Rented sector reform: Housing (Scotland) Bill: business and regulatory impact assessment

Making changes to let property

Background, Objective and Rationale

Under the current legal framework, private landlords are usually responsible for the decoration of a let property and properties can be let furnished or unfurnished. The exact terms on which a property is let will depend on the tenancy agreement in place. Private tenancies that began on or after 1 December 2017, except in a limited number of circumstances, will be a PRT and subject to the requirements of the 2016 Act. The 2016 Act is silent regarding the decoration and personalisation of a property and landlords and tenants are free to negotiate and agree their own terms.

In practice, some landlords will agree specific terms that allow tenants to make certain changes to the let property or stipulate certain specific restrictions; for example, tenants may be restricted from putting up pictures on walls.

Evidence has shown that, where tenants are not afforded the right to personalise their space, it undermines their ability to feel at home in their property, which also undermines their health and wellbeing through various mechanisms.^[104] A recent evidence review^[105] also found that for low-income tenants there could be more systemic tenant/landlord power asymmetries that make them less likely to want to request improvements from their landlords, and recent evidence from the Scottish PRS found that people on low incomes were less likely to be confident in exercising their rights for fear of landlord reprisals^[106]: these studies suggest that those on low incomes may be particularly disadvantaged by not having clear legal rights to personalise their property.

There are arguments based on economic efficiency for government intervention in this area, in particular due to misaligned incentives: the benefits of personalisation accrue to tenants, while the costs potentially fall to landlords. This can result in personalisation not taking place, even where the net social benefit is positive. As set out above, it is possible for a willing landlord and tenant to negotiate to allow the tenant to personalise the property, with the landlord able to use contractual clauses or existing protections (e.g. the tenancy deposit) to protect themselves from any costs. However, there is no obligation on landlords to do so.

There is also an equity argument, that tenants should have a similar ability to personalise their homes as people living in other tenures. There is a further equity argument based on the fact that low-income tenants might find it particularly challenging to negotiate with their landlord to personalise their home, or they may not have the confidence even to ask, in the absence of a clear right to do so.

Sectors and Groups Affected

The main sectors and groups who could be directly affected by the various options considered include:

• Private tenants
• Private landlords
• Letting agents
• Scottish Courts and Tribunals Service
• Tenancy Deposit Schemes

Option 1 – Do nothing (Business as Usual)

In this option, current regulation would remain the same with no additional rights for tenants to make changes to their rented home, and no additional protections provided to landlords who do wish to consent.

This is not the Scottish Government’s preferred option. Doing nothing would not provide those with a PRT greater rights to decorate or make changes to a let property. Whether or not a tenant could make changes would remain solely at the discretion of the landlord. It would therefore not achieve the improvements to the renting experience sought or the associated benefits to the health and wellbeing of tenants, including families with children.

Option 2 – Non-regulatory measures

We have considered pursuing non-regulatory action by amending the Scottish Government’s Model Private Residential Tenancy Agreement to include additional terms relating to making changes to a let property which could not be unreasonably refused.

By making such terms freely available, this approach may raise the salience of personalisation, encouraging landlords and tenants to agree to such terms. It may also make landlords more willing to agree to such changes by reducing any drafting costs to landlords, since they will be able to use pre-written terms instead of trying to draft them themselves or incur legal costs to do so.

However, as there is no legal requirement for a private landlord to make use of the Scottish Government’s model tenancy agreement, there would be no guarantee that all tenants with a PRT would be afforded new rights if this option were progressed. Tenancy terms would also be enforced in the same way as other terms of the tenancy, and there would be no specific framework in which disputes relating to personalisation would be handled.

In addition, should landlords stop using the model tenancy agreement, landlords would no longer be required to provide tenants with the accompanying ‘Easy Read Notes’ which provide tenants with vital detailed information on their tenancy rights and would instead only receive information on the statutory terms. In a survey of private tenants,^[107] 20% of respondents^[108] disagreed that their landlord would be open to their personalising the property (e.g. putting up pictures, changing curtains, painting a room). This demonstrates that a non-regulatory approach would be unlikely to ensure the consistency of rights sought.

Benefits

Some private residential tenants would be afforded additional rights to make changes to their home, helping to improve the renting experience, and potentially the health and wellbeing for some. However, these benefits would not apply to all tenants with a PRT. For those private landlords who voluntarily gave tenants additional rights through using any modified model tenancy agreement, there may be benefits from reduced turnover, with tenants choosing to stay in properties longer, and potentially also taking better care of the property, reducing post-tenancy redecoration costs.

Costs

There would be no additional costs associated with this approach, as landlords could continue to choose whether or not they opted in to providing tenants with greater ability to make changes to the let property.

