APPEAL BY JAMES WRIGHT AGAINST ELDERPARK HOUSING ASSOCIATION
EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
[2017] CSIH 54
XA109/16
Lord Drummond Young
Lady Clark of Calton
Lord Malcolm
OPINION OF
LORD DRUMMOND YOUNG
in the appeal
under section 11 of the Tribunals and Inquiries Act 1992
by
JAMES WRIGHT
Appellant
against
ELDERPARK HOUSING ASSOCIATION
Respondents
in respect of a decision of the Private Rented Housing Committee dated 10 September 2016
Appellant: M Dailly (sol adv); Drummond Miller LLP (for Govan Law Centre, Glasgow)
Respondents: No appearance
4 August 2017
[1] The appellant is the tenant of a terraced house situated at Fairfield Gardens, Glasgow, belonging to the respondent. He has been the tenant of that property since it was built in 1996, and a tenant of the respondent landlord for 20 years before that. The tenancy is a registered tenancy in terms of the Rent (Scotland) Act 1984 and a Scottish secure tenancy under the Housing (Scotland) Act 2001. Prior to April 2016 the rent payable was £3,500 per annum, or £291.67 per month. In April 2016 the landlord sought an increase in the rent to £4,791.96 per annum, or £399.33 per month, an increase of 37%. The increased sum was registered by the rent officer with effect from 28 July 2016. The appellant referred that determination to the Private Rented Housing Panel for reconsideration of the amount of rent charged. The Private Rented Housing Panel appointed a Committee to hear that reference. Following an inspection of the property and a hearing, at which the landlords were not represented, the Committee issued a decision on 10 September 2016 to the effect that the fair rent for the property was £6,200 per annum. The present appeal is brought against that decision.
[2] The respondent landlord is a housing association. Tenancies granted by housing associations were originally treated as regulated tenancies under the Rent (Scotland) Act 1984. The Housing (Scotland) Act 1988 converted such tenancies into assured tenancies, and with effect from 30 September 2002 all registered tenancies with social landlords, except for short assured tenancies, were automatically converted into Scottish secure tenancies by section 11 of the Housing (Scotland) Act 2001. The right of the tenant under such a tenancy to apply for the determination of a fair rent under the 1984 Act was nevertheless preserved by article 5 of the Housing (Scotland) Act 2001 (Scottish Secure Tenancy etc.) Order 2002. The appellant applied to the Private Rented Housing Panel for the determination of a fair rent by virtue of those provisions. The determination of the fair rent is governed by section 48 of the Rent (Scotland) Act 1984, and the present appeal is concerned with the application of that provision to the house rented by the appellant.
Section 48 of the Rent (Scotland) Act 1984
[3] Houses let by housing associations are subject to the provisions of sections 55 to 59 of the Rent (Scotland) Act 1984. Section 56(2) provides that inter alia section 48 of the Act should apply to housing association tenancies with specified modifications. As so modified, section 48 is in the following terms:
“(1) In determining for the purposes of this Part of this Act what rent is or would be a fair rent under a [tenancy of a dwelling-house to which sections 55 to 59 of the Act apply], it shall be the duty of the rent officer or, as the case may be, of the [rent assessment committee], subject to the provisions of this section, to have regard to all the circumstances (other than personal circumstances), and in particular to apply their knowledge and experience of current rents of comparable property in the area, as well as having regard to the age, character and locality of the dwelling-house in question and to its state of repair and, if any furniture is provided for use under the tenancy, to the quality, quantity and condition of the furniture.
(2) For the purposes of the determination it shall be assumed that the number of persons seeking to become tenants of similar dwelling-houses in the locality on the terms (other than those relating to rent) of the [tenancy to which sections 55 to 59 of the Act apply] is not substantially greater than the number of such dwelling-houses in the locality which are available for letting on such terms”.
The amendments made to the foregoing reflect provisions in section 56(2).
Decision of the Committee
[4] The Committee noted that the property in question is a two-storey mid-terrace dwelling house erected in approximately 1996. The accommodation comprises a living room, dining room, three bedrooms, a kitchen, WC and a bathroom. The floor area is approximately 91 square metres. It recorded the terms of a written representation made by the appellant’s solicitor:
“My client’s grounds of appeal are that this increase is unfair and unjustifiable having regard to the statutory test in section 48 of the Rent (Scotland) Act 1984. This increase represents a 37% increase in my client’s annual rent. His rent was last increased three years ago with an approximate 3% annual increase.
His Landlord told him the justification in this 37% increase is because of the increase in value of properties in his area; however, these are not ‘comparable’ properties in relation to section 48 of the 1984 Act. The Association has wrongly had regard to new build properties, whereas my client’s property was built in 1986 and is not comparable. There is no justification for a 37% annual increase, particularly when we have had a historic low rate of inflation and an interest rate of 0.5% base”.
[5] The Committee recorded evidence of comparable registered rents determined by the Private Rented Housing Panel (decision, paragraph 5.3). This is as follows:
“5.3 Evidence of comparable registered rent determined by the PHRP:
5.3.1 Rent of £6900 per annum had been registered for 37 Wanlock Street, Govan, Glasgow, G51 3AB on 19th July 2016. The property was a mid-terraced three-bedroom property. The floor area of the property was 119.5 metres. The Committee had determined the rent using comparable market rents.
