How to navigate Scotland's rent controls and what the future holds

Swedish economist Asar Lindbeck once said that the best way to destroy a city was to bomb it and the second best to impose rent controls, write dispute resolution experts John Stirling and Conner McConnell.

He might have said ‘rent controls for any length of time’. The current period of controls on rent increases for residential properties comes to an end at the end of this month.

In 2022, the Scottish Government introduced a complete freeze on rent increases to address the cost of living crisis. Subsequently, this freeze developed into a rental increase cap of 3% (with landlords able to apply for a 6% increase in particular circumstances), and thereafter a complex formula was introduced to regulate increases. The cumulative effect of that was to restrict the growth of rental levels so that they were necessarily behind the rise in open market rent.

In some ways, open market rent is a poor guide to affordability, both for landlords and tenants. Food costs, energy and interest payments all rose faster than the CPI during the period. There have been winners and losers. The rules around who could and could not raise rents did not account for individual circumstances.

There is an expectation that efforts will be made to increase rentals for established tenancies to open market levels.

Worst hit have been landlords of older properties with substantial borrowings. As the controls only affect existing tenancies, and supply has been depressed, those tenants seeking new leases have also been hard hit, and students have suffered more than most.

Landlords who have had people leave their tenancies, and those with small borrowings, have done better and, of course, tenants in tenancies established within the year before the first rent control have done best. They’ve had their rent suppressed longest.

There is an expectation that efforts will be made to increase rentals for established tenancies to open market levels. Supply has been lessened by landlords leaving the sector, some to holiday lets and some out completely. However, the exodus hasn’t been a flood. There is no evidence of general falls in the value of properties, despite differential taxation within the UK and historically high levels of property tax (LBTT).

We believe those problems and the recent period of rent controls have decreased capital growth rather than put it into reverse. The taxation points are likely to have a greater impact on who lives in what, as opposed to the period of rent controls.

The current controls on Private Residential Tenancy (PRT) increases are not the market’s principal concern. It is the continued control on recovery proceedings that is most concerning. Recovery still needs to be reasonable. That’s the issue to keep a close eye on.

The sector is fragile but currently looks likely to return to market rents. There will be a backlog of improvements held back by rent controls to be worked through. When that’s done, normality will return if there are no more controls and if the tribunal continues to allow landlords to recover in a way that does not trouble capital values.

We are optimistic, but there is a new Housing Bill making its way through the Scottish Parliament. It currently fixes rent reviews outside rent control areas at open market values and gathers evidence to allow rent control areas to be fixed. There have been no rent control areas designated to date. Information aids decision-making and there can be no objection to fixing open market rents during a tenancy, but lawmakers need to note the delicate balance between rent, capital value and timely repairs as the bill progresses.

Written by John Stirling, Partner, Dispute Resolution, Gillespie Macandrew and Conner McConnell, Associate, Dispute Resolution, Gillespie Macandrew