances of landlords who may be disproportionately impacted by rent control can be taken into account. This will be necessary as part of delivering a system of rent control that is capable of balancing the interests of tenants with the property rights of landlords.

We have identified two types of circumstances where it may be appropriate for landlords to be allowed to raise the rent for a property in a rent control area by more than the rent cap:

• where significant improvements to the property are undertaken
• where a landlord is letting a property to a tenant at a rent significantly below market rates

We have set out more detail about the potential circumstances in individual sections below, along with questions about each. We have also asked whether there are other circumstances where it might be appropriate to consider whether landlords may be able to raise rent above the amount allowed by the rent cap.

The Scottish Government is keen to encourage investment in property and promoting good standards and improvements, such as making properties more energy efficient. This could also benefit tenants. For example, a more energy efficient property may mean that the tenant’s heating bills are lower in future.

The Scottish Government is also keen to encourage landlords to support tenants in sustaining tenancies by not charging market rent or managing rent increases in a way that helps with affordability for tenants.

Landlords who charge rent significantly below advertised rates

Throughout our engagement with stakeholders, it has been highlighted that landlords can choose not to increase rents for sitting tenants every year or choose to only increase rents by a small amount, even though market changes would allow them to increase rents at a higher rate. In some cases, the rents these landlords charge may become a lot lower, over time, than the rents being charged for similar properties in the same area. There are also some landlords who deliberately choose to charge less rent than they could for their property, in order to support tenants who, otherwise, may have been unable to afford the rent.

If landlords have historically charged a rent which is significantly lower than the rents charged for similar properties in a rent control area, the landlords of these properties could be disadvantaged in comparison to other landlords who are already charging market rent when the rent control area is put in place. Knowing that this could happen may also mean that landlords might be less willing to charge a rent below market rent in future. Some landlords may also choose to increase rents regularly during a tenancy, where they would not have done so before.

We are therefore seeking views on allowing landlords to increase the rent above the level of the rent cap between tenancies, in cases where the rent for their property is significantly below the advertised rents for similar properties in the same area.

In order to show that the rent they were charging was below this point, landlords would need to consider the advertised rents for other properties which are similar or comparable. This would mean other properties within the same area, which are a similar size, type and condition, and which have also been subject to the rent cap for the same amount of time.

In this section, we ask you to consider that:

• where the previous tenancy for a property was let significantly below market levels, the landlord could be allowed to return to advertised rents for similar properties at the beginning of a new tenancy
• the previous rent could be required to be a certain amount behind advertised rents for similar properties for this exemption to apply
• the landlord could be required to demonstrate eligibility for such an increase by providing certain information

Consultation questions

16. Should landlords be able to increase their rent by more than the level of the rent cap at the beginning of a new tenancy, where the previous tenancy was let significantly below market rates?

Yes/No

Please explain your answer.

17. Should the rent be a certain amount below advertised rents for similar properties for this allowance to apply?

Yes/No

If no, please explain your answer.

If yes, what amount or percentage below the advertised rent for similar properties should a rent be before this should be allowed, and why?

Landlords who make improvements to their property

Private landlords are already required to ensure that any property they rent to tenants meets the repairing standard^[11], and it is not anticipated that landlords would be able to increase rents above the level of the rent cap to reflect the cost of meeting these minimum standards, or for meeting the cost of ongoing regular maintenance of a property. We also do not anticipate that any increases above the cap would be allowed where improvements have been fully paid for by grant funding, or where the tenant has paid for the improvement themself.

However, we do want to incentivise landlords to be able to go beyond these minimum standards and make improvements that bring additional value to the property and which have the potential to bring additional benefit to the tenant.

We are therefore seeking views on whether landlords in rent control areas should be allowed to increase rent by more than the rent cap, where certain types of improvement have been undertaken and after the work has been completed. Examples of this type of improvement could include energy efficiency improvements, such as installing an upgraded heating system, installing improved windows or doors, or making other improvements such as significant upgrades to a fitted kitchen or bathroom

We are also seeking views on how the allowable rent increase above the cap might be calculated in cases where a landlord has made improvements to the property. There are different ways that this could be considered.

