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

Capping of rent increases on referral or appeal

Background, Objective and Rationale

Section 24 of the 2016 Act provides for tenants with a PRT to refer a rent increase to a Rent Officer (Rent Service Scotland). The Rent Officer (or Tribunal on appeal) will then determine the open market rent for the property, based on the rent being paid for similar rented properties in the same area. This may have the effect of agreeing the proposed increase, decreasing the proposed increase, or increasing the rent above the increase requested by the landlord where this is required to bring it in line with the open market rent determined by the Rent Officer.

Prior to the temporary suspension of the rent adjudication process under the 2022 Act, use of rent adjudication under the 2016 Act was limited despite efforts to raise awareness of the right for tenants to make a referral, with only 181 applications made to RSS between 2018 and 2022. This has led to concerns that the current process may act as a disincentive to tenants seeking to challenge a rent increase due to the risk of the rent being set above that requested by the landlord.

In addition, research suggests that affordability concerns, particularly for lower-income tenants, can result in a power imbalance between landlords and tenants.^[61] Despite being aware of their rights, this can result in tenants not exercising them for fear of the consequences. The impact of paying more rent than necessary due to being deterred from making a rent adjudication application may be particularly significant for lower-income tenants, who are more vulnerable to rent increases.

Responses to the New Deal for Tenants consultation support the arguments set out above. Respondents reported that under the current system the risk of a rent increase above that proposed by the landlord has limited the effectiveness of adjudication in addressing affordability pressures, and expressed a view that this is an unreasonable risk for tenants.^[62] Some respondents noted that current rules mean that those requesting adjudication risk being penalised for using provisions which have been intended to increase protections for private tenants.

Similar rights to seek a determination of rent directly through the Tribunal exist for private tenants with Assured Tenancies under the Housing (Scotland) Act 1988 (“1988 Act”). While no new Assured Tenancies can be created, a small number of applications continue to be made to the Tribunal in connection with existing tenancies. The same issue arises for rent increase reviews for Assured Tenancies. Under the current framework, the Tribunal could potentially set a rent above that proposed by the landlord.

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

Option 1 – Do nothing (Business as usual)

In this option, current legislation would remain the same. In determining an application from a tenant for a review of a proposed rent increase, the Rent Officer and Tribunal would continue to have discretion to determine a rent above that requested by the landlord.

Doing nothing would not address the concerns raised in relation to the risk to private tenants that applying to the Rent Officer or the Tribunal for a rent adjudication for a PRT or an Assured Tenancy could result in a rent higher than that requested by the landlord. Tenants with a PRT may therefore continue to be deterred from seeking a review of a rent increase, reducing the effectiveness of rent adjudication. It would also not deliver on the commitments made in A New Deal for Tenants.^[63]

Option 2 – Non-regulatory measures

We have considered further non-regulatory action to raise awareness of tenants’ rights to seek a rent adjudication.

Prior to the temporary suspension of rent adjudication under the 2022 Act, we had already taken steps to raise awareness of private tenants’ rights to rent adjudication through a number of national tenants’ rights awareness raising campaigns. Despite this, usage of the rent adjudication process had remained low.

Non-regulatory action would not address the concerns raised in relation to the risk to private tenants that applying to the Rent Officer or the Tribunal for a rent adjudication for a PRT or an Assured Tenancy could result in a rent higher than that requested by the landlord or deliver our commitment to legislate as part of the New Deal for Tenants.

Benefits

Awareness of tenants’ rights and being empowered to exercise them is an essential aspect of a well-functioning regulatory system. Further ongoing awareness raising activity would benefit tenants helping more tenants to understand their rights to seek a review of a proposed rent increase and encourage tenants to make an application.

Under this option, the potential for rent to be set by the Rent Officer or the Tribunal at a level higher than the amount they originally proposed, if that is in line with open-market rent would remain, and where this happens the landlord would benefit through increased future rental income.

Costs

Cost for the Scottish Government for this non-regulatory action would depend on the type and extent of awareness-raising activity undertaken. Recent national marketing campaigns raising awareness of private tenants’ rights more generally, including how to seek a review of a rent increase, cost £165,000 in 2021-22, and a lower amount of £80,000 in 2023-24 by reusing previous campaign creatives.

There might be additional costs to RSS or the Tribunal if the awareness-raising activity results in more applications for rent adjudication. However, the limited impact of previous awareness-raising exercises on rent adjudications suggests that at any such increased costs could be minimal.

To the extent that tenants have not been applying for rent adjudications because of concerns that the rent could be raised above that requested by the landlord, rather than because they do not know about their rights, tenants would continue to experience the negative impacts of being deterred from seeking a review of a rent increase; as set out above, this may be a particular issue for lower-income tenants.

Option 3 – Legislate (preferred option)

This option would see us progressing legislative changes to amend the rent adjudication framework under the 2016 Act (for properties not in rent control areas) and the Assured Tenancy framework under the 1988 Act. These changes would remove the ability of the Rent Officer or the Tribunal to determine a rent above that requested by the landlord.

