Scottish Tenancy Reform and its impacts on BTR

Out goes the old system of assured and short assured tenancies, replaced by the new tenancy which intends to enhance the security of tenure, with no initial or fixed term period, and based on the provisions outlined in a model tenancy agreement.

However, existing tenancies will continue to be assured until terminated. A tenant now has a 28-day notice period and a landlord has a notice period of 28-84 days, but the landlord must be able to invoke one of the 18 mandatory or discretionary grounds to get the property back. Gone will be the days of ‘no fault’ possession at the end of a tenancy. A tenant will have the right to dispute their ground for eviction and a landlord will need to seek eviction through a judicial body (the First Tier Tribunal).

In addition, rent increases will be limited to once a year with a 3-month notice period. The tenant has 21 days to object and an objection will be referred to a Rent Officer.

Local authorities can also apply to become a rent pressure zone but only after a consultation period with landlords, tenants and their respective representatives, and by providing evidence that rents are rising excessively; causing undue hardship to tenants; and putting pressure on local authorities to provide housing or subsidise rents.

The final decision on this is a matter for Scottish Ministers, who can agree to apply a limit on rent increases by CPI + 1% + x%, with x a matter for their judgement, for a period of up to 5 years. This limiting of rents will be applicable to existing tenancies only and does not effect a landlord’s ability to set the initial rent at the start of a tenancy.

For landlords, the main impacts will arise over less certainty as to the end date of tenancies and controls on rent rises. On the plus side, it should lead to a simplification of the process and paperwork that landlords have to deal with and it may encourage tenants to think about their tenancies as longer term propositions.

Although this is another set of legislative and regulatory changes for the BTR sector in Scotland to contend with, the investment potential of Scotland and its main cities should be largely unchanged. Market conditions of rising demand for rental property, coupled with weak supply and relatively high yields, should still see Scotland as an attractive destination for investment.

Scotland also has advantages over other parts of the UK, with additional dwellings supplement not applied on purchases of 6 or more properties, and a new rental income guarantee scheme just announced to encourage BTR investment by offering to compensate investors for a financial shortfall in qualifying projects that result from lower than expected rental incomes.

However, the framework underpinning the Scottish residential rental market is now very different from that of other parts of the UK and investors in this sector need to be aware of this.