There will though be a continued social cost for those where the lack of control over their home and environment has, or is, negatively impacting on their health and wellbeing or that of their family.

Option 3 – Legislate (Preferred option)

This option would see us progressing legislative changes that would create a legal framework for the introduction of greater rights for most private tenants to make certain changes to their home. This would introduce a right for all tenants with a PRT to make certain minor changes without landlord consent (Category 1 - e.g. putting up pictures and posters), and the right to request certain other changes (Category 2 - e.g. painting walls) that could not be unreasonably refused after they have lived in the let property for over 6 months.

The types of changes that fall under Category 1 and 2 will be subject to further consultation and set out through secondary legislation. Provisions also allow for certain types of properties to be excluded from Category 1. This ensures that there is sufficient flexibility in the legislation to accommodate the needs of all types of properties under the new framework should this be necessary.

Tenants would be required to make a written request for a category 2 change, and the request must set out specific information prescribed through secondary legislation. This will ensure that the landlord has sufficient information to consider the request. Landlords would have 42 days in which to respond to a request in writing. Depending on the individual circumstances of a request, landlords would be able to approve a request, refuse consent where it is reasonable to do so or set reasonable conditions for approval. Reasonable reasons for refusal and conditions for approval would be set out in secondary legislation. Any refusal by a landlord must include their reasons for refusing the request.

Disputes around unreasonable refusal and unreasonable conditions for approval could be brought to Tribunal and be determined by the Tribunal.

This option, which has been informed by consultation and engagement with tenants, landlords, and the Tribunal, seeks to appropriately balance the additional rights for tenants with sufficient protections for landlords. Engagement with landlords and letting agents indicates that many of them already regularly handle requests or have processes in place to manage requests for changes to the let property. The proposed legislation will help to formalise this existing practice, standardising practice across the sector and ensuring that all private tenants with a PRT are afforded rights to make changes to their rented home. As a result, the rights of private tenants will be more closely aligned with other tenures, taking account of the differing legal frameworks.

Benefits

Private tenants

All private tenants with a PRT would be afforded additional rights to make certain small changes without the permission of the landlord and a right to request other larger changes which cannot be unreasonably refused. This will help to improve the renting experience for tenants with a PRT by giving them more control over their home and helping to support mental health and wellbeing.

Evidence illustrates the link between being able to feel secure and at home in a rented property, and health and wellbeing benefits for tenants. In order to feel ‘at home’ one must be able to form routines, exercise control, and be free from surveillance, which allows people to feel secure enough to develop social identity and self-confidence which leads to improved health and wellbeing.^[109] Being able to decorate one’s space was found to be important for low-income renters in particular, and it was found that, even where they lacked the funds to carry out more expensive changes, simply being able to add shelves or hooks to display important objects/pictures were important and meaningful in terms of allowing tenants to undertake ‘deep homemaking’, a practice which led to increased pride and enhanced wellbeing.^[110] The ability to personalise and ensure their property feels like a home was particularly important for families with children, to allow them to create a child-friendly bedroom or help to manage situations in which children are sharing rooms.^[111]

The importance of personalisation to feeling at home and tenant wellbeing was also raised as part of the New Deal for Tenants consultation,^[112] as was the importance of being able to decorate one’s home to achieve ‘tenure blind’ housing outcomes and enshrine tenants’ rights to housing. Tenants will also be able to feed into the consultation process which will support the use of the regulation-making powers, including which types of changes are prescribed in categories 1 and 2.

Tenants will benefit from a clear process for asking for a category 2 change with prescribed timescales within which they should receive a response. Where a landlord does not respond within the prescribed timescale, this would be considered to be an unreasonable refusal, ensuring that tenants are not prevented from exercising their rights where a landlord does not respond. Tenants will also benefit from new appeal rights to the Tribunal in relation to a written request for a category 2 change that they think has been unreasonably refused, or been granted subject to what they consider an unreasonable condition.

Private landlords

As for tenants, landlords will benefit from a clear regulatory framework for considering and responding to requests to personalise a home. The Scottish Government will develop guidance to support implementation of the new framework, which will also make it easier for a landlord to understand their responsibilities.

Anecdotally, landlords and agents also report tenants making changes without permission. Introducing a legal process may result in more tenants proactively seeking consent, helping to avoid some of the existing problems, where works are undertaken without permission.

Further consultation as part of the development of secondary legislation will help to draw on landlords’ experience of alterations and ensure that the types of changes defined as categories 1 or 2 are informed by their views.

