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 The Scottish Government’s Tenancy Proposals and their context amongst Tenancy Reforms – Richard Aird

Introduction

Prior to the First World War, the private rented sector provided about 90 per cent of Britain’s housing needs. By the time the consequences of “reforms” culminating in the Rent Act 1974 had fully filtered through, the private rented sector extended to just 10 per cent of housing stock, resulting in the largest public housing sector in Europe, larger even than communist regimes such as Poland and Romania. Of the laws introduced by the minority Labour government of February 1974, most lauded in their manifesto was their Act to give security of tenure to furnished tenants. Forty years later, the Rent Act 1974 is still seen as being in a class of its own, though for rather different reasons. The Scottish Government’s proposals will go some way in the same direction.


The History of Controls over Rented Accommodation 

With the coming of peace after both world wars, successive governments built houses to be owned and managed by local authorities. So the private rented sector became a backwater which, from 1915 onwards, became subject to a regime of “controlled tenancies” restricting both rents and landlord’s possession. Rents were low and it was hardly surprising properties were often poorly maintained and lacked modern sanitary facilities. The smart money had long since left the private rented sector and little incentive remained to become a private landlord. The local authorities operated a lumbering bureaucratic regime that tended to overlook two key areas: Domestic emergencies and young persons working away from home. Inevitably, this created opportunities for exploitative landlords, typified by Rachman and the domestic tragedies portrayed by the influential television drama “Cathy Come Home”. Less widely ventilated have been allegations of favouritism and abuse by members of public sector housing committees.

Reluctant to grapple with the cause, the Wilson government tinkered with the system. Its first venture, the Rent Act 1965, replaced the cap on rents, by now almost derisory, with a definition of “fair rents”, which still left returns below the market level. The quid pro quo was extensive repairs and improvements.

Since in many situations it was simply uneconomic for landlords to carry out increased obligations, the private sector stock was driven down further and values plummeted. Inevitably, opportunistic purchases of large portfolios of private rented housing by organisations such as the Freshwater Group followed, the prize being the considerable gain on eventual vacant possession. Other purchasers were less patient.

The swinging sixties brought visions of an emancipated existence in large cities. Apart from sharing with resident owners or bed and breakfast hotels, not a cool option, the only accommodation on offer was furnished tenancies, which had somehow slipped through the legislation. The furnished letting market, usually composed of flats to share, dramatically expanded and by the early 1970s became common in large areas of London and in other cities. If not in perfect equilibrium, for the first time in post-war Britain, an improving balance began to appear, accompanied by page after page of advertisements for furnished properties in the London Evening Standard and many provincial newspapers.


The Rent Act of 1974

But the expansion of shared furnished letting did not escape attention for long. The Rent Act 1974 was passed, imposing security of tenure and “fair rent” provisions on furnished tenancies. At the receiving end were panicked landlords who apprehended their ownership rights being legislated away. A remarkable number of furnished properties, amounting almost to one quarter, were sold within the year. Others sought to preserve their investments by letting to people from other countries or students whose stay was necessarily limited.

The brunt of the legislation was born by thousands of young employed persons, usually in the early stages of a career. The “imbalance” in supply of city centre and commutable flats increased by a factor of four. Incidentally, the 1974 Act was based on the minority report to the earlier Francis Commission. The core assumption of the minority was that, despite the obvious risks, landlords of furnished lets would never actually get around to selling their properties. This proved to be a profound misunderstanding.


Deja View – The Scottish Government’s Proposals

Turning to today, the Scottish Government is proposing a new form of tenancy for the Scottish private residential market which would make important changes. Echoing Shelter’s “Making Renting Right” campaign, the objective is to curtail the Scottish landlord’s rights to end tenancies, while introducing a process of adjudication for rent increases. Those promoting the proposals give every appearance of having fallen into exactly the same error as their fellow travellers 40 years before who introduced the Rent Act 1974.

The private rented sector is largely composed of individuals who own three properties or less. Their presence in the market is more fickle than that of larger companies committed by their prospectus, culture and expertise to the property sector. To these investors, restrictions on obtaining vacant possession add to the anxieties of letting property, especially for the older private landlord who may largely depend on the value of the investment to fund retirement.

Few believe the capital gains of the noughties will return and, for the diligent landlord, yields after repairs, management costs and expenses are often modest. Memories of assessments by rent officers and committees under the “fair rents” regime suggest the principal achievement of the adjudication process will be a steady erosion of returns. So it is not difficult to envisage, just as in 1974, many private landlords will sell up as the awareness spreads of new on-costs, hedged by new legal restraints and frustrations.


An End To Buy to Let Mortgages in Scotland – Is this a Concern?

There is an elephant in the room which no one seems to have noticed. The contemporary letting market is substantially financed by buy-to-let mortgages, a development made possible only by the robust bundle of rights provided by the assured tenancy regime. In their efforts to extend onerous licensing requirements, Scottish civil servants have already extended far beyond the scope of the English equivalent the rules for Homes in Multiple Occupation (HMO).  The Scottish concept of  HMO covers flats shared by more than two people. The English provisions are only designed to cover multiple occupation in the form of bedsits, such as Mr. Rigby operated in the Television comedy series “Rising Damp.”  The Scottish Government seems naively unaware that most UK lenders exclude any property defined as HMO from their lending criteria.

The Scottish proposals admit mandatory grounds of possession where a lender (or landlord) seeks to sell the property. But evictions on these grounds will be far from automatic as legal creativity will surely give rise to myriads of defences. Anyway, foreclosure is an unattractive route for the lender which can significantly eat into the proceeds of recovery. Damage the willingness to lend of the small number of specialist lenders left and the whole sector suffers. This has wider consequences than perhaps may initially be imagined. Many current mortgages contain terms which encourage regular re-mortgaging at two or three year intervals and new finance may become harder to obtain. This disastrous consequence is taken a step nearer because the new and peculiarly Scottish regime will require any lender who remains to introduce new underwriting criteria and procedure manuals specially for Scotland. It is by no means certain that remaining Buy to Let lenders, who are now predominately located in England, will undertake this expensive exercise. What is certain though is the new generation of corporate landlords who are necessary to house “the renting generation” will wish to make their investments in the more benign environment south of the border.

So when looking at future policy, the following things have to be considered.

1). The “Generation who Rents” has created the need for a considerable increase in the scope and extent of available rented accommodation.

2). History confirms that the only way to improve the stock of affordable housing for rent is by attracting new landlords to the sector. Penalising those private landlords who remain has the converse effect.

3) An inevitable and well documented consequence of a reduced and overregulated private housing sector are “loopholes” which few would otherwise choose such as “bed and breakfast” accommodation and the return of Rachman-type Landlords.

4)  The availability of Buy to Let Mortgages is crucial to developing a large and expanding stock of private rented accommodation. Cut back on the availability of finance and the extent of affordable available properties for rent markedly reduces.

5) The Scottish Government should make no changes to the present regime of Short Assured Tenancies and reapply a definition of HMO to bedsits where only the bathroom is shared. This would enable steps to be taken to publicise the attractiveness of Scotland as a location for investment in residential housing, rather than make that investment less and less attractive.

 Richard Aird is an Advocate and is qualified as a barrister.