This is the only option that would remove the disincentive to private tenants to seek a determination on a proposed rent increase on the basis that a referral may result in a higher rent than that originally proposed by the landlord.

Benefits

Private Tenants

Capping rent increases on referral or appeal to RSS and the Tribunal at the lower of open market rent and the rent proposed by the landlord will benefit tenants by removing the current risk to tenants with a PRT and Assured Tenancy that the rent may be set higher than that proposed by the landlord. This is currently a barrier for some tenants who may otherwise seek a review of a proposed rent increase. Of the approximately 600 respondents to the New Deal for Tenants consultation who answered the question about this proposal, many supported it citing that removing this barrier for tenants could lead to a more effective and better used rent adjudication process which could act as a deterrent to landlords considering unfair or unaffordable rent increases.^[64]

Removing the concern that the rent might be raised above that asked for by the landlord following adjudication should give tenants greater confidence to challenge rent increases which they feel are not justified. This could lead to a benefit to tenants, including a lower rent increase and providing them with greater predictability once they have received a rent increase notice.

RSS and the Tribunal are required to publish the information used in determining the level of rent, including the assessment of the open market rent for the property. This will ensure transparency of process for both tenants and landlords. Where the open-market rent is higher than the increases proposed by the landlord, a landlord would be able to propose a further increase to this level the following year, should they wish to do so and market conditions continue to justify this. It would also allow tenants to plan for further rent increases, should evidence indicate that the current rent increase was below the open-market rent.

Costs

Rent Service Scotland

As RSS rent adjudication process will remain substantially unchanged except that the final determination of rent cannot be higher than that proposed by the landlord, implementation costs will be minimal.

However, if there is a significant increase in applications for a rent adjudication under the new procedures, RSS may incur an increase in operational costs. A range of scenarios have been costed. The medium scenario is based on a 50% increase in applications, with a low scenario of a 25% increase and a high scenario of an increase of 100%.

The number of rent adjudications has been increasing each year since 2018, likely due to the greater share of tenancies on PRTs as well as greater awareness of rights. However, it is then likely to level out, and it is assumed that the business-as-usual caseloads in the future would be around 200. For each scenario, the baseline caseload is multiplied by the relevant percentage increase, and then by a cost per case of £697, which is based on the current cost per case incurred by the Tribunal.

RSS do not have a role in rent adjudication for Assured Tenancies.

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

Measures in the Bill are not expected to result in any additional implementation costs, or higher costs per case, for the Tribunal in their role in processing appeals against a Rent Officer’s decision in adjudication cases.

As with RSS, the overall process remains unchanged with the Tribunal being restricted from setting a rent higher than that proposed by the landlord. However, should the change result in a significant increase in the number of applications to the rent officer, the Tribunal may see additional costs from a corresponding increase in cases referred on to them for additional consideration.

Approximately 10% of RSS decisions have been appealed to the Tribunal. Applying this appeal rate to the low, medium and high scenarios for increased applications to the RSS, this could result in an additional 5, 10 or 20 appeals to the Tribunal. The SCTS estimate that an average rent adjudication appeal costs £1,511, which leads to the following estimated additional costs for the Tribunal.

Appeals in relation to a proposed rent increase for an Assured Tenancy are made directly to the Tribunal. Data provided by the Tribunal indicates that in 2022-23 there were only four applications made for an assured tenancy rent adjudication.

Published decisions show that two of these applications were rejected on the basis that they were not assured tenancies. Given the low number of applications and that no new Assured Tenancies have been able to be created since the introduction of the PRT under the 2016 Act, it is not anticipated that there will be any material increased costs to the Tribunal from these changes in relation to Assured Tenancies

Private Landlords

Changes to rent adjudication do not amend the rent adjudication administrative process for landlords, or their agents, and there is no fee for landlords when appealing a determination of rent by RSS or to the Tribunal. No additional costs for private landlords, or their agents are expected, related to restricting the Rent Officer or the Tribunal from determining a rent above that requested by the landlord.

While the proposal in relation to rent adjudication may result in the Rent Officer or the Tribunal determining a rent lower than would have been possible under the current rent adjudication processes, the financial impact on private landlords of this change has been assessed as minimal. In only two out of 181 rent adjudications for PRTs has the rent been set above that requested by the landlord. Furthermore, if the change results in more tenants requesting rent adjudications, if the rent is reduced by the RSS or Tribunal due to exceeding the market level, then the landlord was not justified in asking for that increase - and if the rent is set in line with that requested by the landlord due to the market rent being the same or higher, then the landlord is no worse off than if the tenant had not applied for a rent adjudication. Moreover, as pointed out above, if the rent determination finds that the market rent would have been higher than that requested by the landlord, the landlord can take that into consideration when determining the following year’s increase, provided market conditions continue to justify this.

While one business indicated in our engagement that there would be additional costs from instructing an independent agent to provide evidence of market rent, as well as costs associated with their own time in dealing with claims, other businesses did not expect any additional costs. The rent adjudication process is not new and the measure does not change the costs of the existing process. In addition, landlords are not required to instruct an independent agent to provide market evidence, and landlords can therefore go through the process without incurring this type of cost.