There may also be some benefits for private landlords from reduced tenant turnover, with tenants choosing to stay in properties longer. The evidence^[113] also suggests that allowing greater personalisation increases the likelihood that tenants will look after the property. This could potentially result in lower costs for the landlord at the end of a tenancy.

Costs

First-tier Tribunal for Scotland (Housing and Property Chamber)

These new application routes will result in additional one-off and ongoing costs for the Tribunal. One-off costs include establishing the new application routes, training of staff and Tribunal members on the new jurisdiction, and digital costs to update systems.

Implementation costs for the Tribunal

Initial set up costs for all new applications being progressed are set out under the Rent Control section. Tribunal cost estimates are based on implementing multiple applications routes at the same time; should this not be possible there may be some additional costs above current estimates.

Operational costs for the Tribunal

There will be ongoing costs for new application routes in relation to making changes to a home. Three scenarios were developed to show costs for a range of application numbers based of low, medium and high scenarios. These estimates are informed by data on the existing caseload at the Tribunal for enforcing the Letting Agent Code of Practice, given the similarities in the type of disputes, as well as data on dispute levels for similar rental rights in Victoria State, Australia. Further detail on the basis of these estimates is set out in the Financial Memorandum for the Bill.^[114]

There may also be an increase in applications to existing routes resulting from the new applications routes to the Tribunal under the pets and personalisation provisions. These costs are set out above in Table 27 and Table 28.

Private landlords

The exact costs of this provision to individuals and businesses are difficult to quantify as they depend on a range of factors including the existing policies and practice in place, the type of modifications prescribed by Ministers, the nature and extent of the proposed alteration, the size and current condition and decorative order of the let property, whether it is let furnished or unfurnished and whether the let property is managed directly by the landlord or by an agent on their behalf.

Moreover, the preferred option includes a number of important safeguards for landlords helping to ensure the measures are reasonable and landlords’ rights are protected. These protections include:

• The right to refuse a request where it is reasonable to do so in the circumstances.
• The right to set reasonable conditions for approval. Reasonable conditions will be consulted on, but could include, for example, requiring tenants to return the property to its original condition, asking for an additional deposit, and for the work to be carried out by a professional tradesperson. Such conditions will help to mitigate the risk of additional damage to the let property, including from work carried out to a poor standard.

Depending on landlords’ existing policies and practice and the types of modification prescribed in regulations there may be additional costs for landlords associated with:

• Stage 1 – the time to consider and respond to requests for a category 2 alteration from tenants where the measures result in more tenants making a request;
• Stage 2 – modification disputes to the Tribunal following refusal of a category 2 request or in relation to the conditions for approval set by a landlord;
• Stage 3 – cost to repair any damage under category 1 or an approved category 2 modification at the end of the tenancy, as well as any additional void time.

Stage 1 Costs

Stage 1 costs will only occur where a tenant has lived in the let property for at least six months and chooses to make a request under the new framework for a prescribed modification that cannot be unreasonably refused. Powers in the Bill enable Ministers to prescribe the information that must be provided in a request for a Category 2 change. This aims to ensure that landlords have all the information required to consider and determine a request, helping to reduce the time required to consider and respond to a request.

Costs for this first stage in the new framework will depend on a landlord’s existing policies and practice and the type of modification requested. Feedback from landlords indicated that landlords already manage requests from tenants to make changes to their home. Given this and that dealing with any additional requests will require only minor amounts of additional administrative time, we think any additional costs to landlords will be negligible, particularly as setting out the type of information that tenants should supply in legislation and guidance might mean that landlords receive better-quality information at the start of the process than as is the case currently.

Stage 2 Costs

Stage 2 costs would apply where a tenant has made an application for a prescribed category 2 modification and the landlord has refused consent, which the tenant considers unreasonable, or where the landlord has given approval for the alteration but has set conditions for approval that the tenant considers to be unreasonable. The main costs associated with stage 2 of the framework relate to the time required to respond to an application to the Tribunal in relation to their decision to refuse or set conditions for approval.

As with the first stage, costs will depend on the exact circumstances of the case. Engagement with landlords and letting agents suggested that the time taken to manage an application to the Tribunal could take several hours. This would include emails, phone calls, the time taken to consider relevant documentation and attendance at a Tribunal case management discussion or hearing. Some landlords also noted additional costs including travel costs related to any in-person attendance at the Tribunal and time off work for tribunal hearing(s). However, following successful introduction by the Tribunal of teleconferencing and video conferencing, Case Management Discussions and Hearings continue to be largely by teleconference call, with parties, Tribunal members and clerks participating remotely.^[115] We therefore think travel and time off work costs are likely to be minimal.

