Short-term lets in Scotland: what property owners need to know

Transcript

00:00:06 David Lee, Host

Hello and welcome to Podcasts by Brodies. My name is David Lee and in this episode we discussed the thorny issue of short term lets. We'll focus on the growth in short term lets as an industry in itself and the increase in need for property owners to understand their liabilities and obligations when leasing their properties.

Most people are aware of Airbnb, which offers owners the chance to lease rooms or entire properties to tourists without traditional intermediaries to facilitate the transaction. The short-term let sector has, however, come under fierce scrutiny as it's grown due to a perceived lack of regulation or protection for consumers in some cases. In Scotland and the UK, this has been steadily addressed, yet many owners are still not fully aware of their obligations.

Today I'm joined by two experts from Brodies to discuss this complex and very current issue. Kate Donachie is legal director and a health and safety expert and George Sismey-Durant is an associate who specialises in planning issues. Welcome to you both. Let's start with some definitions, George, firstly, what do we mean by short-term letters?

00:01:21 George Sismey-Durrant, Associate

So, commonly you think of your typical Airbnb style apartment or holiday cottage, but the definition catches a broader range of properties and lets. Despite the name, it isn't defined by the period of stay. So, under the legislation, short-term lets are residential accommodation, which is provided by a host in the course of a business to a guest, and then after that there's several criteria that have to be met. For example, it can't be the guest principal home, there has to be some sort of consideration or payment, or at least payment in kind and then it's not a short-term let if it's to family members, or if it's for house sharing for providing a service, for example, an au pair wouldn't count as a short term let. There's certain types of property and tenancies that are excluded, so hotels and aparthotels are excluded from the definition, purpose built, student accommodation, worker accommodation, etc. So the legislation all sets out certain exclusions which you might fall into, so despite our first thoughts of short term lets or holiday accommodation, it's actually a lot broader and sometimes it can be quite hard to see whether you fall within that definition or not. So, for example, one thing we've looked at in the past is when is a guest house a hotel? If it's a guest house, it's subject to it's a short term and therefore subject to licensing. If it's a hotel then it falls outside of it. There's a lot of nuances which makes it a bit more complicated and must first think.

00:03:03 David Lee, Host

You touched there a little bit, George, on the different types of short-term lets, but who are typically the groups who are doing the letting?

00:03:13 George Sismey-Durrant, Associate

It does sort of vary, but it's best to start with the fact that there's three ways to short-term let. There's home sharing which is you're letting someone use your home while you're there. So, for example, renting a room out to someone. Then there's home letting which is the same, but when you're not there, so if you're on holiday or if you're working away or offshore, you can rent your house out and that that counts. then the last one, which is perhaps the more problematic one is the secondary letting, which is where it's not a main residence. So that includes second homes or a commercial holiday let. So, depending on what type they are will depend on who's letting them out, so home sharing it would likely be individuals and home owners, similarly, home letting. Secondary letting is where it is either an individual who's fortunate enough to have a second home or a spare property that they fancy holding onto and renting out, or it's going to be companies or individuals that is their business to hold properties and let them out on short-term net basis or on a commercial basis as a business. We're also seeing that there's a number of companies out there that offer the administrative tasks of sorting out the cleaning, sorting out bookings and so on. So there is those players in the market as well.

00:04:40 David Lee, Host

Thanks very much, George. It's always good to ask these definition questions at the start because they're never quite as simple as they seem. So, there's quite a lot for us to work out there. Kate, if I can come to you, what spurred the growth of the short-term let sector? Do we have any statistics to illustrate how it has grown?

00:04:57 Kate Donachie, Legal Director

I don't have any statistics on that. I think it's probably fair to say that the digital platforms that have offered people a route into this market has been a massive driver. I mean, Glasgow and Edinburgh as obvious examples, there's always been this demand for holiday lets or short-term lets where people working away from home. So, I think the digital platforms have just given the conduit for this, maybe supply people didn't even know they had and to get it onto the market for people to pick up. I think it's just been the ease with which people can come together to make these arrangements and I think it's probably been a bit out of focus for the people who are normally involved in licensing and setting rules for letting, it's happened off screen, which I think is maybe part of the reason we find ourselves here now.

