Short-term lets – licensing scheme and planning control areas: business and regulatory impact assessment

B: Purpose and intended effect

B1. Background

2. Short-term lets have become the subject of much controversy in some parts of Scotland and evoke strong opinions. The 2018-19 Programme for Government made a commitment to ensure that local authorities have appropriate regulatory powers to balance the needs and concerns of their communities with wider economic and tourism interests.

3. The Short-Term Lets Delivery Group was established in 2018 to assess the evidence base and the impact, positive and negative, of short-term lets, identify the existing powers councils have and explore whether further measures are required. The Group comprises officials from across relevant areas of government, including: better regulation, community empowerment, economy, housing, licensing, planning, tax and tourism.

4. In April 2019, the Scottish Government launched a public consultation and commissioned independent research into the impact of short-term lets on people and communities. The 2019 consultation paper outlined possibilities for a regulatory approach, which included the licensing of short-term lets. The paper noted the range of approaches adopted in cities and countries around the world and asked for opinions on the types of short-term lets which should be regulated and the controls which should be applied. In parallel with the 2019 consultation, what is now the Planning (Scotland) Act 2019 completed its passage through the Scottish Parliament and includes provision for the establishment of short-term let control areas. The reports on the 2019 consultation and research^[1] were published on 28 October 2019.

5. On 8 January 2020, Kevin Stewart MSP, Minister for Local Government, Housing and Planning, announced plans to regulate the short-term let sector in the Scottish Parliament:

“First, I intend to establish a licensing scheme for short-term lets using powers under the Civic Government (Scotland) Act 1982. Secondly, I am prioritising work to give local authorities the power to introduce short-term let control areas under powers in the Planning (Scotland) Act 2019. Finally, we will review the tax treatment of short-term lets to ensure that they make an appropriate contribution to the communities that they operate in.”

6. Work to implement the regulations was paused in March 2020 because of the coronavirus (COVID-19) pandemic but resumed in July 2020. A second consultation on detailed proposals was undertaken from 14 September to 16 October 2020. We had originally planned for a longer period of engagement on our proposals in autumn 2020 but the timetable had to be compressed in order to ensure that the secondary legislation could still be laid at the Scottish Parliament in this session. The report on this consultation was published in December 2020.

7. This is important so that local authorities can make progress in establishing licensing schemes and control areas from April 2021 to address what is a pressing issue for some of our communities. Furthermore, the Scottish Government is anxious to see the measures to protect the safety of guests and neighbours rolled out without unnecessary delay.

8. In this BRIA, references to consultation are to the 2020 consultation exercise, unless the context demands otherwise; we will refer to the consultations as the “2019 consultation” and the “2020 consultation” where there is any risk of confusion.

B2. Objective

9. The Scottish Government’s purpose in regulation of short-term lets is to ensure that local authorities can balance the needs and concerns of their communities with wider economic and tourism interests.

10. The Licensing Order establishes a licensing scheme to ensure short-term lets are safe and address issues faced by neighbours; and to facilitate local authorities in knowing and understanding what is happening in their area and handling complaints effectively.

11. The Licensing Order is complemented by the Control Area Regulations which makes provision for local authorities to designate control areas. The purpose of control areas is to help manage high concentrations of secondary letting (where it affects the availability of residential housing or the character of a neighbourhood); to restrict or prevent short-term lets in places or types of building where it is not appropriate; and to help local authorities ensure that homes are used to best effect in their areas.

12. Both these instruments will be complemented by possible changes to taxation to make sure short-term lets make an appropriate contribution to local communities and support local services. The review of the tax treatment of short-term lets is being progressed by the Scottish Government separately.

B3. Rationale for Government intervention

13. The Programme for Government 2018-19^[2], published on 4 September 2018 (page 97), made a commitment to:

“work with local government, communities and business interests to ensure that local authorities have the appropriate regulatory powers to allow them to take the decisions to balance the needs and concerns of their communities with wider economic and tourism interests. These powers will allow local authorities to ensure a safe, quality experience for visitors, whilst protecting the interests of local communities.”

14. The regulation of short-term lets supports the following National Performance Framework objectives:

• We have a globally competitive, entrepreneurial, inclusive and sustainable economy.
• We have thriving and innovative businesses, with quality jobs and fair work for everyone.
• We tackle poverty by sharing opportunities, wealth and power more equally.
• We live in communities that are inclusive, empowered, resilient and safe.
• We value, enjoy, protect and enhance our environment.
• We are creative and our vibrant and diverse cultures are enjoyed widely.

