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Short-Term Let Licensing Creates Immediate Barrier to Investment

Short-Term Let Licensing has created a total and unavoidable barrier to investment or commercial borrowing in the small accommodation sector. This includes the purchase of a new property, the sale of a property or the ability to invest in a business.

There seems to be some confusion in the application of the Scottish Government’s guidance to local authorities in terms of the locus or standing of a prospective purchaser to apply for a short term let licence over a property that they do not own.

This presents a significant problem for the following reasons: (a) further borrowing against existing policies; and (b) new entrants to the market.

The Civic Government (Scotland) Act 1982 (Licensing of Short-term Lets) Order 2022 states the following in the Introductory Text “Interpretation” at 2 (1) to define the ‘host’, the person who can apply for a short term let licence: “host” means a person who is the owner, tenant, or person who otherwise exercises control over occupation and use, of the accommodation which is the subject of a short-term let.“

‘Control over occupation and use’ is clearly a higher benchmark than someone who simply has the “permission” or “consent” of the owner of the property to apply to the relevant local authority for the short term let licence. This situation appears to be causing confusion at local authority level. The Scottish Government’s guidance does not align with the SSI.

The Highland Council, for as example, has stated the following:

“The host or operator of the let can apply for a licence or they can have an agent of their choice apply on their behalf.

The agent will need to have permission from the host or operator to apply for a licence on their behalf.”

The Highland Council’s interpretation of “control over occupation and use” is closer to the SSI than the Scottish Government’s interpretation which simply requires ‘permission’ from the owner. A prospective purchaser does not have locus to apply for a short term let licence with just the “permission” of the owner. Moreover, there is no scope in the legislation for the local authority to exercise any “discretion” over “the control” or “use” description of “the host”. There is no such discretion and an application granted under such supposed “discretion” would be unlawful.

This Scottish Government’s guidance on the point aligns with what the Cabinet Secretary for Housing Shona Robison MSP said to the Convener of LGHP Committee, Ariane Burgess MSP on 7 December 2022. The Scottish Government’s guidance does not align with the SSI. A prospective purchaser does not have locus to apply for a short-term let licence with just the “permission” of the owner. Moreover, there is no scope in the legislation for the local authority to exercise any “discretion” over “the control” or “use” description of “the host”.

Given the above impasse between the Scottish Government and local councils, it would appear to be the case that it is impossible to borrow against a property that is going to be used as a short-term let.

If this is the case, it will have a number of deleterious effects. Properties that come on the market will have to go to residential purchasers only. The average price of a property in many parts of Scotland, most specifically in rural areas, is out of the reach of those on an average wage. That means these properties will sell to individuals with wealth – possibly moving from more affluent areas of the country. The properties are more likely to be sold as second homes.

The Royal Bank of Scotland has confirmed that they “would expect operators to have all necessary permits, licences, etc. to do business at all times, and that without it they would be in default.” We understand that as it stands, the RBS has not amended it’s credit policy on the back of the change in legislation, however, understanding the changes they will have a more cautious approach going forwards. What is clear is that a licence will need to be in place as a Condition Precedent (CP) before lending is confirmed.

One of the leading lenders to holiday lets in the UK has confirmed to the ASSC that they are struggling to see how they could lend to someone without a licence as they would not meet the lending criteria which is based on Interest Coverage Ratio (ICR) thresholds. They note the following:

“With the introduction of the Licensing order from the 1st October 2022 lenders are reviewing their ability to lend in Scotland to self-catering holiday let / unlicensed guest houses / Bed & Breakfasts. 

As a lender active in this market, we believe we will be unable to lend to new property purchases in Scotland because we don’t believe we can do so responsibly. We use an affordability test based on Interest Coverage Ratio (ICR) to ensure that the applicant has sufficient rental income to cover loan servicing and repayment. At the point of lending, the borrower would not hold a licence and therefore we cannot be certain they will be able to operate their business, as the applicant is unable to host guests (up to 9 months for new applicants). 

 Therefore, any borrower that requires this income to service the loan would not be able to borrow. Some borrowers could demonstrate affordability using other earned income not related to the property being purchased and use a personal income and expenditure test, however this will restrict the market to high earners running amateur businesses or topping up already high incomes rather than full time guest house and bed and breakfast operators.

We believe therefore that this will severely impact the market for these properties. This in turn means reviewing our budgets and market expectations as to what this will do to lending volumes, property prices and our back book portfolio. With 2/3 of new lending in 2022 being made up of property purchases, this is expected to have a serious impact on our business model.

Specific areas of the licensing requirements which have led us to this conclusion are:

  • The owner of the property must be named on the application form or permission from the owner to apply for a licence.  Until the sale completes then our applicant is not the owner.  Whilst a vendor may give the applicant permission to apply for a licence, this isn’t guaranteed, particularly if the sale is dependent on the licence being in place as it could slow down the sale. Applicants are reluctant to spend money on a licence until they are the owner of the property which may not complete.
  • With the requirement that each host and property must be licensed, this is preventing an active host adding to their property portfolio with another property that is currently in let as a holiday let.
  • It’s against the law to take bookings or host guests before you have a licence.  Whilst this is not impacting our back book portfolio of active hosts, it does impact property purchases.
  • It is stated that there should be no presumption that the purchaser’s application for a licence would be granted.
  • The introduction of Control Areas and planning permission needing to be in place alongside a licence gives greater concern to lending in these areas. 

In addition, we need to consider our existing customers and the impact on them if they are not successful in their licence application. They may no longer be able to afford to keep the property.  While we have strong checks on the types of properties our applicants are purchasing, a large volume of properties on the market at the same time is likely to impact the value of properties if large numbers of existing operators cease trading.  Whilst some properties may be suitable for as a longer-term rental property, there is likely to be an impact on rental income making the property unaffordable. In addition, not all properties would be suitable for residential use due to the nature and size of the property. We would expect some customers to see their income severely impacted, and as a lender we would need to support customers in financial difficulties and in the worst-case scenario take possession of properties.”

The ASSC received a letter from Kintail Finance on 6th February 2023, representing the commercial property finance, broking and sales sector, which is pivotal to the operation of the commercial property sales market in the Scottish accommodation sector:

  • Lenders are absolutely key to make the market function as it should.
  • But they are quickly pulling out of the market, unable to lend to a prospective purchaser because their client cannot secure a licence as part of concluding missives on a property purchase.
  • We know the effect of lenders pulling out of the market – we saw this at Covid in March 2020, when business sales/purchases plummeted; and of course in the financial crash of 2008.
  • This is the scale of the problem currently facing buyers in this sector NOW.
  • The effect on sellers is to create a “Barrier to Exit” as they are unable to sell their business, as buyers cannot secure finance.
  • Finance is required in 96% of business purchases in this sector.
  • To put into context, if a rule with this impact was implemented in the personal mortgage market, people would be unable to buy a home, as there would be no lenders. The market would collapse.
  • This is what we are now facing for the small commercial accommodation sector, unless urgent changes are made to the implementation of the legislation.

Read the full letter: Letter to ASSC

While this remains the status quo, lenders are not prepared to lend to new operators. This creates an immediate barrier to investment.

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