5.3.2 Rent of £2892 per annum had been registered for Flat/1, 845 Govan Road, Govan, Glasgow, G51 3DL on 13th June 2016. The property was a top floor traditional tenement flat with two bedrooms. The floor area of the property was 58 metres. The Committee had determined the rent using comparable registered rents from the rent register.
5.3.3 Rent of £4000 per annum had been registered for 9, Wanlock Street, Glasgow, G51 3AB on 1st August 2016. The property was a 3 storey townhouse with four bedrooms. The floor area of the property was 119 metres. The Committee had determined the rent using comparable registered rents from the rent register.
5.3.4 Rent of £4000 per annum had been registered for 46, Wanlock Street, Glasgow, G51 3AB on 13th June 2016. The property was a 3 storey townhouse with four bedrooms. The floor area of the property was 119 metres. The Committee had determined the rent using comparable registered rents from the rent register”.
[6] The Committee considered which of three methods of assessing the rent was appropriate in the present case. The three recognized methods that are used are (1) determining the fair rent by reference to comparable registered rents in the area; (2) determining the fair rent by reference to market rents of comparable properties allowing for appropriate deductions for scarcity; and (3) determining the fair rent by reference to the anticipated annual return based on the capital value of the property. They acknowledged that none of these methods is the primary method, and that the appropriate method depends on the facts and circumstances of the individual case. The Committee noted that, of the comparable properties, the second, third and fourth had been determined by reference to comparable fair rents taken from the rent register. The rent of the first property had been determined by reference to market rents of comparable properties after allowing for appropriate deductions for scarcity. The Committee continued:
“The Committee did not consider the comparable rents from the rent register to be the best evidence as these rents had only been fixed by the rent officer and had not been tested by a Private Rented Housing Committee. The Committee had obtained evidence of properties available to rent in the Glasgow G51 postcode area. They found that there are over 200 properties available to rent ranging from one-bedroom to three-bedroom properties. The rents ranged from £350-£695 per month. After careful consideration and given that strength of market rental evidence the Committee determined that the method of using comparable market rents was the best evidence available.
As explained, the Committee had obtained details of a number of other similar sized properties available to lease in the area from the Internet. The rents of three-bedroom properties range from £632-£765 per month. These comparable properties were three-bedroom properties with kitchen and bathroom, with floor coverings and appliances provided by the landlords.
The Committee acknowledged that there is a reasonable supply of similar properties to rent in the Glasgow area and therefore there is no scarcity of supply of such properties at this time”.
[7] On the foregoing basis the Committee concluded that the average market rent of properties comparable to Fairfield Gardens was £7,800 per annum. An adjustment was required to reflect the fact that the landlords of the present property did not provide any appliances, decoration or floor coverings, and also for the poor condition of the windows in the property. For those reasons they considered that a deduction of £1,600 per annum was reasonable. As a cross check the Committee compared the rent with the rent that had previously been determined for 37 Wanlock Street (the first of the comparable properties referred to in paragraph [5] above), and concluded that the rent was comparable allowing for differences in the properties. The rent fixed was higher than that sought by the landlords, but the Committee noted that the respondent as a social landlord “would not be bound to charge the full rent assessed”.
Appeal
[8] The appellant has appealed against that determination. In summary, his submission is that the Private Rented Housing Committee was required by section 48 to consider “current rents of comparable property in the area”. In doing so it should not have disregarded registered rents for social housing in the locality, as the Committee appeared to have done. It was further submitted that the Committee had been in error in carrying out the general Internet search of the private rented sector properties advertised online in the locality. Furthermore, the Committee erred by having regard to commercial rents in the private sector, as these were not comparable to properties in the social rented sector. Finally, it was submitted that the Committee had erred in its application of the principles laid down in Western Heritable Investment Co Ltd v Hunter, 2004 SC 635, where the First Division had held that in determining a fair rent regard must be had to rents for dwelling houses of a comparable nature, which was a matter of judgment.
[9] On the foregoing basis, three questions of law were presented for the opinion of the court: first, whether the Committee erred in law in its interpretation of the term “current rents of comparable property in the area” in its determination of a fair rent under section 48; secondly, whether the Committee erred in law in its application of the decision in Western Heritable; and thirdly, whether the Committee erred in law in failing to have regard to registered social rented sector rents and instead by having sole regard to open market rents in the private rented sector in determining a fair rent.
Interpretation of Section 48
[10] The interpretation of section 48 and its predecessors has been considered by the Court on a number of occasions. Corresponding statutory provisions in England and Wales have given rise to a further succession of cases, which have frequently adopted an approach that is distinct from the Scottish approach: see Robson, Housing Law in Scotland, pages 158‑165 and 175-181. Nearly all of the Scottish cases have related to houses within the private rented sector. The present case, by contrast, relates to a property within the social rented sector, and a critical point raised by the appeal is whether similar principles apply to both of those categories. The most recent detailed consideration of section 48 is found in Western Heritable Investment Co Ltd v Hunter, supra. Although the case involved a property within the private rented sector, the court made a number of important observations that are relevant to the present case. In general, the court affirmed the view that three methods of valuation may be appropriate in setting a fair rent. These have been described as follows (Robson, op. cit., pages 159-160):
“First, the rent fixer can have resort to the register of existing fair rents which have previously been fixed. The most helpful will be those which are for similar-sized properties of similar character and location. The more recent these are the more useful they are likely to prove. Alternatively, a return on the vacant possession capital value of the property can be calculated. This will be a percentage – traditionally in the reported cases between 6 per cent and 8 per cent – to which sums are added to cover the costs of repair, management and insurance.… [T]here is now also a set of rents of assured tenancies which represent a market rent… The Court of Session has indicated that use of these as evidence of market rent is permissible but that there is no method to be regarded as the primary method. In practice the method chosen by the committee will depend in each case upon the evidence available”.
