Rent Adjudication (Temporary Modifications) (Scotland) Regulations 2024 – Business and Regulatory Impact Assessment

Competition Assessment

The implementation of transitional measures is anticipated to have an impact on a segment of private landlords (those with sitting tenants), although the impact will differ based on individual situations.

The transitional arrangements should not hinder the capacity of new landlords to compete in the rental market as they pertain only to rent increases during an existing tenancy and not to rent setting for new tenancies or rent setting between tenancies. Landlords have expressed concerns that these measures might result in a decrease in the overall availability of rented accommodation in the private rented sector due to landlords exiting the sector as a result of the impact on the overall profitability of offering properties for rent. This could potentially lead to diminished competition among landlords and an increase in rents over time. Given these concerns, it is crucial to assess the potential effects of these measures on competition within the rental market, as per the Competition Assessment. This leads us to the following questions:

Will the measure directly or indirectly limit the number or range of suppliers?

There are anecdotal reports of landlords in the private rented sector contemplating exiting the market, which could potentially decrease the supply of properties. However, to the extent that landlords are actually taking this step, the net impact on supply will depend on whether their properties are sold to other landlords or are removed from the sector. It will also depend on the size of inflows to the sector. These could come from newly built properties, such as from build to rent projects (although again there have been anecdotal reports of build to rent investors pausing projects), or from existing properties in other tenures which are switched into the private rented sector.

However, as illustrated by Table 10, over the period of the operation of the 2022 Act, the total number of properties registered on the Scottish Landlord Register has slightly increased. Although there are some limitations of this data (discussed above), this would suggest either that the anecdotal reports have not translated into a significant exit of existing properties or reduction in build to rent, or that any such effects have been offset by the other factors discussed above.

Based on this experience, we similarly do not expect that the transitional measures will have a substantial negative impact on the number of properties in the sector, particularly as the level of rent increases permitted will be raised from the current level of 3% (or 6% on the grounds of prescribed property costs) under the 2022 Act.^[57]. The adjudication limit of between 6%^[58] and 12% would only apply if the rent is referred to adjudication. Furthermore, these higher nominal rent increases will take place in what is expected to be a lower-inflationary environment,^[59] meaning that in real-terms rent increases on existing lets could be significantly higher in the period the measures are in force than in the preceding nineteen months.

Will the measure limit the ability of suppliers to compete?

The measures apply across all property types and locations, so we do not anticipate that it will limit the ability of existing suppliers to compete with one other. Furthermore, as set out in the answer above, we do not expect the proposed measures to have a significant negative impact on new suppliers entering and competing in the sector.

There could be an impact on the incentives for landlords to compete through offering different combinations of quality and price, because restrictions on rent increases may limit a landlord’s ability to recoup the cost of improving the quality of some existing tenancies. However, we believe that the level at which the rent taper has been set achieves the right balance in terms of preserving incentives for landlords to invest in existing lets while providing a degree of protection from large rent increases for tenants, who still face challenging financial conditions.

Will the measure limit suppliers’ incentives to compete vigorously?

For the reasons set out above, we do not expect there be a significant impact on suppliers’ incentives to compete vigorously.

Will the measure limit the choices and information available to consumers?

New supply will be protected because initial rents are not capped, and incentives to invest in existing property are largely maintained, so we do not anticipate that the measures will materially limit the choices available to consumers.

We will also provide information to tenants through a range of channels, to raise awareness of the proposed changes. Such communication may also help increase general awareness amongst tenants about their rights.

Consumer Assessment

The Scottish Government defines a consumer as “anyone who purchases goods or digital content, or uses goods or services in the private or public sector, now or in the future”. In the rental sector, the tenant is typically the consumer. However, landlords could also be consumers of services provided by letting agents.

Does the policy affect the quality, availability, or price of any goods or services in a market?

Controls on rents could reduce the incentives to invest in new supply, as well as in the quality of existing properties. Furthermore, while existing tenants could benefit from lower rents in the short term, this could lead to higher rents in the long term due to a fall in supply.

However, taking into account that rents for newly let properties or tenancy changes are not affected, as well as the level at which the adjudication taper has been set, we do not anticipate that the proposed measures will have a significant negative impact on this. Trends in the number of properties on the Scottish Landlord Register over the period of the 2022 Act support this view. Sitting tenants will benefit from the additional protection in respect of the ability to challenge excessively large rent increases during a period of ongoing pressure on household budgets.

Does the policy affect the essential services market, such as energy or water?

No.

Does the policy involve storage or increased use of consumer data?

No.

Does the policy increase opportunities for unscrupulous suppliers to target consumers?

No. Under the 2016 Act, tenants have protection in terms of when and how their rent can be increased and a right to adjudication of proposed rent increases by a Rent Officer and, if necessary, the FTT.

• Rents for sitting tenants can only be increased once per year
• If a landlord wants to increase the rent, they must give at least three months’ written notice.
• Tenants can refer a proposed rent increase to a rent officer for adjudication within 21 days of receiving the notice.
• The rent officer has the power to decide what the rent for the property should be with reference to the relevant legislative provisions.
• If the landlord or tenant disagrees with the rent officer’s decision, they can appeal to the FTT, who will make a final decision.

Access to rent adjudication is available to applicable tenants under the 1988 Act through referral direct to the FTT. The procedure for seeking an increase in rent under a 1988 Act tenancy may vary depending on the terms of the tenancy type.

Does the policy impact the information available to consumers on either goods or services, or their rights in relation to these?

No, as set out above, we will communicate the changes to tenants.

Does the policy affect routes for consumers to seek advice or raise complaints on consumer issues?

No, as discussed above, tenants will be able to apply to the Rent Service Scotland, or the First-tier Tribunal as the case may be, to review their rent increase. Tenancies with a PRT would be able to appeal any Rent Service Scotland decision to the First-tier Tribunal, in line with pre-2022 Act practice.