15. The rationale for government intervention^[3] is based around:

a) asymmetric information affecting guest safety; and

b) negative externalities, such as:

(i) increased housing costs;

(ii) reduced amenity;

(iii) quality of place;

(iv) noise and nuisance; and

(v) criminal use.

16. We consider these in turn.

17. Asymmetric information can occur when one party involved in a transaction has different information about the good or service than the other party.

18. A primary motivation for introducing this legislation is to enhance guest and neighbour safety. (Neighbour safety is affected, for example, through risk of fire.) In the private rented sector, a landlord must register with the local authority that their rented property is located in before they can let a property. As part of the registration process, the local authority will check whether the landlord is a fit and proper person. A prospective tenant is able to search the Scottish landlord register to check whether a landlord is a fit and proper person before living at the property. A similar process exists for Houses in Multiple Occupation (HMO), which require a licence. In both cases, the property must at least meet the repairing standard and the landlord must be a fit and proper person.

19. At present, short-term lets are unregulated; the only mechanism the average guest has to find out about the accommodation is peer review on platforms. Even assuming the reviews are authentic, peer review tends to be focused on quality of experience rather than safety. Whilst there is some overlap between quality and safety, most guests will not have the time, inclination or skills to examine or comment upon safety features.

20. The primary concern stemming from this is that people may unwittingly stay in accommodation that is unsafe. The mandatory safety conditions for the licensing scheme will apply across Scotland for all types of short-term let and set licensing requirements around water, electrical, gas and fire safety. (These are summarised in the consultation report at Annex C.) Broadly speaking, this asymmetry of information is addressed through the mandatory licence conditions.

21. This asymmetry of information can also lead to market failure in the sense that prices determined by the market do not provide proper signals to consumers (guests) and producers (hosts). If it is difficult for guests to distinguish the safety and quality of short-term lets, this could mean that some hosts may offer lower prices because they do not incur costs required to meet safety standards, and thus undercut hosts who do ensure that their accommodation is safe. If there was much better information (through licensing), then unsafe accommodation should be removed from the market and hosts will be competing on a level playing field of compliance with mandatory safety conditions. It may even be possible that a licensing scheme could boost overall demand for short-term lets by providing consumers with increased confidence in the functioning of the short-term lets market.

22. A negative externality occurs when the action of one party adversely affects another party, but this is not accounted for in the market price of a good or service. This can result in an outcome where the efficient amount of a good or service supplied is exceeded and unnecessary social costs are imposed. One example is the impact of poor quality short-term lets on the safety of neighbours, discussed above. Other examples, discussed below, are more variable across Scotland and will be addressed through the discretionary powers given to local authorities through the Licensing Order and Control Area Regulations.

23. An example of a negative externality arising from short-term lets, the impact of which can vary substantially across Scotland, is the effect on local housing markets and communities. Research for the Scottish Government on the impact of short-term lets^[4] on local communities identified that there were just under 32,000 active Airbnb listings in May 2019 across Scotland, with nearly 70% of these being secondary letting (whole properties). In Edinburgh City Centre and Skye, it was estimated that secondary lets actively listed on Airbnb accounted for just over one in ten of all dwellings in these areas.

24. In areas like Edinburgh City Centre and Skye, where there is high demand for short-term accommodation, it may be more profitable for a landlord to let their property as a short-term let, rather than a long-term let, reducing the supply of private rented sector accommodation. It may also attract investors looking to buy property to let as a short-term let, competing with residents looking for permanent accommodation in the area. This reduction in the supply of housing available to residents can impose social costs that are not borne by short-term let hosts:

a) increased costs of housing (renting or purchase) for local people;

b) the supply of local amenities for residents may decrease if there are not enough residents to make these amenities financially viable;

c) the quality of the neighbourhood and sense of community can be adversely affected if residents feel less safe because of the high concentration of short-term lets or if residents have fewer permanent neighbours;

d) specific nuisance such as through noise, littering and other forms of antisocial behaviour; and

e) use of short-term let accommodation for criminal enterprises (such drug dealing, sex trafficking etc.), with or without the collusion of the host.

25. The potential negative impacts of short-term lets on local communities are evidenced in the research the Scottish Government carried out in 2019. This research showed that there is a large degree of concern about the prevalence of short-term lets across Scotland, and in turn there are social costs caused by short-term lets that are borne by residents. The research included a survey of 197 residents in five areas of Scotland:

• Edinburgh (Central ward comprising the Old Town, New Town and Tollcross) – established world heritage site, city-centre tourism;
• The East Neuk of Fife (East Neuk and Landward ward coastal towns excluding St Andrews) – established coastal second home location;
• Fort William – rural expanding tourism;
• Glasgow (City Centre ward including Merchant City, Anderston and Yorkhill) – inner-city centre event tourism; and
• Eilean a' Chèo (Skye) – remote rural established tourism.