The first involves a comparison with other fair rents that have been set for comparable properties in the same area; normally these will be apparent from the register of rents maintained under section 45 of the 1984 Act. The third in effect involves a comparison with market rents of comparable properties in the same area. The second method was referred to with some frequency in the earlier Scottish cases, but it has fallen out of favour in more recent decisions, and the other two methods have generally been preferred.
[11] In Western Heritable, the approach to determination of the rent was discussed in some detail. Lord Hamilton, who discussed the matter at greatest length, noted (at paragraph [37]) that dicta in earlier cases appeared to reinforce the concept, inherent in the adjective “fair”, of “an equitable balance between the legitimate interests of the landlord and the tenant respectively of the dwelling house”. Section 48 gives directions as to how that balance should be struck. The Committee must have regard to all the circumstances other than personal circumstances, with particular reference to the specific matters set out in subsection (1): knowledge and experience of current rents of comparable property in the area, and the age, character and locality of the dwelling house in question, its state of repair and the provision and condition of furniture. Nevertheless, under subsection (2), an assumption must be made about the impact of any local scarcity, and the other matters specified in subsection (3) must be disregarded. The fact that rent had been registered following a statutory application would not render it irrelevant. On that basis, Lord Hamilton stated that the matters to which regard was to be had under section 48(1) could not be restricted to “market” rents (excluding registered rents), and thus “fair” rent could not as a matter of statutory construction mean “market” rent. The relevance of registered rents of comparable houses is further emphasized in the speech of Lord Reid in Skilling v Arcari’s Exrs, 1974 SC (HL) 42, at page 50, where he remarked that, in determining a fair rent:
“The most obvious and direct method is to have regard to registered rents of comparable houses in the area.… [A]s the number of comparable registered rents increases, the more likely it will be that it will lead to a correct result. Of course it must be open to either party to show that those comparable rents have been determined on a wrong basis, but until that is shown it must be assumed that rents already determined have been rightly ascertained”.
It is accordingly well established that a Committee, and indeed a rent officer, should normally have regard to comparable registered rents. Furthermore, Lord Reid’s remarks appear to me to be quite general in their impact; at that time the system of registration of rents was in its early stages, and Lord Reid recognises that as more rents are registered the registration will become an increasingly reliable source of information.
[12] In addition, it is permissible to have regard to relevant market rents. The relevance of market rents, however, is “a matter of judgment, not of law”: Western Heritable, per Lord Hamilton at paragraph [41]; see also paragraph [42]. The task of determining a “fair rent” was described by Lord Hamilton as follows (paragraph [41]):
“This is a composite task, though a committee will need to set out in an orderly fashion the process of reasoning by which it arrives at its ultimate conclusion. That process may be, but need not necessarily be, one of first taking market rents and then discounting for any scarcity element and making any appropriate disregards. Other processes, may, depending on the available evidence, be appropriate, either as the principal basis of determination or as a check. In some cases reliance on registered rents may be appropriate as a principal basis or as a check. No process (or method) is, as a matter of law, ‘primary’”.
As to the relationship between rents determined by committees and rents determined in the open market, Lord Hamilton further remarked, at paragraph [42]:
“Rents [determined by committees] were among those relied on by the appellant before this committee. As what is to be determined under section 48 of the 1984 Act is in effect the fair ‘going rate’ for the subjects, evidence of what has been determined for comparable subjects by third parties may be as cogent as that which has been negotiated by landlords and tenants themselves”.
In the same case LP Cullen stated (at paragraph [11]) that it was not necessary to identify a market rent en route to assessing a fair rent; in this respect he disagreed with a view that had been expressed in an English case. Furthermore, the Lord President stated that if registered rent comparables are to be used, it is necessary to reassess their current validity and applicability. Overall, the method used should depend on “what is the best available evidence”, although it might be appropriate to use other available evidence as a check: paragraph [12].
[13] Following Western Heritable I am of opinion that it will normally be appropriate for a committee, or a rent officer, to have regard to registered rents and to market rents, according to the evidence that is available. Indeed, there may be advantages in using market rents as a cross-check against registered rents, to ensure that, where there is no local scarcity, registered rents do not come to be markedly out of line with current market conditions, and to provide an adjustment for general inflation. In all cases, however, registered rents, if evidence of comparable properties is available, will potentially be relevant.
[14] A further issue that is important in the present case is the manner in which a Private Rented Housing Committee should treat properties owned by social landlords such as housing associations. Properties let by housing associations (and the Housing Corporation) are dealt with separately in Part VI of the 1984 Act (sections 55-59). Section 56(1) provides that a separate part of the register of rents kept under Part V should be used for the registration of houses let by housing associations which fall under Part VI of the Act. Nevertheless, section 56(2) provides that a substantial part of Part V of the Act, including specifically section 48, should apply to tenancies falling under Part VI subject only to the replacement of any reference to a regulated tenancy by a reference to a tenancy to which sections 55 to 59 apply. (That amendment is reflected in the wording stated at paragraph [3] above). Thus section 48 applies in terms to properties let by housing associations. Section 57 of the Act imposes a rent limit; in effect this prevents a housing association from recovering any rent in excess of the registered rent. That does not, however, affect the manner in which the rent is calculated under section 48.