00:05:46 David Lee, Host

You've touched on it there, it has come into more people's consciousness, I guess as a result of the decision to license short-term lets, what was or what were the real drivers for pursuing the licensing approach?

00:06:01 Kate Donachie, Legal Director

I think there have been several, it's been multifactorial to put it that way. As I said, I think the issue is that this happened organically and initially at least Airbnb was a very owner to renter relationship, it wasn't really on a commercial scale and I think he kind of went under the radar. But there are there are. There have been concerns about people turning residential properties and essentially to commercial businesses without any change of use planning permission and there are issues about the supply and the rental market. In parts of Edinburgh where we would have previously had good supply of student lets or young professional lets, these have disappeared and have become Airbnb properties and that has other knock on effects around the city and on prices elsewhere in the city. There's problems with neighbours complaining, Edinburgh during the festival is always noisy and busy, but I think having several people living in flats and residential stairwells causes problems and I think there are big issues with regulation and safety. We know that one of the places we are most vulnerable is overnight accommodation, where we are not familiar with our surroundings, so you know typically hotels, but that's no different really for Airbnb properties. So it's a point in time when you as a guest are particularly vulnerable and there really were no or very little controls on the safety of that accommodation and then you look at the fairness in the market so when you compare what Airbnb, for example, or other short-term letting business models have to satisfy in terms of regulation and health and safety standards as compared to hotels and aparthotels and other kinds of student accommodation, there is a distortion there in the market because of the disparity between the obligations that both kinds of businesses have.

00:07:57 David Lee, Host

Thanks very much indeed, Kate. George, what about looking in a bit more detail at licensing in practice, what does it mean for property owners who are leasing out their homes and how does the licensing regime affect different categories of short-term lets?

00:08:14 George Sismey-Durrant, Associate

In short, if you now need a license before you can start operating, there are transitional provisions, which might touch on a bit later, for existing operators. But yes, you need a licence before you can do it now and failure to get a licence and have it in place for when you have a short-term is a criminal offence now, so the consequences are quite significant for property owners who were previously operating perfectly fine without that risk. So it is important to get it right in terms of do I need a licence or if I don't, you need to check that you don't have one. As I said, there's a bit of grey area in the definition around some aspects which I would advise getting advice on, but I suppose with any new regulatory requirement, there's always a cost involved, and it's not necessarily the application fees, but it's any associated cost of getting it fit for obtaining a licence and part of that, from my point of view is, most councils in applying for your licence will require you to have the appropriate planning in place, so it's actually lawful to use it as a short-term let too. So if the operator doesn't have that, then that's another process they have to go through and cost to incur to get their licence.

00:09:44 David Lee, Host

When you talked earlier on, George, you talked about the different categories. If you're doing something like home sharing, just to clarify if you're just renting a room out, you need to licence for that?

00:09:54 George Sismey-Durrant, Associate

Yes, that's correct. So there are some possibilities of getting temporary licences or exemptions, for example, in Edinburgh they have an exemption in the policy for the fringe and Hogmanay. So there's certain ways you can just do it on a short-term basis but there is still a cost involved.

00:10:14 David Lee, Host

Are you finding that people who do it on a very small basis, home sharing, home letting and whatever, are they the ones who are finding the costs quite, not necessarily prohibited but, higher than they maybe realised that where that burden's falling more on the smaller the smaller letter if you like.