26. Resident respondents were asked whether they agreed or disagreed with the following statements about the effect of short-term lets; the share that agreed with these points is as follows (the remaining disagreed or were neutral):

• Reduction in homes for general residential use – 62%
• Reduced housing affordability for local people – 57%
• Negative impact on parking – 53%
• Increased littering / waste – 52%
• More traffic problems – 47%
• Inconsiderate use of common spaces – 42%
• Noise and disturbance – 38%
• Negative impact on overall character (of neighbourhood) – 35%
• Increased cost of living in neighbourhood – 35%
• Damage to homes or common areas – 27%
• Higher insurance premiums – 26%
• Threats or abuse – 21%.

27. Exploring these concerns in more detail, in Edinburgh, most resident, community and business participants in the research highlighted the reduced supply of housing caused by short-term lets in the city centre, and the impact they felt this was having on housing costs. This was usually expressed as cost of rents in the private rented sector, although some community participants also highlighted local house sales being out of reach for residents, with properties sold to short-term let investors. It was claimed by many community participants that this has resulted in a “spiralling decline” for the sustainability of the local community as there was no way of attracting residents due to increasing prices combined with “over-tourism” in the area.

28. In Fort William and Skye, the suggestion from many business and community participants was that there was a considerable problem in sourcing workers due to lack of available residential housing. This was related to workers for the tourism industry, property construction and maintenance, other local industry, public services including health and education, and the university in Fort William. Some participants in each area explained that the lack of residential housing was exacerbated by the fact that there are very few viable housing alternatives in these rural areas due to the travel distances involved.

29. Concerns were also raised by many participants in all case study locations over the lack of health and safety regulations in short-term lets when compared to the residential letting market, or traditional B&B and hotel sectors. This was also linked to concerns about: building insurance, property repairs, and residents being unable to find hosts to resolve issues.

30. In Edinburgh, one of the most prevalent concerns and negative impacts of short-term lets raised by many resident and community participants was around the daily disruption caused by them. This included noise caused by the constant stream and volume of visitors and cleaners in common stairs; the noise of suitcases being wheeled about and bumping up and down two or three times every week; continual buzzing at the common entry doors at anti-social hours; visitors not understanding how to use the local refuse system; visitors not recycling; taxis arriving and departing often using their horns to indicate their arrival; and smoking in the common areas. The same participants discussed the fact that this could be ignored occasionally, but it was the incessant nature of the disruption which caused unhappiness. There was a sense of powerlessness to do anything about the problem due to the transient nature of tourists, the anonymity of hosts and no-one to go to “centrally in the council”. This often related to visitors not understanding the etiquette of living in tenements.

31. Many resident, community and a few business participants, raised concerns about the impact that short-term lets have on the character of areas, and sustainability of communities. The most common issues related to the availability of local services, shops for local people, and the impact on falling primary school rolls due to falling residential population. These issues were raised in all areas apart from Glasgow.

32. The reduction of local services and shops for local people was raised by many community participants across all areas, except Glasgow. These participants often made a direct link between the growth of short-term lets and tourism to the closure of local amenities such as the post office, bank and library. They also noted that many retailers in these areas now concentrate on the tourists for trade, with examples of local shops such as the local butcher, green grocer and newsagent closing over recent years. Some participants in rural areas were concerned about the continued 'liveability' of the community for local people, with useful local shops closing for tourist shops. They highlighted that people now have to travel long distances for shopping due to local shop closures.

33. These social costs to residents are not borne by short-term let hosts. If they were, it might be expected to result in a reduction in the problems associated with short-term let accommodation.

34. The legislation seeks to remedy this by giving local authorities discretionary powers through: the Licensing Order to manage the adverse impacts of short-term letting on neighbours and communities; and through the Control Area Regulations to designate parts of their local authority as control areas. This approach recognises that these negative externalities may not be prevalent across all areas of Scotland, or in all areas of a local authority, by giving local authorities discretionary powers to flex to local circumstances.

35. The Licensing Order will give local authorities discretionary powers to add licence conditions to address local needs and concerns. These conditions can be applied generally (to all licences), in certain circumstances (e.g. tenement buildings) and individually to a specific licencee (though this is only likely if problems have arisen). This will allow local authorities to target specific measures on the specific licencees or areas with specific problems.

36. The Control Area Regulations would require a landlord seeking to let a property as a short-term let in a control area to apply for planning permission to be able to do so, which could be refused. This would enable local authorities to manage the prevalence of short-term lets in their area, and reduce social costs arising from short-term lets.