[15] Against that background, in the absence of any justification in the particular circumstances of the case, there is in my opinion no warrant for treating houses let by housing associations in a fundamentally different manner from other rented property for the purpose of fixing a fair rent under section 48. Thus in setting a fair rent for property owned by a housing association or other social landlord, a committee may have regard to evidence both of registered rents, including obviously those where the landlord is a social landlord, and of rents fixed by the market in the private sector so far as those are comparable. I reach this conclusion for three reasons.
[16] First, according to their terms, the provisions of section 48 that state how a fair rent is to be determined apply equally to privately rented properties and to properties that fall under Part VI of the Act. That in itself suggests that the basic method evolved by the courts in cases such as Western Heritable should apply in both cases.
[17] Secondly, in my opinion privately rented housing and social housing cannot be said to form two wholly distinct markets; they rather form different aspects of a single market in low- or moderate-cost rented housing. The standard test for whether a separate market exists is the presence or absence of cross-elasticity of demand: the classic discussion of this concept in a legal setting is found in United States v E.I. du Pont de Nemours & Co, 351 US 377 (1956); and see also Posner, Economic Analysis of Law 9th Ed, section 10.7. In the case of private rented housing and housing association tenancies, it is not difficult to envisage circumstances where a tenant of a property falling into one of these categories might consider taking a property falling into the other category, at least if the rents were comparable. Nevertheless, the fact that privately rented housing and social housing can be said to form aspects of a single market does not detract in any way from the need to ensure that the properties used for comparison purposes truly are comparable having regard to their size, character, location, age, state of repair, the terms of the tenancy, and any other relevant factors.
[18] Thirdly, it would be wrong in my opinion to treat housing associations and other social landlords as if commercial considerations were irrelevant. A housing association is normally an autonomous body (usually incorporated as a limited company) responsible for its own finances. It must conduct its own administration and maintain its housing stock properly. It might also require funds to acquire and improve further property or to build new housing. The management of a housing association is responsible for ensuring that its purposes are properly carried out, and in doing so they are subject to fiduciary duties in essentially the same way as other company directors or trustees. For that reason they should try to obtain a reasonable return on the association’s housing stock in order to fulfil its purposes properly. That will normally require the charging of a fair rent in terms of section 48, which of course can be considered to be ex hypothesi fair to the tenants.
[19] For these reasons I am of opinion that the level of rents charged for comparable rented properties in the private sector will generally be a relevant factor in setting the fair rent of housing association property. Nevertheless, in such a case, for the reasons given by Lord Reid in Skilling v Arcari’s Exrs, supra, in the passage quoted at paragraph [11] above, it will frequently be appropriate for the rent officer or committee to begin with the rents that have been registered for comparable properties falling under Part VI of the Act (housing association properties), and to use the private rented market as a cross-check, making allowance for any scarcity in accordance with subsection (2) of section 48. Such a cross‑check may be appropriate to ensure that there is some correlation between the level of rents and general inflation. Moreover, in their determination of fair rent, a rent officer or committee may give differing weights to evidence of registered rents of housing association properties and evidence of rents charged in the private sector, on the basis that the former are a more exact analogy than the latter. Ultimately, the decision as to what is a fair rent is a matter of judgment for the Committee, and it may properly attach greater or lesser weight to comparables according to how closely in point they are. The existence of a recently fixed rent for a comparable housing association property may well be significant.
Decision of the Committee
[20] In the present case the Committee reached its decision for the reasons set out in paragraphs [5]-[7] above. In my opinion that reasoning is defective in four important respects. First, the Committee referred expressly to the four comparables set out at paragraph [5] above, three of which were based on comparable rents taken from the rent register, but then stated that it “did not consider the comparable rents from the rent register to be the best evidence as these had only been fixed by the rent officer and had not been tested by a Private Rented Housing Committee “. For that reason the Committee appears to have disregarded the evidence of the last three comparables, which were based on evidence of registered rents. The language used by the Committee, “not… the best evidence”, seems to indicate that the registered rents were not taken into account in the exercise of fixing the rent for the appellant’s house. That in my view is wrong. Even if rent in the rent register has been set by a rent officer and has not been referred to a committee, that means that it has been accepted by both landlord and tenant. That acceptance indicates that the level of rent can be seen as consensual, which is in itself an indication that the rent is truly a fair rent. For that reason the reasoning of the Committee is deficient. Comparables based on the register were relevant evidence, and should have been taken into account. Furthermore, the use of such comparables is clearly contemplated in the passages quoted above from Western Heritable and Skilling v Arcari’s Exrs: see paragraphs [11] and [12] above. The failure to take such comparables into consideration of itself constitutes a clear error of law.
