What the New Rent Controls Mean – How to Work out the ‘Calculated Amount’ and ‘Market Difference’
With the final period of the Cost of Living (Tenant Protection) (Scotland) Act 2022 (the Act) coming up fast on 31 March 2024, the question that was on the Private Rented Sector’s mind was “what is next”? Were we going to return to the position before the Act and before the current rent cap, or is something else coming along? With the recent consultation dated 15 December 2023 (that was not advertised, open over the festive period and which closed on 10 January 2024) on ‘Supporting transition away from the emergency measures’ [contained in the Act], the Scottish Government gave a clear indication of their intentions in relation to the question of further rent controls.
Indeed, if anyone was in any doubt, the consultation was swiftly followed by the draft Rent Adjudication (Temporary Modifications)(Scotland) Regulations 2024 (the Regulations).
Is the rent cap going to end on 31st March 2024?
The technical answer to that question is ‘yes’, but that does not mean the end of controls on rent increases. What the Scottish Government now proposes to do, is to replace the current rent cap, which is relatively simple to understand, with a new byzantine system which rewrites the basis under which Rent Officers and/or the First-tier Tribunal can adjudicate rental disputes between landlords and tenants. Further information and accompanying documents can be found here: https://www.gov.scot/news/continuing-rent-protection-for-private-tenants/
What do the new rules mean?
Prior to the Act where there was a dispute about a rent increase under both the Private Housing (Tenancies)(Scotland) Act 2016 and the Housing (Scotland) Act 1988, the comparator of ‘open market rent’ was used to determine whether the increase was reasonable. That will change to the lowest of 3 measures:
- Open Market Rent (OMR);
- The new rent proposed by the landlord, or;
- Where the gap between the tenant’s current rent and the OMR (known as the ‘market difference’) is more than 6%, what is called the ‘permitted rent’.
These new rules only apply to statutory rent increases for Private Residential Tenancies and assured (including short-assured) tenancies. They do not affect contractual rent review clauses in assured/short-assured tenancies.
What is the ‘permitted rent’?
This is where things get a bit more complicated. We will no longer have a straight ‘rent cap’ but something that operates in a very similar way and where rent increases can be no more than 12% (but not as simple as just a rent cap of 12%) as well as lovely new formulae to get used to (some readers will be old enough to remember the formula set out for Rent Protection Zones, which was never used). In short, the permitted rent will be deemed to be either:
- Where the ‘market difference’ is less than 24%, the ‘calculated amount’; or
- Where the ‘market difference’ is 24% or more, 12% more than the rent currently paid.
How do you work out the ‘calculated amount’ and the ‘market difference’?
That brings us to the new formulae, which are as follows:
1) For “calculated amount”
‘C’ is the current rent and ‘D’ is the market difference expressed as a percentage.
2) ‘Market difference’ as a percentage.
Where ‘C’ is the current rent again and ‘M’ is the OMR.
What will this look like in practice?
So, if a tenant disputes a proposed rent increase by a landlord, then at adjudication, Rent Officers and the First-tier Tribunal will use the formulae to determine the new rent. If the ‘market difference’ is less than 6%, then then the proposed rent will apply. If the ‘market difference’ is more than 6%, then the rent will be increased by 0.33% for every percentage point the ‘market difference’ exceeds 6%, but always subject to a maximum increase of 12%. By way of further illustration, if a landlord proposes an increase of 8% (and the gap between current rent and OMR is 8%), then the increase that would be allowed at adjudication would be 6.7%.
How long is it proposed this would be in place for?
It is suggested that this system would be in place for a maximum of 12 months starting on 1 April 2024 and be subject to ‘regular review’. However, subject to parliamentary approval, it is suggested that they could be extended for further periods of 12 months at a time. The question will be whether these proposed measures will be used to ‘plug the gap’ between the current rent cap under the Act and the anticipated longer-term ones under contemplation in the expected Housing Bill which was the subject of a previous blog?
Summary
The justification further controls are that, if the current ‘rent cap’ was lifted without anything being put in its place, it could lead to ‘sudden unmanageable rent increases for tenants’. There is nothing in the consultation or the regulations to help landlords who may be (and who have been since the Act came into force) struggling with increased costs and an inability to charge a market rent for their properties to help cover those costs. Indeed, some may say (with some merit) that, the only reason why some tenants now face the prospect of sudden large increases is because of the original rent ‘freeze’ and rent ‘cap’ themselves which artificially depressed rents, which in turn has caused a contraction in supply and more pressure on rent levels.
If you require any further information or advice, please contact us or watch our blogs for further updates.
