Private rented sector changes in Scotland

Few policy changes in Scotland’s property sector have received more attention than the rent controls and eviction ban originally introduced as a temporary measure in late 2021. There has been a range of changes since these measures were introduced and so much information shared about the potential and actual consequences. As the new year begins, it is worth assessing where we are, how the policy may change in 2025, and what the consequences of current proposals are likely to be should they be brought into law. Current state of play From 1 April 2024, the Scottish government introduced a transitional rent control framework, as well as updating the eviction order provisions, as a temporary measure for a period of one year – with the ability to extend these for a further 12 months. The purpose of this transitional rent control framework is to keep a lid on rental increases in the private sector, while the new Housing (Scotland) Bill – which will impose permanent rent controls – is in the process of being finalised. Under the current, temporary measures, landlords have been able to propose an increase of any amount, provided the property’s rent has not already been raised in the previous 12 months. The landlord must serve a rent-increase notice at least three months prior to the proposed rent rise and this can only be done in 12-month intervals. However, if the tenant does not agree with the proposed figure, they can challenge it and refer the case to a rent officer, who will determine the permitted rent increase for the tenancy based on a new “tapered” approach. They will then set the rent according to the lowest of three factors: the rent proposed by the landlord; the open market rent; or, where the open market rent is more than 6% higher, by 0.33% for each percentage above 6%, subject to a cap of 12%. The Scottish government has committed to reviewing the temporary system early this year. What does the Housing (Scotland) Bill propose? With these measures in place, the Bill has been making its way through the Scottish parliament. If passed in its current form, the Bill would give local authorities the power to decide whether rent controls are required within their respective areas to “protect the social and economic” interests of tenants. This would need to be done every five years at minimum, with interim assessments if there have been any significant changes to the level of rents or rate of increase in rents since the most recent report – the first such recommendation has to be submitted by 30 November 2026. To help local authorities complete these reports, landlords will be obliged to share details of their tenants’ current rent and most recent rent increases – if they fail to do so, they could face penalties for failure to comply. The Scottish government will only be able to designate an area a “rent control area” if it is satisfied it is both necessary and proportionate and will have to consult with both landlords and tenants affected before doing so. The decision would also need to be approved by the Scottish parliament. In addition, the Bill proposes that rent rises in rent control areas would be capped both during and between tenancies, meaning landlords would not be able to markedly increase rent when a property is re-advertised, and increases are limited to once in any 12-month period. The Scottish government also recently announced an amendment to the Bill that would cap any rent increases in controlled areas at the consumer price index plus 1%, up to a maximum of 6%, both during and between tenancies. Are there any other changes? While evictions orders can now be enforced as they were prior to the Covid-19 pandemic, after being suspended for a while, the Bill could introduce a requirement on first-tier tribunals and the sheriff court to consider delays based on the circumstances of the case. This is aimed at protecting tenants during the eviction process, balancing their rights with landlords’ ability to recover the let property. The proposed legislation could also see tenants given statutory rights to keep pets and make both minor and major alterations to rental properties. However, this would be done with conditions attached, such as the property being reinstated to its original condition when vacated or requiring higher rental deposit. Potential implications There are, however, a number of details that still need to be addressed. For example, suggestions have been made that mid-market rental properties and/or social landlords could be exempt from the proposed rent control areas. Likewise, the possibility of newly constructed private rented sector developments being excluded has also been mooted. If that does end up being the case, it could lead to the creation of a two-tier market, giving a competitive advantage to new PRS schemes in their overall scalability. Landlords typically undertake improvements to properties, with substantial capital expenditure, between tenancies. If they are unable to raise rents sufficiently in those periods to cover their costs, this could have the unintended effect of leading to a general deterioration of housing stock over time. Finally, there is the allowable rent increase itself. Stating a maximum increase of CPI plus 1%, capped at 6%, as the maximum allowed rise may simply bake in higher than inflation rent uplifts for tenants, representing a bad deal for them in the long run. Inevitably, until the Bill is finalised, there will be a degree of uncertainty over rent controls in Scotland. As a result, it is no secret that over the last few years a number of build-to-rent schemes have stalled, as investors assess the economic viability of projects and look for clarity over the future returns they can reasonably expect. We won’t have total clarity over Scotland’s policy on rent controls until well into 2025 – but the fact that there is a commitment to consultation with the property industry and other stakeholders, and a general sense of direction, is at least some progress for now. Matthew Aitchison is a valuations & advisory partner at Knight Frank Scotland Photo © Sophie Grieve Williams/Unsplash