[21] Secondly, the four comparables referred to by the Committee (paragraph [5] above) are in my opinion in point, although there is perhaps a discrepancy between the first of these and the last two. Those three comparables all appear to relate to terraced properties with three or four bedrooms, with floor areas of 119 or 119.5 square metres. The property occupied by the appellant has three bedrooms but has a smaller floor area, 91 square metres. I am obviously unable to say that, in terms of area or layout, the various properties are comparable, but the Committee does describe these as “Evidence of comparable registered rents determined by the PRHP”; that seems to indicate that they were considered comparable. The rent for the third and fourth comparables was fixed at £4,000 per annum. The rent for the first, where comparable market rents were used, was fixed at £6,900 per annum, which is significantly higher, and the discrepancy perhaps calls for an explanation. It may arise from the fact that comparable market rents were used for the first and registered rents for the last two, but this is not a reason for disregarding the last two. The rent of £4,000 per annum set in those two cases should be compared with the appellant’s rent of £3,500 per annum, Elderpark Housing Association’s proposed rent of £4,791.96 per annum, and the Committee’s determination of the rent at £6,200 per annum, which made allowance for the lack of appliances, decoration and floor coverings and the poor condition of the windows. In these circumstances, it is wrong in my opinion to disregard the third and fourth of the comparables in determining a fair rent. This failure too is in my view an error of law.
[22] Thirdly, the Committee gave priority to evidence of market rents over registered rents; indeed, they appear to have given particular significance to a single local comparable property and to a range of properties discovered by means of an internet search; the particular properties relied on are not specified. In my opinion this is wrong, in the absence of particular circumstances. On the approach put forward by Lord Reid in Skilling v Arcari’s Exrs., supra, an obvious starting point is to have regard to registered rents of comparable houses in the area. Nevertheless, as is indicated in Western Heritable, supra, it may in some cases be preferable to begin by looking at private market rents of comparable properties. On either of these approaches, rents in the other category may be used as a cross‑check. In particular, if registered rents are used as a starting point, a cross-check against private market rents of comparable properties may help to deal with factors such as inflation. It may also, as Lord Reid indicated in Skilling, demonstrate that registered rents have been determined on a wrong basis. The fundamental point, however, is that if both registered rents and market rents are available, they should both be taken into consideration, and reasons should be given if they are to be disregarded.
[23] Fourthly, the Committee indicate that they carried out an Internet search to obtain evidence of properties available to rent in the Glasgow G51 postcode area. Over 200 properties were discovered, ranging from 1 to 3 bedrooms, and with rents ranging from £350 to £695 per month. The Committee ultimately determined that this method of using comparable market rents was “the best evidence available”. In my opinion that approach was wrong. A postcode area will usually cover a range of different residential areas, not all of which will be comparable. Privately rented properties, in particular, may exist within one postcode in areas that are from a social or economic point of view very different. The individual properties may vary greatly in size, character, age and the neighbourhoods in which they are located; they are likely also to vary in their state of repair. Consequently considerable variation in rent is to be expected, and unless an internet search is approached with considerable discrimination and local knowledge it can be highly misleading. Furthermore, the Committee appear to have used average figures taken from their Internet search, with rents of three-bedroom properties ranging from £632 to £765 per month (£7,584 to £9,180 per annum). Those figures by themselves cover a significant range, and they are clearly somewhat out of alignment with the direct comparables that are referred to by the Committee. This illustrates the dangers of any exercise as general as an Internet search. In my opinion it is not apparent that the figures taken from the internet search were truly comparable with the property at Fairfield Gardens. The use of this method was in my opinion not justifiable in performing the task required by section 48 of the 1984 Act, and it amounted to an error of law.
Conclusion
[24] For the foregoing reasons I am of opinion that the approach taken by the Committee in the present case was fundamentally flawed, and that their decision was erroneous in law and cannot be sustained. I would accordingly propose that we should answer the questions asked in the appeal, set out in paragraph [9] above, in the affirmative. In doing so, however, we should make two matters clear. First, we do not endorse any submission that the private rented sector and the registered social rented sector are wholly distinct and that accordingly the Committee ought only to have had regard to rents in the latter sector. Both sectors may be relevant. Secondly, the method followed by the Committee should be that set out in Western Heritable, as described at paragraphs [12] and [13] above: both registered rents and market units should be taken into account, if evidence exists. It is important, however, that the rent should be determined on the basis of properties that truly are comparable. In the present case, the fundamental flaw in the Committee’s reasoning was to disregard registered rents of comparable properties without good reason and to rely instead on a range of rents derived from an internet search without a proper assessment of whether the properties involved were truly comparable.
[25] I accordingly propose that we should quash the Committee’s decision of 10 September 2016 and remit the case back to a differently constituted Committee in order that a fair rent may be determined in accordance with section 48 of the 1984 Act, applying the approach discussed above.
EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
[2017] CSIH 54
XA109/16
Lord Drummond Young
Lady Clark of Calton
Lord Malcolm
OPINION OF LADY CLARK OF CALTON
in the Appeal
under section 11 of the Tribunals and Inquiries Act 1992
by
JAMES WRIGHT
Appellant
against
ELDERPARK HOUSING ASSOCIATION
Respondents
in respect of a decision of a Private Rented Housing Committee dated 10 September 2016
Appellant: M Dailly (sol adv); Drummond Miller LLP (for Govan Law Centre, Glasgow)
Respondents: No appearance
4 August 2017
[26] I have had the opportunity to consider in draft the Opinions of Lord Drummond Young and Lord Malcolm. For the reasons given by Lord Drummond Young, I agree with his conclusion in paragraph 23.