00:10:34 George Sismey-Durrant, Associate

It's not so much the home sharing, I think it's more those that have a have, let's say, once owned a property in Edinburgh or any city and have moved out but retained that flat and have been operating it as a short-term let. We've had a lot of people come to us who have shown that they've won awards for their letting, but because of the new system they can't get a licence or can't get planning and so it's now kind of prevented them from using that source of income. It's affecting a lot of people, that's for sure and I think you're right, it's the individuals doing it rather than the businesse, that's because, I suppose it's a bigger impact on them financially.

00:11:17 David Lee, Host

What about the key dates and the key milestones, George, that we've seen so far? What have operators of short-term let's had to do on these very specific dates and where are we now in that journey?

00:11:33 George Sismey-Durrant, Associate

The 1st of October of 2022 was when the licencing regime came into effect and the 1st of October 2023 was key if you were an existing operator, so if you were letting out your property prior to the 1st of October 2022, you were considered an existing operator for the purpose of the regime and therefore you could continue operating without a licence provided you submitted a licence application by the 30th September 2023, the date was initially the 31st of March, but they extended it and again, if you're an existing operator, provided you've submitted your application by the 30th of September, you could continue to operate while your application was being determined and so you could in theory still not have a licence, but you can still be operating lawfully if you were operating prior to 1st of October. Then on the other side, if you weren't operating before October 2022, you fall into the boat where you need to apply for a licence and obtain a licence before you can operate, so you can't continue to operate whilst you apply it, you have to obtain it before it's operated. If you were, suppose, an existing operator and failed to meet the 1st of October 2023 deadline, you're then in the same boat that you now need to wait to obtain a licence being granted from the Council to then be able to operate lawfully and there are separate dates with the planning, but that's something for another discussion.

00:13:22 David Lee, Host

Thank you, George. Can you explain to us why there was a legal challenge to the licensing regime around short-term lets? What form did that challenge take and then what happened?

00:13:34 George Sismey-Durrant, Associate

So, the legal challenge was brought by a group of short-term net operators, and was also crowdfunded I think, and that was to challenge the City of Edinburgh Council's short-term licensing policy because the impact it was having on so many operators in Edinburgh. So, the background, the policy had previously had a presumption that a licence wouldn't be granted for a secondary let, so your second home or commercial short-term let in a tenement or a building which had a shared entrance with other residential flats, and so under that policy an applicant had to kind of prove that they were an exception to that policy. So that was challenged among with other aspects of the licensing policy and the Court of Session in June 2023 determined that that specific policy was unlawful because it blurred the distinction between the planning regime and the licensing regime, which are distinct. So, the planning regime is all to do with whether a short-term use is acceptable in that premises when considering things like community, whereas the licensing regime should only be concerned with actually how the short-term let is run, so placing a presumption against granting a licence in tenements because of this impact on amenity, because of a shared entrance, was dealing with matters of kind of acceptability of use rather than how it's going to be run. So, it was it was touching on planning matters rather than licensing matters, so that's why it was unlawful. There was other aspects of it around temporary letting of secondary letter properties as well as the required floor coverings, but the main point was around this, how they were treating tenements and shared entrance properties differently from other properties which was not a matter for licensing. It's also worth mentioning briefly that there's been a second judicial review or legal challenge on the planning side to do with the short-term rent control areas which Edinburgh have introduced and there's a couple more that have been introduced or are in the process of that. So, that was a clarification on that, which has been helpful but again, planning is kind of beyond this podcast.

00:16:14 David Lee, Host

We'll come back later on to where we might go next and what's happened with the legal challenge and so on. I want to also talk a little bit, not just about licencing requirements, about the health and safety obligations placed on operators of short-term let. Kate, can you talk us through that a little bit? What are the obligations in terms of health and safety that operators need to be aware of?

