Cost of Living (Tenant Protection) (Scotland) Bill: business regulatory impact assessment

Options

Option 1: Take no legislative action

Option 2: Minimum Safeguards

Option 3: Balanced safeguards

Sectors and groups affected by all three options

The groups and sectors affected will include, but are not restricted to:

• Tenants in the private and social sectors
• Student tenants in college and university halls of residence and PBSA
• Private and social landlords
• College and University student accommodation providers and providers of Purpose Built Student Accommodation (PBSA)
• Residential investors (including build to rent provision)
• Letting agents
• Scottish Courts and Tribunal Service (SCTS)
• Scottish Housing Regulator
• Sheriff Officers
• Rent Service Scotland
• Support organisations for housing and homelessness
• Local authorities

Option 1 – Do nothing

In this option, no new measures are introduced.

Benefits

Voluntary rent freezes have already been agreed by some landlords in the social rented sector over the recent years to support tenants with the impact of the Covid-19 pandemic. Local Authority Landlords and Owever, Registered Social Landlords have business plans which may include rent increases as part of their forecast and while Local Authority Landlords are likely to have greater resilience, for Registered Social Landlords, any additional new rent controls will impact their business planning.

Landlords in the private rented sector, both individuals and businesses, will be affected by the current economic environment and are likely to be facing higher costs. No action would potentially give them access to additional income through rent increases, some of which may be needed to offset the rising cost of providing the property (although there is some risk of landlords passing on increases in personal costs too).

Some landlords have told us that additional regulation may lead to landlords leaving the private rented sector. While it is difficult to map cause and effect to any one market intervention, the number of PRS properties to rent has grown alongside increased regulation since devolution, from 120,000 properties in 1999 to a peak of 370,000 in 2016, with a decline to 340,000 in 2018 and 2019. In any event, if landlords were to leave the private rented sector, this would further exacerbate supply issues. In addition, the rented sector is still recovering from the effects of Covid measures that further risk contraction in available private rented sector properties which may put additional pressure on social rented properties as a result. Recent events in the financial markets following the UK Government's fiscal event may result in increases in interest rates faced by landlords and increase the relative impact of a freeze. This option has a lower risk in respect of these issues.

Tenants would continue to have existing protections under the private residential tenancy and be able to make a referral to a Rent Officer (Rent Service Scotland) to determine whether an increase is reasonable but only with regard to open market rent. In addition, tenants' can't be asked to leave for no reason and landlords must go through the legal process to end a tenancy with failure to do so being a criminal offence.

In college and university halls of residence and PBSA, rent is often inclusive of energy costs, and is set prior to the beginning of the academic term. The majority of providers have advised that this is the case and that they have little appetite to change this. This option acknowledges this, not imposing any changes on providers.

Costs

Tenants would be exposed to rising costs that may become unsustainable and there may be health and wellbeing impacts for those individuals, and to the NHS, associated with losing their homes and being without secure accommodation at this time. In addition, there is a risk that if people lose their homes they will find it difficult to maintain or secure employment, worsening their situation and putting further pressure and cost onto public services.

If no action was taken to support tenants, it is probable that rents will increase for a proportion of existing tenants and rent arrears would be more likely to increase. If rent or rent arrears increase to levels where tenants need to move or are evicted, this could lead to an increased demand for homelessness and housing support. For students, whether in mainstream PRS, halls or PBSA, losing their accommodation could prevent them from continuing with their studies.

The uncertainty of the next 6 months (and potentially beyond) leaves tenants with already more precarious financial circumstances facing additional rising costs through which existing mechanisms to navigate are only partially-equipped.

Recent developments in the financial markets may lead to landlords attempting to pass on higher borrowing costs which would exacerbate affordability issues

Conclusion

The Scottish Government does not consider this to be an appropriate option given the current pressures on household incomes. In addition, existing evidence demonstrates those who rent their home are more likely to have lower household incomes, higher levels of poverty and to be financially vulnerable than those in other tenures.

Option 2 – Minimal safeguards

Introduce a rent freeze and moratorium on evictions, increased penalties for unlawful evictions and powers to change rent adjudication with the only safeguard for landlords being the ability to enforce eviction action due to antisocial behaviour, criminality, tenant abandonment and/or where the property is to be sold by a lender.

Benefits

This option offers comprehensive protection for tenants, with clear and understandable messaging that there are almost no circumstances where tenants can be evicted or rents can be increased.

Tenants will continue to be expected to pay their rents and any debt accrued will continue to be owed.