[27] I would merely add that I find it surprising that the Committee gave no reasons or explanation for their selection of new build properties in Wanlock Street as their chosen comparators for a property in Fairfield Gardens, which according to the appellant, was built in 1986 in a different part of Glasgow to different specifications and size. I accept that the Committee are entitled to use their discretion and judgment in concluding what is a fair rent but the statutory provisions inter alia make it plain that the decision about what is comparable property in the area is critical to the task of the Committee. The Committee are also directed by the statutory provisions to have regard to the age, character, and locality of the dwelling house in question and its state of repair. In my opinion in carrying out their task, the Committee should give reasons as to why properties are identified as comparable in a situation where the Committee apparently chose to disregard properties which are almost identical in the same street as Fairfield Gardens.
EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
[2017] CSIH 54
XA109/16
Lord Drummond Young
Lady Clark of Calton
Lord Malcolm
OPINION OF LORD MALCOLM
in the Appeal under section 11 of the Tribunals and Inquiries Act 1992
by
JAMES WRIGHT
Appellant
against
ELDERPARK HOUSING ASSOCIATION
Respondents
in respect of a decision of a Private Rented Housing Committee dated 10 September 2016
Appellant: M Dailly (sol adv); Drummond Miller LLP (for Govan Law Centre, Glasgow)
Respondents: No appearance
4 August 2017
[28] I have had the considerable advantage of reading a draft of Lord Drummond Young’s judgment. As will become apparent, I agree with much, but not all of his Lordship’s analysis. The submission for the appellant was that commercial rents of private rented sector dwellings were not and could never be of a comparable nature to properties in the social rented sector. It was stressed that the appellant’s landlords (the respondents) are a charity. They fulfil a social function, and receive funds directly from the Scottish Government. The basis of the appeal was expressed as follows:
“The appellant’s tenancy exists in a different market to the private sector. The appellant’s tenancy is not available on an open commercial market basis. The PRHC ought to have interpreted section 48 of the 1984 Act to mean an assessment of rents for equivalent social sector properties in the appellant’s locality. It erred in law in determining that private rental sector rents were comparable to the appellant’s property.”
[29] Attractively presented though it was, the above argument is without support either in authority or in the terms of section 48 of the Rent (Scotland) Act 1984. In Learmonth Property Investment Co v Aitken 1970 SC 223, it was held by the First Division that, when determining a fair rent for a dwelling house let under a regulated tenancy, a Rent Assessment Committee fell into error by, amongst other things, disregarding market rents. Lord Cameron observed that the language of the statutory provision requires regard to be had to all the circumstances, and this should include rents in the market in the locality. Subsection (2), by specifically excluding the element of “scarcity” value in the market in the locality, “by the plainest implication, emphasises the relevance of ‘market rents’ as a circumstance to which a Committee is bound to have regard” (page 232).
[30] In Learmonth the court also made reference to the capital value of the property, and the interest of the landlord in obtaining a fair return for his investment, stressing that a fair rent should be a figure which is fair to both parties. Return on capital as a method of valuation has fallen from favour in recent years, but decisions on both sides of the border have continued to emphasise the role of open market rents in this context. For example, in R v Secretary of State Ex Parte Spath Holme Ltd [2001] 2 AC 349 at 378/9, Lord Bingham of Cornhill referred to Court of Appeal approval for the proposition that open market rents are the proper starting point for the assessment and registration of a fair rent. In one of those decisions (Curtis v London Rent Assessment Committee & Others [1999] QB 92) Auld LJ, relying on a long tract of high authority, stated (at 114/5) that “a fair rent is a market rent adjusted for scarcity and disregards” and that whatever route of assessment is chosen, every route must start from the market rent.”
[31] The First Division returned to this subject in Western Heritable Investment Co Ltd v Hunter 2004 SC 635. Lord Marnoch saw no difficulty in describing market rents as a starting point in every case; however, the majority (Lord President Cullen and Lord Hamilton) described a composite, not a sequential task. The main opinion was delivered by Lord Hamilton. For him the rent passing for other dwelling houses of a comparable nature was plainly a relevant circumstance. A Committee’s consideration was not limited to market rents minus any scarcity value and other statutory disregards. There is no “primary” method, and no one lawful route for the assessment of a fair rent. Registered rents could be considered as part of the relevant circumstances. An overly rigid approach should be avoided, in what is essentially an exercise of judgment made by professional persons. That said, depending upon the particular circumstances, market rents for truly comparable properties may be “highly persuasive” (paragraph 41). Lord Hamilton stressed that to focus only on registered fair rent comparables might lead to inadequate weight being given to rents “actually and currently being struck in the market” (paragraph 45).
[32] It is difficult to reconcile the appellant’s submission (summarised above) with the decision in Western Heritable Investment Co. It also contradicts the rejection in Skilling v Arcari’s Executors 1974 SC(HL) 42 of the relevance of the personal circumstances of the parties, something which is in any event reflected in the terms of section 48(1) of the 1984 Act. Reference can be made to Lord Reid’s observation (page 51) that all the relevant circumstances mentioned in the statutory provision relate to the house itself. Just as his Lordship said “The house itself remains the same whoever is entitled to possess it.”: it can also be said that it remains the same whether owned by a housing association or a private landlord. The appellant stresses that his landlord is a charity reliant upon public funds, and suggests that his lease can be distinguished from open market rentals by virtue of what is described as “the commercial disparity” between rents agreed and paid in the two sectors. Understandable although all of that is, the statutory test concentrates on a fair rent for the property in question, which may or may not coincide with any typical social rent passing in respect of comparable properties. (As the Committee itself pointed out, the appellant’s landlord is not compelled to charge the assessed fair rent.) In other words, comparable properties are not limited to dwellings subject to a “social” lease with a housing association or equivalent landlord. There are a number of disparate sectors within the landlord group. It would be a source of uncertainty and potential confusion if Committees had to make a categorisation and then add it to the overall mix.
