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

Summary and Recommendation

The power to modify the approach to rent adjudication on, or in anticipation of, the expiry or suspension of the temporary rent cap was included in Schedule 3 of the 2022 Act in order to support the transition away from the emergency rent cap. The proposed use of this power has been informed by the potential for the suppression of in-tenancy rents during the rent cap to give rise to situations where tenants could experience excessively large rent increases, even though the proposed rent would not necessarily exceed the market rent. The Scottish Government does not consider that the pre-2022 Act approach to rent adjudication, which is based on market rents, would protect tenants from excessively large rent increases if there is a sudden move to open market rent in a single step. This temporary protection is essential given the very challenging financial situation that privately renting households continue to face.

Table 15 summarises the benefits and costs for Option 2, which has been costed relative to the business as usual (Option 1).

Table 15. Summary of benefits and costs for Option 2 (relative to Option 1)

Benefits

Lower rental payments for tenants (estimated between £19m and £226m across Scotland, with a central estimate of £81m) as a result of protection against very large rent increases.

Reduced costs for local authorities and third sector organisations (non-monetised) as a result of reduced pressure on housing and homelessness services since easier for tenants to sustain tenancies.

Reduced pressure on NHS Scotland (non-monetised) due to reduced negative mental and physical health impacts on tenants as a result of concerns about very large rent increases.

Costs

Foregone rent for landlords (similarly estimated between £19m and £226m across Scotland, with a central estimate of £81m which is equivalent to 2.1% of the estimated total rental income in 2024-25 of £3.867bn) due to the operation of the tapered approach, although this will be an overestimate to the extent landlords would set a below-market rent even without the change in adjudication process.

Familiarisation costs for landlords (small) – Scottish Government communication will help ensure any such costs are mitigated as much as possible.

Reduced incentives for landlords to invest in new supply and housing quality (small) – such costs are expected to be limited since new let rents are not controlled, and the level of the taper has been set so as to allow landlords a sufficient increase in rental income (between 6% and 12% if the gap to market rent justifies it, and this increase is expected to take place in the context of lower inflation) to cover costs related to housing quality.

Higher adjudication costs for RSS and FTT (estimated between £0m and £0.31m for RSS and £0m and £0.07m for FTT) if caseloads increase.

Net benefit

In economic terms, foregone rent represents a transfer from landlords to tenants. Since tenants continue to face challenging economic conditions, this transfer is expected to result in a net social benefit. Avoiding the financial, housing and health impacts of excessively large rent increases could also reduce pressure on public and third sector organisation budgets. Familiarisation costs are expected to be limited due to Scottish Government communication and the negligible change in the existing processes, as are wider costs from reduced incentives to invest in new supply and the quality of existing homes due to the design of the temporary changes to the adjudication process. Administrative costs for the rent adjudication process (estimated to be less than £0.4m in total) are expected to be small in comparison to the net social benefit of the regulations.

After careful consideration, the Scottish Government recommends implementation of option 2, as this proposed change to the rent adjudication process would balance the rights of landlords and tenants. The change proposed under Option 2 still takes account of market rents in the adjudication process and allows for rent increases up to 6% to go forward without any modification (provided the new rent does not exceed the market rent value). Rent increases above 6% can also go forward, but the tapered approach means that they will take account of the gap between the existing rent and the market, with the additional gap between the existing rent and market above 6% split between the landlord and the tenant, up to a maximum of 12% of existing rent. This allows for rents to increase, and to move back towards the market level as part of the transition away from the rent cap.