One way would be to look at the rental value of the property, as improvements to a property might enhance the overall rental value of the property (as compared to other properties in the rental market). Determination of a new rent for the property could take this into account, for example, by considering the advertised rents for other properties which are similar or comparable.

Another way to calculate a rent increase above the cap after improvements to the property could involve looking at the costs which the landlord incurred to make the improvements. A new rent for the property could be determined which took account of these costs (‘cost recovery’).

Some improvement works can be expensive, so allowing landlords to apply all of the cost of improvements to one rent increase could lead to a tenant in a rent control area facing a very large rent increase in one year. In order to prevent tenants being given a very large rent increase after an improvement to the property, the costs for an improvement could instead be recovered through a rent increase which could be calculated to spread the increased cost over a number of years.

One possible way to approach this might be to consider the typical lifespan of the type of improvement (i.e. how long it might be expected to last). For example, calculating a rent increase above the cap in relation to the cost of an upgraded boiler could involve considering the number of years which the boiler might be expected to last before a replacement is needed, and splitting the cost over that number of years.

An important consideration with a ‘cost recovery’ approach is whether a landlord should be able to recover all of the costs they paid for any improvements. Many improvements which could be made to a property will increase the value of the property as an asset, which may benefit the landlord. Although a tenant is likely to benefit from an improvement to the property which they are living in, an individual tenant may not live in the property for the whole lifespan of the improvement, and so may not benefit from it fully. We have asked what you think about this below.

Energy Efficiency

There are currently no minimum energy efficiency standards in Scotland that would require private rental properties to reach a minimum level of energy efficiency. However on 3 April, the Acting Minister for Climate Action, Dr Allan, confirmed the Scottish Government’s intention to introduce a Heat in Buildings Bill (HiBs Bill) in Year 5 of this parliamentary session which would provide Scottish Ministers with powers to introduce minimum energy efficiency standards for owner occupier and non-domestic properties. In addition to bringing forward the HiBs Bill, we confirmed that we will progress with the development of regulations under existing powers in the Energy Act 2011 to introduce a minimum energy efficiency standard (MEES) in the private rented sector. These regulations would mean all privately rented properties, as far as possible, reaching the equivalent of EPC C.

We recognise that, depending on the current energy efficiency performance of the property, the cost of achieving any standard will vary. Energy efficiency improvements can reduce the energy demand of a property which could have a positive impact on reducing emissions, but also support bill payers in reducing their energy bills, making a home warmer and easier to heat. The details of the MEES regulations will be subject to further consultation with the sector as well as being scrutinised by the Scottish Parliament before introduction.

In this section, we ask you to consider:

• that landlords could be able to increase rents by more than the level of the rent cap in circumstances where they have made certain improvements which enhance the rental value of the property or bring additional benefit to the tenant
• the categories of improvements that could be considered as part of this could include energy efficiency improvements, such as installing an upgraded heating system, installing improved windows or doors, or making other improvements such as significant upgrades to a fitted kitchen or bathroom
• how these improvements might be distinguished from those that that would be expected as part of routine property maintenance
• different ways a rent increase above the cap might be calculated in cases where a landlord has made improvements to the property
• different ways that costs for improvements could be split between landlord and tenant

Consultation questions

18. Should landlords be able to increase rents by more than the level of the rent cap to recover costs, where they have undertaken certain improvements which may enhance the rental value or bring additional benefit to the tenant?

Yes/No

Please explain your answer.

19. Should landlords who make improvements to a property which improve energy efficiency (for example by making specific improvements which improve the Energy Performance Certificate (EPC) rating of the property, or by installing an upgraded heating system) be allowed to raise the rent above the level of the rent cap?

Please explain your answer.

20. Are there any other types of improvements that should potentially qualify for this kind of increase above the level of the cap?

Yes/No

Please explain your answer.

21. How do you think improvements that might qualify for this increase above the level of the cap should be distinguished from work that would be expected as part of routine property maintenance?

22. Do you think that a rent increase above the cap should be calculated by:

a) improved rental value basis

b) cost recovery basis

c) other

23. If a cost-recovery basis was used, what kind of factors should be taken into consideration when deciding how it should be applied?

