Letting in the law

I left the legal profession in 1997 to join the world of property management, a career leap akin to waking up one morning Freaky Friday-style to discover I was no longer an adult but was 16 again.

Gone were the hallowed halls ringing with ethical borders, centuries-old traditions carved in stone and regulations venerated as the law of the land. Instead I had crossed into a nascent world where rules were rudimentary and regulations highly optional: if as a property agent you checked your landlord’s gas appliances once a year, you were ahead of the game.

The duty of care landlords owed tenants was obvious and my company quickly established a code of conduct which included many precautionary measures to protect tenants, such as electrical portable appliance tests and safety checks, periodic electrical inspection reports, the installation of carbon monoxide and smoke detectors and soft furnishing checks.

Eight years in, the industry is growing up. However, with growth comes responsibility and as landlords face an escalating amount of legislation that will transform the way the industry operates, many are asking, is bureaucracy overburdening landlords and threatening profits?

Houses in multiple occupation

The Civic Government (Scotland) Act 1982 (Licensing of Houses in Multiple Occupation) Order 2000 (as amended in 2002 and 2003) heralded the current wave of legislation and was greeted with all the enthusiasm of junk mail. There was angry chatter of huge conversion costs, for example the potential requirement for external fire escapes.

In reality, the cost today of converting premises for HMO purposes is approximately £2,000, illustrating the industry’s adaptability to this legislative challenge. This is not an insignificant amount, but for those landlords willing to invest in HMO properties, there are rich rewards, even with the ongoing costs of annual inspections and licensing fees. As many landlords have shied away from this legislation-heavy zone, creating a deficit of accommodation, a glut of student tenants in Scotland’s cities, backed by parental guarantees, has kept demand high and pushed rents up.

Antisocial behaviour

Another piece of legislation set to further encumber landlords in the future with tough penalties if not observed, is the Antisocial Behaviour (Scotland) Act 2004, which will hand local authorities the power to regulate rental accommodation. Due to be implemented early next year, it will oblige all private landlords in Scotland to register with the appropriate local authority and specifies that it will be a criminal offence for an unregistered person to let out residential property.

Registration shifts the onus of responsibility for unruly tenants squarely onto landlords’ shoulders, with serious penalties for landlords who do not deal effectively with problem tenants. In such circumstances, a local authority can order that no rent is payable by the (antisocial) tenant, or can seize management of the property from the landlord. Authorities will also be entitled to enforce antisocial behaviour orders against tenants at the landlord’s expense. To avoid such scenarios, landlords must demonstrate their ability to tackle antisocial behaviour. My company is developing an antisocial behaviour policy for landlords to ensure a watertight procedure is in place to deal with complaints of alleged antisocial behaviour by tenants. The thrust of any such policy should be to diffuse any problems at an early stage.

Of course, there will be occasions where the only remaining option is to terminate the tenancy. Where the tenancy is a short assured tenancy (SAT) under the Housing (Scotland) Act 1988, the strongest device in the landlord’s armoury is a validly executed notice to quit and section 33 notice. It has been common practice for tenancy agreements to permit the month-to-month extension of a tenancy; however by allowing such an extension, the landlord is unable to serve notice to quit and section 33 notice within the requisite two month notice period. As these notices represent the most straightforward way of ending a SAT, landlords would be well advised to set up a SAT for a fixed period (minimum six months) and always to make sure the correct notices are served to ensure termination at the ish.

Landlords must take care to ensure that the criteria for establishing a SAT are followed to the letter, in order to make use of these valuable tools. It has been recognised that local authorities will accept a landlord’s intention to terminate a SAT at the ish as an appropriate response to antisocial behaviour on the part of the tenant. Without a tenancy expert to guide landlords through this legal quagmire, landlords could face a potentially very expensive, very nasty catch-22 where they have no power to evict the tenants and yet are held accountable for their bad behaviour in the eyes of the law.

Landlord accreditation

Registration will undoubtedly be seen as another layer of bureaucracy facing landlords. However, landlords with HMO licences and members of voluntary accreditation schemes such as the Edinburgh Landlord Accreditation (ELA) scheme will automatically be fast tracked onto the register.

A joint initiative between City of Edinburgh Council and the Scottish Landlords Association, ELA is a pilot scheme to set industry standards and recognise good practice in the private market, for those agents and landlords achieving the standards in terms of safety, tenancy management, and presentation, and will set those property agents apart with a badge of excellence. Other schemes due to be piloted are South Ayrshire, Dundee and Dumfries & Galloway. It seems likely that accreditation schemes will go nationwide.

Council tax discounts

Another significant issue affecting landlords is the introduction of the Council Tax (Discount for Unoccupied Dwellings) (Scotland) Regulations 2005, which poses financial ramifications to landlords nationwide. This change, which came into force on 1 April 2005, handed discretionary powers to local councils to reduce tax discounts from 50% to 10% on all second properties which are not the title holder’s primary place of residence, including holiday homes and rental properties. Originally it was understood this amendment would affect holiday homes only. However, practitioners should be aware that several local councils such as Aberdeen, Argyll and Bute and Edinburgh have already extended the parameters of “second home” to incorporate rental properties when furnished but unoccupied.

For example, a landlord with a furnished rental property which is unoccupied for as little as 24 hours, sees the previous council tax discount reduced from 50% to 10% – representing a marked increase in costs. As the changes may be backdated to 1 July 2005, this could translate into significantly larger council tax bills per annum for landlords. A loophole allows an overseas resident who owns property in Scotland still to qualify for 50% tax reduction, if the rental property is considered the principal place of residence in the UK.

Exceptions apply where the property is undergoing or requires major repair work to render it habitable, is undergoing structural alteration, or is unfurnished, in which cases complete exemption from council tax may be granted.

It has been speculated that participating councils have earmarked the extra revenue to fund affordable housing schemes, which must be applauded. However, with favourable council tax discounts on rental properties looking like a thing of the past, landlords must be made aware of the new council tax charges and must minimise any void periods to reduce council tax overheads.

Self-invested personal pensions

The introduction of self-invested personal pensions (SIPPs), scheduled for April 2006, is being heralded as big news for prospective landlords. For the first time, personal pension funds can invest in residential property. In a nutshell, investors will be able to purchase an investment property via their pension and enjoy tax relief (40% for higher rate taxpayers and 22% for standard rate taxpayers) plus tax-free rental income into their SIPPs. The rules are still to be ironed out; however practitioners should be prepared for the property market to re-ignite as a new wave of investors enter the property market. As the borrowing capacity of a SIPP is limited to 50% of the pension fund, early investments may be targeted towards smaller properties. For example, a SIPP with £100,000 of assets could borrow £50,000, creating purchasing power of £150,000. It could therefore be expected that SIPP investing will impact the first time buyer market initially, before rippling out to the wider market over the next few years. All other things being equal, property prices are bound to increase as a result.

The letting industry has come of age as it has adapted to legislation already imposed. I am confident that it will cope equally well with the new challenges posed by the Antisocial Behaviour Act and SIPPs. There are now several intertwining strands of legislation, through which a landlord must tread carefully. It has therefore never been more essential to put property investment into the hands of an expert. This is no longer a game – the letting industry just got serious.

Emma Fursman LLB, DipLP, MBA, DipCIM is managing director of Dunpark Property, management agency and buy to let consultancy