Based on a time cost of £25 per hour,^[116] this could result in an additional cost for an individual landlord of approximately £125 per Tribunal application based on a total of 5 hours. This average cost per application is then multiplied by the projected number of applications to the Tribunal relating to personalisation (see Table 30) to derive estimates for the total cost to landlords from such applications.

Stage 3 Costs

There may be additional costs for landlords in relation to repairs to the property resulting from damage caused by an alteration under category 1 (no consent required) or an approved category 2 modification at the end of the tenancy.

As previously indicated, the exact additional costs will depend on a range of factors related to the property; its size, current condition, existing landlord policies and practices, the length of the tenancy and the types of alteration prescribed through secondary legislation following further consultation. A further BRIA of the costs associated with the prescribed modifications affirmative regulations will be prepared to support the secondary legislation.

Stage 3 costs due to Category 1 change

It is anticipated that most costs associated with repairing damages resulting from category 1 changes, which are intended to be small changes (for example, putting up pictures on walls), will be relatively small. In addition, some landlords have indicated that they already allow their tenants to put up pictures and posters, so for landlords in these circumstances there would be no additional costs associated with a category 1 change.

There are already existing protections in place for landlord to recover costs associated with damage to the let property through any tenancy deposit taken at the beginning of the tenancy. The maximum deposit allowed is twice the monthly rent which, based on the average rent for a 2 bedroom property (the most common property size), would be around £1,682.^[117] Feedback as part of our engagement with landlords suggests that the cost of wall repairs could be in the region of £200-£300. This level of cost could therefore be accommodated within the current tenancy deposit limits, if one is taken.

Stage 3 costs due to Category 2 change

The types of modifications prescribed will be subject to further consultation but are likely to include the painting of walls and putting up shelves. A further common request landlords report receiving from tenants is putting a television on the wall.

Responses submitted as part of our BRIA engagement indicated that the most common type of repair which landlords have to undertake as a result of tenant changes to the property (with or without permission) was the redecoration of the property. This ranged from repairing walls, to repainting walls and woodwork of one room, to redecorating the entire property. A number of respondents also gave examples of the need to replace carpets where they had been damaged by a tenant’s changes (e.g. paint on carpet). Another common concern highlighted was that the work carried out by tenants (with or without permission) was poor quality and not to at a lettable standard, requiring redecoration at the end of the tenancy.^[118]

It is difficult to quantify the potential additional costs, both due to the range of variables that affect the cost of a repair (as discussed earlier), and also because, given that landlords already undertake similar repairs, it can be difficult to determine the additional cost which is attributable to personalisation, i.e. what is over and above general redecoration costs. Anecdotally, redecorating between tenancies is common. However, the average cost of these repairs reported by those responding to our request for information, ranged from £250 for wall repairs to £2,500 for repainting and repairing a whole 2 bed property (the most common property size (Table 33). Landlords also highlighted the potential for additional void time where the repairs required resulted in a delay to the reletting of the property. Based on average rent of a 2-bed property of one-month delay in the reletting of a property could result in a loss of rental income of approximately £841 where this occurs.

Based on the average costs of likely repairs, the majority of these costs could be covered by deductions from the tenancy deposit at the end of the tenancy. As is currently the case, costs that can be deducted from the tenancy do not include fair wear and tear of the property and these should be taken into account when a landlord is determining what costs can be recovered through the tenancy deposit.

As mentioned earlier, a common concern raised by landlords/agents and reason for redecoration at the end of a tenancy by respondents was that the work carried out by tenants (with or without permission) was of a poor quality and not to a re-lettable standard. The policy proposals take this into account, and for larger changes under category 2 the provisions provide powers for Scottish Ministers to set out reasonable conditions of approval. These will be subject to further consultation but could include requiring the work to be carried out by a qualified tradesperson or requiring the tenant to pay a reasonable supplementary deposit above the current tenancy deposit limits, or to reinstate the property at the end of the tenancy. Such conditions will help to mitigate any additional costs for landlords relating to the cost of and time taken for any after-tenancy repairs; they could even result in some cost savings for private landlords from lower re-decorating costs where a tenant leaves the property in good condition at the end of the tenancy or returns the property back to its original state.

Where the costs exceed the deposit (with or without a supplementary deposit), there are existing legal mechanisms to recover costs from tenants through making an application for a payment order through the Tribunal.

In light of the existing protections and provisions in the Bill to set reasonable conditions for approval, any additional costs for landlords associated with this measure are therefore considered to be negligible.