Other costs a landlord may face

A rent control area may last up to five years. We recognise that, within this time, landlords may experience other increases in the costs of offering the property to let, such as maintenance, insurance and mortgage costs, which are not included in the examples that we have already covered. Many of these costs, and particularly the aggregate of these costs, will likely be correlated with inflation. We have announced our intention to lodge amendments to the Bill at Stage 2 of the Bill process^[12] to set out the form of the rent cap on the face of the Bill. Subject to the approval of the Parliament, rent increases would be limited to a rate equal to the lower of (i) the percentage change in the Consumer Price Index (CPI) plus 1% and (ii) 6%. We expect that a rent increase within the proposed rent cap, based on the CPI annual rate of inflation plus one percentage point, would adequately cover most of these increases.

However, we recognise that there may be cases where there may be increases in a landlord’s costs which may impact certain groups of landlords more acutely than others. In particular, stakeholders have raised that there are some utility and service costs for landlords which may be more likely to affect rural properties. These may include costs for private gas or electricity supplies, district heat networks, private water supplies, septic tank or sewage disposal, and maintenance of private roads, among others. We are aware that some costs can also be more expensive for landlords of properties in rural areas, and that costs for some types of utility may be paid by the landlord in rural areas, whereas they may be paid by tenants in some cases in urban areas.

We are also aware that some landlords may offer supported accommodation or other similar services to tenants with particular needs through a private residential tenancy. We recognise that it is important to consider any other facilities and services included in the tenancy agreement with the tenant which could result in increased costs for these landlords.

In this section, we ask you to consider:

• any other circumstances where you think that rent increases above the level of the cap should be permitted
• how these measures could apply in settings where there are additional services included in the agreement with the tenant, such as in rural settings or in supported accommodation

Consultation Questions

24. Are there any other cost increases for rental properties that would justify raising the rent above the level of the cap?

Yes/No

Please explain your answer.

25. Are there any other circumstances under which landlords should be allowed to raise rents above the level of the rent cap?

Yes/No

Please explain your answer.

Demonstrating eligibility for an increase above the level of the cap

In cases where a landlord is allowed to increase the rent above the amount allowed by the rent cap, the landlord could be required to apply to an external decision maker, such as a rent officer (part of Rent Service Scotland^[13]) or the First-tier Tribunal for Scotland Housing and Property Chamber^[14] before increasing the rent, in order to confirm the increase is allowed. This process could involve the landlord providing evidence of the reason for the increase (for example, evidence of the cost of any improvements they have made).

Alternatively, landlords could be allowed to increase the rent for the property above the rent cap, without requiring approval. Tenants could then have the right to challenge any increase that they did not feel was correct. The Bill, as introduced, already allows for a tenant to refer a case to a rent officer for verification if the tenant considers that the amount of the proposed increase of rent is more than is permitted. A process could be provided to allow tenants to challenge rent increases where a landlord is allowed to increase rent above the level of the cap.

In this section, we ask you to consider:

• that landlords could be required to demonstrate the reasons for any rent increases above the level of the cap by providing certain information
• how this process might work

Consultation questions

26. What should the process be if a landlord seeks to make a rent increase above the level of the rent cap for any of the reasons referred to in the previous sections in this chapter? (Landlords who charge rent significantly below advertised rates, landlords who make improvements to their property, other costs a landlord may face)

Please choose your preferred option:

a. landlords should be required to seek approval before raising the rent above the rent cap

b. landlords should be allowed to raise rents above the cap without a requirement to apply to an external decision maker

Please explain your answer.

27. If landlords were required to seek approval before raising the rent above the rent cap, what kind of information should landlords have to provide to tenants after the rent increase has been approved, and when?

28. If landlords were required to seek approval before raising the rent above the rent cap, what should be considered when designing a process for landlords to apply?

29. If landlords were allowed to raise rents above the rent cap without seeking approval, should they still need to produce evidence to prove that they qualify?

Yes/No

Please explain your answer.

30. If landlords were allowed to raise rents above the rent cap without seeking approval, who should they need to provide evidence/information to and when?

31. If landlords were allowed to raise rents above the rent cap without seeking approval, what should be considered when designing a process for tenants to verify or challenge the increase?