[33] In the present case the Committee held that there was no scarcity of rental property in the locality. (It was the scarcity value disregard in subsection (2) which originally justified the soubriquet “fair” rent: Robson, Housing Law in Scotland page 159.) In such circumstances it would be inherently surprising if, as suggested on behalf of the appellant, Committees required to shut their eyes to the operation of the market when assessing a fair rent for the subjects under consideration. In Skilling, Lord Kilbrandon (page 54) described the exercise as identifying “the rent which a landlord would demand and a tenant would be prepared to pay if the market were roughly in a state of equilibrium without serious shortage or surplus of subjects available for letting.” On the face of it, in a market in such a state, freely negotiated rents, if available to a Committee, are likely to be of considerable assistance.
[34] I am in agreement with Lord Drummond Young that there is no merit in the submission that houses let by housing associations must be treated differently from other rented property when a fair rent is being fixed. There are provisions in Part VI of the Act dealing with rent limits in respect of dwellings owned by housing associations, but they have no impact on a Committee’s task when assessing a fair rent under section 48. I also agree that the basic method evolved by the courts in cases such as Western Heritable Investment Co is of general application. I am less confident in any proposition to the effect that it will usually be appropriate for the rent officer or Committee to begin with rents that have been registered for comparable properties let by housing associations, and that the private rented market be used only as a cross‑check. It was a theme of the majority opinions in Western Heritable Investment Co that, subject to taking all relevant circumstances into account, the exercise itself was likely to be fact sensitive, with the rent officer or Committee enjoying considerable discretion as to the exact route or method to be adopted. A prescribed sequential approach was rejected by the majority of the court. The assessment of a fair rent has been described as an art, not a science. Different Committees may adopt different approaches, and no doubt reach different ultimate figures, with none of them falling into error. For myself I would not wish to add to the guidance given by the majority of the court in Western Heritable Investment Co. In so far as one member of the court differed from the majority, it was to lay stress upon market rents, not registered rents.
[35] I agree that if it can be said that the Committee closed its eyes to comparable rents from the rent register simply because they had been fixed by a rent officer, not by a Private Rented Housing Committee, that would be an error. However, as I understand its decision, the Committee did have regard to the four registered rents put before it, but gave three of them little or no weight, essentially because they were materially below both market rents for comparable subjects and the registered rent which had been assessed by reference to the private sector. It seems to me that the Committee was more than entitled to adopt that overall approach. It is in line with the rejection of the basis of the appeal to this court, particularly given the finding that there was no question of a scarcity value disregard under section 48(2).
[36] It is necessary to summarise how the Committee reached its decision. It inspected the property concerned. The landlords did not attend the hearing and were not represented. (The same applied in this court, hence we heard submissions only from the appellant.) The tenant attended with his representative from the Govan Law Centre. No evidence of comparable rents was provided. The Committee referred to representations from the Centre previously tendered, in which it was stated that the 37% increase in rental suggested by the landlords was put forward on the basis of the increase in the value of properties in the area; however these were not comparable properties in terms of section 48 of the Act. They were new build properties. A 37% annual increase was unjustified, especially given the low inflation and interest rate base. Reference was also made to four comparable registered rents. A rent of £6,900 per annum had been registered for an address in Wanlock Street, Govan in July 2016. This was a three bedroomed mid-terraced property, with the rent having been determined by a Committee using comparable market rents. The three other registered rents ranged from £2,892 per annum to £4,000 per annum, each of them determined by an examination of the rent register.
[37] The Committee summarised the terms of section 48 of the Act. It noted that three methods of assessing the fair rent were open to it. None of these was the primary method, the appropriate method being dependent upon the facts of the case. Reference was made to the guidance laid down in Western Heritable Investment Co v Hunter. It was necessary to proceed upon the best available evidence and use other evidence, where possible, as a cross‑check. The Committee noted that one of the registered rents had been determined with reference to market rents of comparable properties allowing for appropriate deductions for scarcity. The other registered rents were not the best evidence as they had been fixed only by a rent officer and not tested by a PRHC. It is clear that the Committee’s concern was that these rentals had been determined without specific reference to market rents of comparable subjects in the locality.
[38] The Committee looked at all dwelling houses available for rent in the postcode area, ranging from £350 to £695 per month, depending upon accommodation, etc. (It will be common for a Committee to carry out its own investigations, no doubt including gathering information from the internet.) “After careful consideration and given that strength of market evidence, the Committee determined that the method of using comparable market rents was the best evidence available.” When restricted to three-bedroom properties, the rent ranged from £632 to £765 per month. The Committee found that there was a reasonable supply of similar properties to rent in the Glasgow area and therefore there was no scarcity of supply. It was decided that the market evidence disclosed that the average market rent of properties comparable to the appellant’s house was £7,800 per annum. Adjustments were required for certain factors pertaining to the particular condition of the property, including the poor condition of the windows, resulting in a fair rent of £6,200 per annum.
[39] As a cross‑check it was noted that the registered rent of the property in Wanlock Street assessed by reference to comparable market rents was £6,900 per annum, which was in line with the fair rent assessed for the property in question, having regard to differences in the respective subjects. It was recognised that the assessed fair rent was in excess of that suggested by the landlord and that set by the rent valuation officer. However, as a social landlord, it would not be bound to charge the full assessed rent. Finally the Committee observed that it had had regard to all the factors specified in section 48 of the 1984 Act.
