Major changes to the tenancy laws in Scotland will give more security to tenants, but also produce hazards for landlords.
The Private Housing (Tenancies) (Scotland) Act will commence in stages later this year and will come into force in 2017. The Act sees the current system of tenancy agreements swept away and replaced with a single ‘private residential tenancy’ (PRT).
The Scottish Government claims the Act that was driven by a wish to given more security to tenants, will also safeguard lenders, landlords and investors.
But there are concerns that provisions to limit rent rises and repossess properties are going to adversely affect landlords and discourage them from investing in the sector.
The main change for tenants will be that their tenancies can continue indefinitely, unless the landlord is able to invoke specific criteria to end them. The no fault ground for eviction disappears. Tenancies will also last for a minimum of six months, unless both parties agree otherwise.
Another restriction on landlords is that rents can only be reviewed annually, with at least three months advance notice given of any intended increase. Tenants can appeal to the rent officer who will then set an ‘open market rent’. This, in turn, can be challenged by the landlord at the First-tier Tribunal (FTT).
There are worries that this change may have unfortunate consequences for both sides. Landlords may find it hard to fix rents that anticipate all their costs over a year. This could mean some having problems keeping up mortgage repayments. Equally, there is a risk that rent is set too high as an insurance against unforeseen eventualities, to the detriment of tenants.
Another hazard for landlords is that they may find their properties in a designated ‘rent pressure zone’. This will mean only being allowed to increase rents by a percentage above the consumer price index plus one per cent for up to five years.
But perhaps the biggest change is that the Act makes it much harder to repossess a property at the end of a tenancy. The process of terminating has arguably been streamlined, but the practice of repossession will get harder.
For example, there will be no need to serve both a Notice to Quit and a Notice of Proceedings. Both are replaced by a single Notice to Leave. But this can only be served on the basis of at least one of the fewer available grounds for repossession.
There is a further significant potential issue over repossession. Where tenancies have been in place for more than six months the landlord must give 12 weeks’ notice. The CML has raised concerns that a tenant could leave immediately after a Notice to Leave was issued, but the landlord may not gain possession for 12 weeks. There may also be an impact on rent revenue during the notice period that could make it hard to meet buy-to-let mortgage payments.
If a Notice to Leave is ignored, the landlord should apply to the FTT, which will issue an eviction order provided the statutory grounds for doing so have been established.
Most of the statutory grounds are mandatory, which means the court must grant an order. They include if the property is 'intended' to be sold by the landlord with a reasonable prospect of succeeding, or is sold by the lender, criminal behaviour by the tenant, breach of the tenancy agreement or rent arrears of at least three consecutive months. The CML has further concerns regarding the ‘sold by the lender' ground for eviction and the possibility of a tenant paying rent to a landlord with a mortgage, but the landlord not making payments to their lender. It has also stated that the new notice periods proposed may mean that five or six mortgage payments are missed before a lender can proceed to obtain an eviction order, as it will have initially taken the landlord through its early strategies for payment when the mortgage payments were initially missed. This potentially increases bad debt levels for lenders.
Lenders often find themselves in the position of having to obtain vacant possession of a property that has been let to a tenant. The preference is to obtain vacant possession of the property and then sell it on to repay the sum owed by the customer.
To obtain vacant possession of a tenanted property a lender will first start possession proceedings against their customer. Once Decree is obtained against the customer the lender will then have to take steps to remove the tenant. This will not change under the new legislation.
Usually the tenant will be aware of the possession proceedings against the customer, as the court papers require to be served on the Occupier of the property.
The approach taken to remove a tenant will depend on whether the lender consented to the tenant occupying the property. It is easier for the lender to obtain vacant possession when a tenant is unauthorised.
Unauthorised tenancies occur when a customer obtains a mortgage for a residential property and then rents the property to tenants without the lender's consent. This means that the tenancy will have been created in breach of loan conditions. The existence of an unauthorised tenancy will usually come to light during possession proceedings or upon enforcing the court order awarded against the customer.
In these circumstances, if the tenant does not vacate voluntarily, the lender must raise court proceedings against the tenant to remove the tenant from the property and obtain vacant possession.
The introduction of the PRT will not alter the legal position where a tenancy is unauthorised.
The situation for lenders dealing with a property occupied by an authorised tenant is more problematic, as the lender has consented to the tenancy. This situation occurs with buy to let mortgages, as the lender is consenting at the outset to the property being rented to tenants.
A lender faced with an authorised tenant will still require to issue court proceedings to obtain a possession order against the customer. As with the unauthorised tenant, the court order against the customer is not enforceable against the tenant. This presents the lender with a practical difficulty as it is unlikely to be able to challenge the validity of the tenancy. This leaves the lender with several choices:
The new legislation is likely to create additional challenges for lenders trying to secure vacant possession. The Act provides greater security of tenure therefore tenants may be more reluctant to vacate the property voluntarily. This will be particularly so when alternative rented accommodation in the area is limited. The removal of the no fault ground for possession is one way in which the Act provides greater security (although this would only be an issue for a lender who adopted the tenancy, which will be rare in practice). The property being in a rent pressure zone (and therefore having increases controlled) may also make it much less attractive for a tenant to vacate a property.
Only one outcome is currently clear from the new Act: it is going to significantly change the relationship between landlords and tenants.
Lenders need to consider the changes being introduced by the Act and their potential impact on obtaining possession of buy to let properties.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com