00:16:41 Kate Donachie, Legal Director

So, coming back to what I was saying before around these short-term lets almost going under the radar or finding themselves in a loophole. What the new licencing system is seeking to do is to apply the rules which currently apply or did apply in the past to longer term lets to short-term lets, so that short term let operators are treated really largely like landlords and are subject to the same regime, and we've seen a gradual but quite steady ratcheting up of the obligations on landlords in the private sector over the last ten years or so. I think the first thing to be aware as a short-term let operator is there are standards, mandatory standards that you must meet and that meeting those standards as a condition of your licence. The standards, as I say, mirror what's in place for other landlords. The property must meet the Scottish repairing standard, which is the requisite standard of repair required for long term lets, put very shortly means that the fabric, the fixtures and fittings, and any furniture or appliances in the property must be in good working order and they must be maintained and there's a requirement that at the start of the let they're in good condition and that the operator then responds timeously to any reports that something's gone wrong, probably less of an issue where there's more frequent handovers and people will be in the flat more often or in the property more often but it just means things have to work, and they have to be kept in good order, and more specifically, an operator will now need to have certain certificates to certify safety, so gas safety certificate and electrical installation condition report which is a testing the actual wiring of the system, portable appliance testing which is testing with things that are plugged in to the electrical systems, a fire risk assessment, a Legionella risk assessment which might be more pertinent actually in properties when they're let out in short-term basis, but might be sitting empty for periods so that is a real risk there and also energy performance certificates and all of these things must be renewed every year, and they must be displayed in the property and so there's an ongoing obligation it's not just a case of bringing the property up to standard to get the licence and sort of sitting back and it's a relatively onerous system, I think most landlords would agree that it it's not easy, it's not cheap but I think it's relatively common sense and as I've said, sleeping in a property overnight that you're not familiar with is one of the more dangerous things you'll do specifically in terms of fire risk and a fire risk assessment must be carried out on a regular basis and obviously any identified risks must be managed by the operator. There will also be a maximum number of guests specified in the licence, that has other implications, but they're also our safety aspects to that as well, they can't be exceeded. So, I think that's probably a very brief rundown of what's being imposed via this new regime.

00:19:58 David Lee, Host

What about potential liabilities for those operators Kate? What about the insurance considerations as well on top of all that?

00:20:07 Kate Donachie, Legal Director

In some respects potential for liability hasn't really changed because operators have always had duties as occupiers and so if someone was injured or property was damaged as a result of a hazard in the property or something that the landlord or the operator had or hadn't done, they could potentially be liable. I think what these standards do by imposing specific requirements is remove any ambiguity about what would be considered reasonable care, and I think you could expect that any sheriff or court of session judge would really look dimly on an operator who hadn't satisfied the safety requirements. I think it would be an uphill struggle to argue that you weren't negligent there. So I think in some ways it makes it clearer for people what they are obliged to do, they're probably not requirements that didn't exist before, although I suspect their requirements weren't being met by some operators. There are also explicit requirements in terms of managing anti-social behaviour and so I think it might be easier for liability or responsibility to attach to operators where harm is caused by bad behaviour on the part of guests, and that includes a requirement that guests are provided with clear instructions and that the expectations are set out in relation to acceptable behaviour and so I think it's not likely to be enough in the future for an operator simply to say, well, these are grown-ups and I've got no control over them. I just gave them keys to my property. In terms of insurance, that's interesting because the licence makes it mandatory for operators to have buildings and public liability insurance, which isn't the case for landlords, it's certainly not universally. That's something I would always recommend that someone had anyway, because it gives you obviously protection. I think what's worth noting here is lots of people might already have this insurance and might think that's fine, I've got that box ticked, I'm not going to worry about it. I think it's likely that policies now for this kind of property and business will have a condition that the operator complies with all licencing requirements and failure to do that could result in an insurer refusing cover so it it's even more important just to make sure that everything is in order and that they've complied with all of the obligations imposed on them. I think it's also possible we're seeing a general tightening in the insurance market, so that's additional conditions being imposed and certain liabilities being excluded or being included, only at an extra cost. So it's more important than ever to check what your policy actually says, because there might be additional conditions imposed on you in terms of what you need to do and again, a failure to meet those could result in you not having any cover. The last thing to say is just that you need to be at full in your disclosure to your insurer about what you're doing, and you need to keep them up to date so if something changes, you take on a different property or you add guests to the property you're letting out, or something about the profile of it changes, you must tell the insurer again to make sure that you actually have the cover that you're paying for.