Letting agents

Any additional costs will depend on the existing fee structures a letting agent has in place and whether these are based on the work undertaken or a percentage of rental income basis. There may be some additional costs to letting agents where their agency fees would not sufficiently cover any additional costs associated with managing a request for a change under this provision or in supporting a landlord respond to an application to the Tribunal. These additional costs could be recovered from the landlord through a change in letting agent fees where this was thought to be necessary

Where a letting agent manages request for changes on behalf of a landlord, they will benefit from there being a clear regulatory framework for considering and responding to requests and from the guidance by the Scottish Government to support implementations. These will make it easier for an agent to manage a request on behalf of a landlord.

Further consultation requirements for making use of the regulation making powers for setting the types of changes will help to draw on the experience of letting agents in setting the types of changes prescribed in categories 1 and 2.

Private tenants

Any additional costs for tenants are likely to be minimal and associated with the time to make a request for a category 2 change and for making an application to the Tribunal to challenge a decision to refuse, or a condition for approval by a landlord or agent that they think is unreasonable. Powers for Scottish Ministers to set out the information required as part of any category 2 request aims to make the process of making a request as simple as possible for both tenants and landlords.

There may also be additional upfront costs for tenants associated with any additional deposit requested by a landlord as a condition of approval. This deposit, less any reasonable deductions for damage, should be returned to the tenant at the end of the tenancy – the tenancy deposit scheme framework provides assurance to tenants that this will be the case. Any additional supplementary deposit allowed, and the parameters of this, will be subject to further consultation with tenants and landlords.

The tenant is able to take the time and financial costs into account when deciding whether to request a change. Therefore, they only have to incur these costs where the benefit to them from making a change exceeds these costs. We therefore anticipate that the provisions will result in a significant net benefit to tenants.

Some landlords have indicated that in response to the proposed legislation they may switch to letting on an unfurnished basis; stop redecorating between tenancies and simply market the property as seen, allowing tenants to decorate how they like; and/or routinely take the full two months’ deposit legally allowed. It has been suggested this change in behaviour could negatively impact on tenants by shifting costs onto them, which could particularly disadvantage low-income tenants. A recent study of the Scottish PRS found that many tenants in their sample were unhappy with the condition of their properties, which was combined with a low awareness of their rights as well a fear/lack of confidence in exercising rights for fear of landlord repercussions. This was particularly the case for low-income renters, whose housing choices are already constrained.^[119] There is also evidence that low-income tenants may be unable to afford larger decorating- related costs such as purchasing furniture or painting.^[120]

However, the proposed legislative approach is designed to mitigate any potential unintended consequences due to changes in landlord behaviour. The Bill sets out a clear legislative framework for dealing with requests to make changes to the property, and implementation of the framework will be accompanied by awareness-raising activity. This should help landlords and tenants to understand their respective rights and responsibilities, and provide a robust process for dealing with any disputes, giving confidence to all parties, and in particular low-income tenants. Furthermore, provisions in the Bill require Scottish Ministers to consult further on the types of changes that fall into category 1 and 2, the information that must be provided as part of a written request, as well as reasonable conditions for approval. This will help the Scottish Government to develop the detail of the regulations so that they meet our overarching policy intention while responding to concerns of landlords. Any unintended impacts from changes in landlord behaviour will also be monitored as part of implementation and evaluation activities.

Tenancy deposit schemes

Approved tenancy deposit schemes already handle disputes about repairs needed at the end of the tenancy. No significant changes are anticipated from these provisions to approved schemes processes and procedures.

Should the provisions result in more tenancy deposit disputes resulting from modifications under category 1 or 2, there may be additional use of the free tenancy deposit adjudication service.

As part of the BRIA engagement process, we consulted the three approved tenancy deposit schemes – LPS (Letting Protection Service) Scotland, mydeposits Scotland and Safe Deposit Scotland – on the potential impact and costs that may arise from the provisions to allow greater flexibility for tenants to personalise their home and flexibility for private tenants to have a pet. Their feedback was set out above.^[121]

Following a similar approach to that set out in relation to keeping pets, if it is assumed that there will be a 5% increase in tenancy deposit applications, then based on a current level of adjudications of 4,671 (2022-23 data), this could result in 234 additional adjudications relating to personalisation across the three schemes. Taking into account the average cost of a tenancy deposit dispute is £125, this could result in an additional costs of £29,250 per annum relating to disputes. In addition, assuming that that the same share of decisions is reviewed as is currently the case, there could be an additional £75 per annum in relation to appeals. As also set out under the section of Pets, if there was a significant increase in caseload there may be a requirement for more Alternative Dispute Resolution staff.

However, it is anticipated that these additional costs incurred would be offset by any uplift in interest revenue that could be generated from the additional funds held from additional deposits requested by landlords. For these reasons, no significant increase in net costs for tenancy deposit schemes is anticipated.