Costs

This option includes minimal safeguards for landlords and therefore does not reflect the best balance of interests between landlords and tenants; with potential detriment to both landlords and tenants. Under this scenario if tenants choose not to, or are unable to, pay their rent, landlords could be trapped in loss making leases as enforcing an eviction order due to rent arrears would not be possible. In addition, rental debt follows a tenant after the tenancy ends and staying in an unsustainable tenancy could result in significant debt and impact on their ability to secure a rental property in the future.

If substantial numbers of tenants do not pay their rent, the supply of and investment in housing in the private rented sector and the social rented sector could be at risk without appropriate and proportionate safeguards for landlords.

Conclusion

The Scottish Government considers that this option does not represent a proportionate and balanced approach. If a blanket rent freeze were to be applied - combined with an evictions moratorium with no safeguards in respect of financial hardship being faced by landlords – then some landlords could find themselves trapped in loss-making leases and unable to meet the costs of offering the property for rent. The Scottish Government believes that such an approach would not strike a fair balance of rights and may also impact negatively on tenants.

Option 3 – Balanced Safeguards – the preferred option (reasoning set out below)

Immediately introduce a 0% rent cap and moratorium on evictions across the rented sector with a number of safeguards for landlords.These safeguards will include some limited circumstances where evictions can continue and allow rent increases in relation to limited prescribed costs. In addition, there will be increases in penalties for unlawful evictions and powers to change rent adjudication.

The Bill is being introduced as soon as possible in order to support tenants during the cost of living crisis, with the emergency measures initially in force until 31st March 2023 which provides certainty over that period. There will be a power to modify the measures should it be necessary and proportionate to do so at any time.

There will be the option to extend the measures for 2 further periods of 6 months with Parliamentary approval which provides surety that the measures are time bound and cannot be maintained without proper scrutiny. In addition, the Bill contains provisions that require the measures to be reviewed, and reported on, every 3 months and for the Scottish Government to move to immediately expire any provision that is no longer necessary. Together these measures provide certainty for landlords on the overall duration that the restrictions in the Bill can be in force and that they will be kept under review to reflect changing circumstances.

The emergency measures will:

i) set a cap on the maximum level of increase in rent in the private and social rented sector and for college and university halls of residence and PBSA. The cap will be set at zero for the period to 31st March 2023 but this can be varied whilst the emergency measures are in force, to respond to changes in wider economic circumstances. The cap will apply to any rent increase proposed on or after 6th September 2022. For the period the measures are in force landlords will not be able to increase rents for existing tenancies, other than in line with the cap, but rents can be re-set between tenancies.

The following safeguards are included in the emergency rent cap measures for PRS landlords:

• While the general presumption is for a freeze, landlords will have a means to apply to a rent officer to increase rent in light of an increase in specific prescribed costs related to offering the property for rent
• Where that is granted, the permitted increase for prescribed costs will be capped at 50% of the increase in costs or 3% of the existing rent level whichever is lower.
• Where an increase in rent on the basis of prescribed costs is approved, there will be a route of appeal for landlords and tenants to the First Tier Tribunal

where the rent officer's decision is disputed.

ii) prevent enforcement action in respect of evictions for six months in the private and social rented sector, college and university halls of residence and PBSA.

The following safeguards are included in the moratorium on evictions:

• The maximum period that any individual enforcement action will be prevented for will be 6 months;
• The measures will allow eviction on the grounds of anti-social behaviour, criminality, abandonment and where the property is to be sold by a lender to continue;
• 3 new grounds of eviction will be created to support landlords where there are substantial rent arrears, or where the landlord needs to sell or live in the let property due to financial hardship^[14];

• Eviction orders granted in eviction proceedings raised before the legislation comes into force and where the eviction notice was served before the announcement on 6th September, will not be caught by the moratorium and will still be able to be enforced.

iii) increased penalties for unlawful evictions

These measures change the way civil damages can be awarded for unlawful eviction. This is intended to discourage landlords from carrying out such evictions and will benefit tenants who have been subject to this. It is not considered that any safeguards are required as landlords who conduct evictions lawfully will not be affected.

iv) provide additional powers to temporarily reform rent adjudication.

These measures will allow Scottish Ministers to temporarily reform the rent adjudication process to support the transition out of the emergency measures. Any regulations made under this power will be subject to consultation and will be made through the affirmative parliamentary procedure, ensuring that appropriate scrutiny is given to the necessity for any temporary changes proposed. It is considered that this provides a significant safeguard in terms of this measure.

Further details about the specific safeguards and approaches are set out in the Policy Memorandum.

Costs and Benefits Analysis

Rent Restrictions with balanced Safeguards

The potential costs that landlords could face has been calculated using scenario analysis, where a number of scenarios have been forecast to provide a range of potential costs to all landlords^[15].