00:23:11 David Lee, Host

Thanks very much, Kate. As you said earlier on, a lot of these things are common sense, a lot of them apply to landlords anyway, but to smaller operators, there clearly is quite a lot there, they are quite onerous in terms of those regulations and obligations. What's your best guess in terms of what impact that might have on the market, particularly for very small operators?

00:23:38 Kate Donachie, Legal Director

I think as George said, it will have an impact on the smaller operators. I think probably mostly the people that will rent a room on an ad hoc basis or maybe think I'm out of town for a couple of weeks, I'll just rent out my flat, why not and without actually having to think about what the implications of that are, and I think now it would seem prohibitive to think you've got to get an electrician out, a gas fitter out, someone out to do Legionella risk assessment and you've got to keep those up to date so it's not even just a one off, I suspect it probably will also, rightly or wrongly, give people an anxiety that they didn't have before about being liable for something going wrong, maybe that's not a bad thing, but I think that will probably have a chilling effect on people's maybe gung ho attitude that's maybe been around in the past to getting things on the market and I think other people who are probably perfectly responsible and doing everything right might just feel they don't want to risk getting it wrong just from a regulatory point of view and that's enough to put them off. So, I think it will have an effect of reducing the number of people and the number of properties that are going into this market. I think for the people who are doing it on a professional basis, so where it's run more as a business, I don't think it should have too much of an impact because I suspect it will match what they're doing elsewhere in slightly different longer term markets. I would agree with George, it's the small ad hoc people that I think this is going to impact the most.

00:25:11 David Lee, Host

So, George, there's an awful lot to think about here, what do you think we might see? What changes might we see to how the short-term let scheme and the legislation operates overtime?

00:25:26 George Sismey-Durrant, Associate

It is hard to tell at the moment just because we are in the early days of a fully operating system, so council's licencing boards are, and particularly in Edinburgh, have been flooded with applications given the 1st of October 2023 deadline and so they're working their way through those applications. So there are still many short-term lets operating under those transition provisions that won't necessarily be going on once those applications have been determined but once the initial wave of application is dealt with, we'll be able to see what that embedded system will look like and where improvements could be made. At the moment it's perhaps a bit too early and because it is relatively new and slightly complex legislation, there are obviously going to be teething issues so, as you said, there were the two legal challenges which the latter being quite helpful clarifier. I'm not going to put my neck out and say how it's going to change I think it's a bit too early to do so.

00:26:37 David Lee, Host

Kate, some final thoughts from what you think the future of short-term lets might look like in Scotland given everything that we've discussed today?

00:26:49 Kate Donachie, Legal Director

Just to repeat or echo what I've said before, I think it will be a streamlining between the short-term letting market and the longer term letting market and equalization from my perspective and the safety requirements, I think it will change the profile of operators for good or ill. I would hope that what it might do is take some of the heat out of this, you know, in Edinburgh especially, there is a lot of strong feeling on both sides of this. I would hope that the fact that there is a licencing regime that there are objective standards that must be met and there are mechanisms for taking action against their responsible operators. Might make things a bit friendlier and might just make it easier for everyone that's operating in the sector to do so. So that be my positive note to end on.

00:27:40 David Lee, Host

Thanks very much, Kate, and thanks very much George for your terrific insights today on this very important and very relevant topic. You've been listening to where some of the country's leading lawyers and special guests share their Enlightened Thinking about the issues and developments affecting the legal sector and what they mean for organisations, for businesses and for individuals across the various sectors of the UK economy and wider society. If you'd like to hear more, you can subscribe to Podcasts by Brodies on all your favourite podcast platforms. For more information and insights, please visit www.brodies.com.