[40] In summary, having correctly instructed itself by reference to the guidance in Western Heritable Investment Co, of the four registered rents put before it, and in light of the market information, the Committee preferred to place weight on the one which was based on comparable market rents. The others were not ignored or disregarded, but were clearly out of line with the relevant rental information as to comparable market rents. Given that there was no scarcity of available properties, there was no reason for a fair rent to differ materially from a market rent of a comparable property. The fair rent was fixed at £571 per month. The notes accompanying the Committee’s decision refer to legislation limiting the allowable annual increases when the registered rent exceeds that previously payable – see section 58 of the 1984 Act and The Limits on Rent Increases (Scotland) Order 1989 No 2469. They also observe that, given the absence of scarcity in many areas, the fair rent will often be the same as the market rent.
[41] Bearing in mind that the Committee is a specialist panel entitled to use its own knowledge and expertise, and identify what it considers to be the best available evidence, I have difficulty in identifying any challengeable error of law in the assessment carried out by the Committee. It did not disregard any of the registered rents, but explained why it preferred to use the wider information as to market rentals in the area plus the registered rent which had been assessed by reference to comparable market rents. For myself I see no reason to criticise the use of information from the internet. Those on the Committee can be trusted to have applied appropriate professional judgment in the selection of relevant material, and also in the assessment of the significance, if any, of differences in floor area, layout, and other such considerations. It is not open to the court to substitute any view of its own on these matters. The fact that the fair rent as assessed by the Committee was higher than that asked for by the landlord does not indicate an error of law. The task of the Committee is to apply the statutory provisions and fix what it decides is the appropriate figure. For myself I would not wish to express any views on any duties incumbent on housing associations concerning rental levels. The court was not addressed on that issue.
[42] I would demur from any view that the market evidence should have been used as a mere cross‑check against registered rents for comparable properties let by housing associations. The decision as to what is a fair rent is a matter of judgment for the Committee, and it may properly attach greater or lesser weight to comparables according to its professional opinion. In this regard, the mere existence of a recently fixed rent for a comparable housing association property may be a relevant factor, but it need not be decisive.
[43] Lord Drummond Young finds support in a passage in Lord Reid’s speech in Skilling for the proposition that the Committee erred in, as his Lordship puts it, giving “priority to evidence of market rents over registered rents.” For myself I doubt that Lord Reid intended that a Committee could not fix a fair rent based on market rents if and when it considered that the registered rents before it were too low. The issue in Skilling was whether the Committee erred in using a return on capital method of valuation based on the assumption that the house was let with vacant possession. The only evidence of comparable rentals before that Committee consisted of registered rents, perhaps because, unlike in the present case, there was a substantial scarcity disregard (40%) to be applied. In those circumstances it is understandable that Lord Reid talked of having regard to registered rents of comparable houses. Even so, he added that a Committee was not bound to them if satisfied that they were “determined on a wrong basis”, which presumably could include being too far below privately negotiated rents in a market where there was no shortage of supply to meet the demand. Their Lordships stressed that, in effect, the valuator was expected to choose the relevant evidence by exercising his professional skill and experience –for example see Lord Kilbrandon at page 55. His Lordship also said that the court did not have a jurisdiction to review such an assessment if it was based on the prescribed statutory provisions.
[44] I fear that at a reconsideration the Committee may be unclear as to what is expected of it. We all agree that market rentals are relevant evidence as to a fair rent for the appellant’s house. Is the majority saying that an appropriate figure based on such evidence must be discounted to reflect the three lower registered rents, no matter any view of the Committee that privately agreed levels are the best evidence of a fair rent in a market in a state of equilibrium? If so, how is that discount to be calculated? I would have difficulty in reconciling this with the rejection of the primary basis upon which this appeal was brought.
[45] On the other hand, it may be that the majority of the court intends no more than that the Committee must take the lower registered rents into account when exercising its professional judgment, but thereafter is free to decide the fair rent at a sum reflective of market levels in the locality. In that event, the key difference between us is that I take the view that in its decision of 10 September 2016 the Committee has done just that; whereas the majority is of the opinion that the Committee “disregarded” the lower registered rents in the sense of completely shutting its eyes and closing its mind to them. If, contrary to my view, that is the proper interpretation of what the Committee did, I would agree that it was in error. I consider that it is only on this basis that the majority view can be reconciled with the rejection of the appellant’s submission that the Committee erred in law in determining that private rental sector rents were comparable to the appellant’s property.
[46] I find no error in law in the decision taken by the Committee and no fundamental mistake in the approach which it adopted. Of course matters would have been different if the appellant’s proposition that the Committee could not have regard to commercial rents in the private sector had succeeded. Differing from your Lordship and your Ladyship, I would refuse this appeal. So far as the questions of law posed by the appellant are concerned, I do not consider that the Committee erred in law in its interpretation of the term “current rents of comparable property in the area” in section 48 of the Act, and in my view it properly applied the guidance in Western Heritable Investment Co. It follows that I would answer the first and second questions in the negative. I would decline to answer the third on the basis that it proceeds upon an inaccurate premise. The Committee did not fail to have regard to registered social rented sector rents and did not have sole regard to open market rents in the private rented sector, albeit it preferred the latter as a guide to the assessment of a fair rent.