The range of costs to all PRS landlords depends on a variety of factors but there are two key components,

• the percentage of tenancies that could face a rent rise over the period the measures are in force; and
• the percentage increase in rent prices over the initial period.

Evidence^[16] suggests that half of landlords do not increase rents for existing tenants. Of the remainder, around 15% reported that they increased rents each year. For landlords who increase rents less frequently than each year, only a portion of their tenants will experience a rent increase in any given year. We have assumed a an estimate of 50% of landlords increasing rents for existing tenants in a given year , equivalent to 25% of existing tenants, who have been in their properties for more than 1 year, who could face a rent increase during the initial 6 month period^[17] and with behavioural change as a result of the current economic situation this could be between 15% and 35% of existing private rented tenants.

It has been assumed that those in the PRS could face a wide range of rent increases, from 2.5% to 10% annually.^[18]

Excluding the 35% of PRS properties where the tenant has been living for less than a year, if about a quarter of the rest (around 220,000) would experience a rent increase during the initial period then the total cost to private landlords could range from £6,000,000 to £23,000,000, based on an average 2-bedroom rent of £693 in 2021, rolled forward to August 2022 using the ONS private rental index^[19], providing a monthly rent of £722. If this figure is converted to a per property figure, this equals to an average of £110 to £420 across the 55,000 properties that may have experienced a rent increase. Using the wider range of existing tenancies that could face a rent rise (15% - 35%), the total cost to landlords for an initial 6 month freeze range from £3,500,000 to £32,500,000. The total rental income for private landlords is estimated to be around £3 billion a year.

In recognition of potential increased costs to landlords and to support them to continue to offer properties landlords will be able to apply to a Rent Officer to increase rent in order to reflect an increase in limited, prescribed costs related to offering the property for rent. This will allow rents to increase up to a maximum of either 50% of the increase in prescribed costs or 3% of the total rent (whichever is lower) where the landlord can evidence that they have faced an increase in the prescribed costs. If the cap rises above 0% landlords will be able to increase rents in line with the rent cap.

It is recognised that a rent freeze could reduce the incentive to invest in rented property for new or existing landlords. It may also limit landlords' ability to invest in energy efficiency and improvements for existing rented properties. However, given the relatively short initial period, these impacts may be relatively modest as the loss of income will only be the foregone rent increase over this period or less depending on if or when rent may otherwise have been able to increase. There is also funding and advice available to PRS landlords to support them to improve energy and carbon efficiency of properties through the Homes Energy Scotland's private sector landlord advice scheme^[20] and landlord loans.^[21] It has been suggested that lenders may be nervous of increased regulatory risk as a result of this intervention and increase the cost of borrowing or rebalance the amount they are prepared to lend to the sector in Scotland.

If rent caps were extended beyond the initial period, then the impacts on landlords' ability to invest could become more significant as an increasing share of rents would be at a level below what they otherwise may have been. This may be in the context of high levels of inflation, particularly in the construction sector, results in higher costs for routine repairs and maintenance and also improvement costs, such as energy efficiency. While inflation may be the more significant of these two factors, this, might result in landlords being less able to afford to invest in the property. The impact will however depend on future trends in inflation, and the level of rent increase permitted, and can be considered at the review point.

If the cost of maintaining a property becomes unaffordable and there is uncertainty around the duration of the measures and the potential timeline for being able to raise rent then this may result in landlords considering whether it is in their best interests to leave the sector. This could impact on the availability of rented property and increase rents in the long-term.

There may also be a potential impact on landlords' health and wellbeing as the financial stresses, outlined for tenants above, will also apply to some landlords in the private rented sector who rely on rents to support their income. The safeguards included in the Bill will support landlords where there is an increase in their costs.

In relation to social landlords, the Scottish Housing Regulator have estimated that an absolute rent freeze in 2023/24 would remove at least £50 million in income in that year from the business plans of Registered Social Landlords (this does not cover impacts on Local Authority landlords). Lower rents and lower income will reduce the available funding for maintenance, building improvements for energy efficiency and there is a risk of how this will impact stock supply in the medium to long term. The sector funds a significant amount of its investment by borrowing against future rents. Lenders have viewed it as low risk and set interest rates accordingly. Figures from the regulator identify that the sector is currently carrying £6.4 billion of debt. If this perception changes there is a risk that borrowing costs will rise. Each 0.1 percentage point increase in the cost of servicing the sectors outstand debt of £6.4 billion by £6.4 million per annum^[22] Changes in borrowing costs will impact as debt is refinanced or where lending covenants are breached.

The Scottish Government will work with the social sector on whether a cap on the sector from 1 April 2023 (should the measures be extended beyond 31 March 2023) is necessary and if it is at what level and provide decisions as early as possible. A Short Life Task & Finish group including SFHA, GWSF, ALACHO, COSLA, Tennant organisations and the Scottish Housing Regulator and others from the Sector will be established to support this. Scottish Government will also work with the sector to establish if there are any additional safeguards that should be put in place.

In respect of college and university halls of residence and PBSA, given the difference in how tenancies in this sector are structured, the provisions will have minimal impact for academic year 2022/23. They will provide certainty and reassurance to students that their rents will not increase until 31 March 2023. If the measures are extended beyond 31 March, it is likely providers will factor in inflationary driven cost increases in determining rent levels for academic year 2023/24 which could result in higher rates for students.

The Scottish Government is committed to developing a student accommodation strategy for Scotland informed in part by the PBSA review which is being taken forward in parallel with the New Deal for Tenants. This will address affordability and improving standards across the private rented sector. The review is being driven forward by the PBSA review group which includes sector representatives.

General points

- The rent restrictions could discourage tenants from moving as they may be subject to an increased rent if they do because landlords tend to increase rents at the point of tenant turnover, so if a tenant moves, they would likely experience an increase in rent for a comparable property. Not being able to move for work, caring or social reasons could be detrimental, although over the initial period this impact may not be substantial.

- Landlords may have already issued rent increases in good faith and in accordance with the existing law in order to manage their costs prior to the Government announcement on 6 September and those increases will not be affected. However, those who were eligible only after this point (rent increases being limited to once a year) or those who had voluntarily delayed issuing such a notice will be disadvantaged.

Evictions with balanced safeguards

Evidence reviews and research studies undertaken in the UK (including Scotland)^[23] suggest that feelings of insecurity related to tenure have impacts on tenants' health and wellbeing. These studies conclude that the negative impacts of housing insecurity are complex and effect tenants in several different ways including by causing financial distress (including around potential expenses related to moving); causing concerns over finding a new property; making it difficult for tenants to feel at home and connected to their place when insecure; and by causing stress over the potential of being separated from local support networks. An evictions moratorium, except in specified circumstances, offers additional security to tenants in a challenging time.

PRS landlords seeking to repossess a property due to rent arrears could incur additional costs due to the extended period that a tenant can hold rent arrears without being evicted. The cumulative worth of rent arrears that a tenant must hold before being evicted will be 6 months.

Data from the First Tier Tribunal (FTT) from 2022 (up to August) shows that in 90% of eviction cases for rent arrears, 6 months' worth of rent arrears had been accrued at the point the eviction is granted. For the remaining 10% of cases an average of 4 months' worth of arrears had been accrued. However, given the intention to create a new ground for eviction for substantial rent arrears (6 months or more), it is possible that landlord and tenant behaviour or actions may change making predicting the impact difficult. For example, landlords may wait until 6 months of arrears have been reached before starting FTT proceedings or tenants may seek to keep arrears below 6 months in total at the point the FTT make their determination.

The average monthly rent for a PRS landlord of £693 (for a 2-bed property) in 2021 can be rolled forward to August 2022 using the ONS calculated private rental market index^[24] giving a more up-to-date rent figure of £722. This figure would be the average additional debt to landlords for every month that the enforcement is delayed (up to a 6 month maximum). How long that delay could be is entirely dependent on individual circumstances, actions of landlord and tenants and the time it takes to process eviction applications on rent arrears by the FTT.

It is difficult to forecast the number of evictions that could take place as the numbers will be affected by the ongoing uncertainty caused by the cost crisis, which could lead to tenants being less likely to pay their rent and therefore increase the probability of an eviction for rent arrears. In 2019 (pre-Covid) there were 264 rent arrear evictions therefore assuming 6 months this would be 132. This figure is being used as it relates to evictions in 2019 but we do not know what the total number of evictions will be over the next 6 months given the different current social and economic situation. .

One example of potential impact could be this: without the emergency legislation a landlord would have to wait for 3 consecutive months of rent arrears before giving the tenant 28 days' notice of the intention to evict before the FTT would consider it. Under the new legislation if a landlord waits until 6 months of arrears (although this is not necessary) has been accrued this would mean an addition 2 months arrears before seeking the action (£1444 average^[25]).

If this was to be applied to all rent arrear evictions over 6 months (using the 2019 data set out above) this could lead to an overall cost of around £0.2m^[26]. However, there are many reasons why this figure could be substantially higher or lower depending on multiple factors including tenant and landlord actions, numbers of cases and economic changes. This provides one possible scenario and should not be considered an estimate of costs to the sector. As safeguards in the legislation are being put in place to both ensure any delay in individual eviction enforcement does not exceed 6 months and to ensure cases with substantial rent arrears (over 6 months or more) will not be delayed, there are multiple scenarios and cost implications depending on individual circumstances. Therefore it is not possible to estimate the cost to the sector with any degree of certainty.

For social landlords seeking to repossess a property due to rent arrears, there are likely to be cost implications for those landlords due to loss of income from unpaid rent. An average weekly rent for a social rented property was £85.36 in 2021/22. Therefore, where a tenant was unable or did not pay rent for a period of 6 months, a landlord based on the average weekly rent would lose £2,219 over this period. As per the Scottish Housing Regulator's National Report^[27] published on 31 August 2022 - social landlords had total arrears of rent of £169,626,857 at 31 March 2022. This is 6.3% of total rent due, an increase from 6.1% in the previous year, and the highest level of arrears reported to the Scottish Housing Regulator since the introduction of the Scottish Social Housing Charter in 2012.

In addition Registered Social Landlords (RSLs) employ contractors to carry out maintenance and other essential services which are funded out of rental income. Loss of rental income could potentially affect an RSL's capacity to contract work and affect those jobs.

Responses to the Coronavirus Reform Bill consultation^[28] on Tribunal Discretion and Pre-Action Protocols were mixed with some welcoming strengthened tenants' rights whilst others were concerned about the negative impact on private landlords and supply in the rented sector. In the New Deal for Tenants Consultation Analysis Report, the financial risk to landlords from rent control and increased protection for tenants was cited as a significant concern by respondents reflecting landlord perspectives, noting that landlords say they can suffer significant financial losses in relation to rent arrears and that ongoing barriers to evictions could be a significant deterrent to investors^[29].

There are some recent indications that the demand-supply balance in the private rented sector has tightened recently, with data from letting agents suggesting a drop in the number of new listings and a fall in reported average time-to-lets, alongside separate trends in a reduction in landlord registrations and increased numbers of eviction cases where the landlord intends to sell. The introduction of the emergency measures may accelerate in these trends when the measures are lifted.

In terms of college and university halls of residence and PBSA, contracts tend to be for an academic year, typically September to June. Students tend to vacate properties at the start of the summer and in many cases those properties are then let for commercial purposes for the summer months (for example around the Edinburgh Festival). Many first year undergraduates move out of this type of accommodation after their first year, into the PRS.

Given that the measures do not apply between tenancies, even if the provisions extended beyond 31 March 2023, providers would be free to set rents for academic year 2023/24, taking account of energy costs and construction sector inflation, at a higher level than for the 2022/23 academic year. However, the measures will provide assurance to current renters that there will be no in rent increases within their current contract while the measures are in place.

The last significant intervention in this market was the 28-day notice period brought in as part of the Coronavirus (Scotland) (No.2) Act 2020. Earlier this year, through consultation on the operation of the notice to leave period, providers highlighted the significant costs to them of the government's intervention in bringing the 28-day notice period into the PBSA sector.

NUS Scotland research has highlighted the already challenging situation faced by students^[30] and a report by the Mental Health Foundation highlighted the relationship between poverty and financial worries and mental health issues.^[31] These measures will provide assurance and certainty with regard to students in college and university halls of residence and PBSA around in year tenancy rent increases.

General Point

It should be noted that the moratorium on evictions will impact on the Sheriff Officer profession. This is a small sector with less than 150 commissioned officers in Scotland. A large proportion of their work is in relation to the process of recovering property and ensuring that the eviction process is fair and lawful. The legislation aims to reduce the number of evictions enforced and this will impact Sheriff Officers. However, the enforcement of eviction orders will continue where the order is granted in eviction proceedings raised before the legislation comes into force and where the eviction notice was served before the announcement on 6th September will continue. Eviction orders granted in relation to specified grounds of eviction will still be able to be enforced, for example where a landlord needs to sell the property to alleviate financial hardship, or where there are substantial rent arrears.

Unlawful Evictions

Improving the way compensation can be awarded and the method of calculating the level of compensation would reduce barriers for tenants to challenge an unlawful eviction and receive compensation where an unlawful eviction is found to have occurred. This would also make it more expensive and risky for a landlord to pursue an unlawful eviction, potentially acting as a strong disincentive. As the action is already unlawful there should be no impact for businesses and individual landlords who continue to follow legal requirements.

Rent Adjudication

The power to temporarily change rent adjudication processes is being made available to support transition away from the current emergency measures. At this time there is no commitment as to the use of the measures but the impacts of any changes would be fully considered and subject to consultation if they are to be used.