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A REVIEW OF THE FIRST YEAR OF THE MANDATORY LICENSING OF HOUSES IN MULTIPLE OCCUPATION IN SCOTLAND

CHAPTER EIGHT COSTS AND FEES

LOCAL AUTHORITY LICENSING COSTS

8.1 This Chapter examines the costs for local authorities to administer their licensing schemes and the costs incurred by private HMO owners and universities to meet the costs of obtaining a licence. It also examines the different fee levels charged by authorities and compares private owners' fees with their other licensing costs.

8.2 Local authorities are expected to ensure that the costs of operating their local HMO licensing scheme are covered by fee income (Scottish Executive, 2000b: 13). As the research noted previously, HMO mandatory licensing is a complex, inter-departmental and inter-agency activity. Defining, far less costing, all relevant licensing tasks is an equally complex exercise. From the results of the postal survey, the most significant finding was that, for two thirds of authorities, this exercise had not been tackled or not been completed for the first year of the scheme. Only 11 local authorities (34%) provided figures on the cost of running the scheme in the first year (Table 8.1). The costs varied widely across the authorities though this is not in itself unexpected. The different priorities that authorities accorded HMO licensing for staffing resources, the number of HMOs to be licensed and the proactive versus reactive styles of working by officers, all lead to different cost outturns. The two highest costs of over 100,000 came from Glasgow (706,000) and Edinburgh (220,000). In the lowest cost band of under 2500, West Lothian estimated its first year expenditure on the scheme at 1400.

Table 8.1 Local authority costs of operating the mandatory licensing scheme in the 1st year

Source: local authority postal survey
* Percentages rounded up

8.3 The survey did not seek information on how the costs were arrived at. However, Glasgow indicated that its calculations were based on direct staff costs plus associated overhead costs of officers from development control, licensing, environmental health and building control. Dundee (which provided no costs) stated it had established HMO licensing as a cost centre that had input costs for average staff time on inspections, training costs, support service costs, police and fire brigade costs. This was then used to calculate a licence fee that it hoped would cover the actual costs.

Surplus or deficit?

8.4 All authorities were asked whether the first year of the scheme had run at a deficit or produced a surplus. As with the identification of costs, the most significant figure was that half of the authorities provided no information (Table 8.2). Thirteen authorities (41%) stated they were in deficit and only 3 indicated a surplus or break even outcome. Estimates of the size of deficits were available from only 8 authorities and these varied between 50 and 17,000, other than one very high deficit of 376,000.

Table 8.2 Surplus or deficit in the first year of the mandatory licensing scheme

Source: local authority postal survey

Note. More authorities indicated a surplus or deficit had occurred than the number who provided operational costs.

8.5 COSLA had stated that without financial support from the Executive " there is no other method of recovering costs other than to pass these on to landlords" (COSLA, 2002: para 14.1). However, for the first year at least, local authorities said that their deficits had largely been met by subsidy from other service budgets or in one case, cross subsidy of income from other types of licences. This may change in the future. Glasgow anticipated it would have a first year deficit but projected that increasing income would bring the budget in to balance or surplus as more HMOs entered the system when the threshold is reduced in the second and third years (clearly dependent on change in exemptions categories). However, to deal with its deficit, Edinburgh had decided to raise its fees by 10% for the 2002/03 licensing year. Some other authorities in deficit indicated that fee increases may have to be contemplated when their three year renewals come round.

8.6 The overall picture conveyed from the data on costs, surpluses and deficits was that the financial framework for managing mandatory licensing was underdeveloped. Half of authorities provided no information, probably indicating that information could not be provided. Some of those that did provide figures said they were only estimates. The basis of calculating costs seemed to vary across authorities and lack transparency. REHIS made the point:

" Officially' the view is that authorities have costed the process but the reality too often is it has been much more rough and ready and not accurately costed for admin, inspections, fees to the fire brigade, reporting, etc." (REHIS representative)

8.7 Some authorities said it would seem useful for more detailed guidance to authorities about costing HMO licensing as an activity, to achieve more transparency in relation to fees and to ensure more consistency of approach across the country.

LICENCE FEES

8.8 Under the Civic Government (Scotland) Act 1982, setting licence fees is a matter for local authority discretion not central imposition. The Executive can only advise and accepts that fees:

" will vary in different parts of the country, depending on the numbers and standards of HMOs, but they should be kept as low as possible" (Scottish Executive, 2000b: 13).

8.9 To deal with the costs associated with different sizes of HMOs, it suggests authorities consider introducing a sliding fee scale linked to number of occupants.

8.10 The licence fee data in the local authority postal survey is complicated to present because of the wide variety of different ways authorities had chosen to construct their fee scales. The approach adopted reflected the licensing requirement in the first year of the scheme. The initial first year fee for HMOs of over five qualifying persons was identified and then placed into either a low (31 - 133), mid (233- 300) or upper (480 - 567) range of per annum charges. All three year licence fees were 'converted' to a per annum basis. For authorities that operated with a flat fee, its value was the same for all sizes of HMO but for authorities that used a sliding scale fee, it was the fee for the first band over five persons that was used. This means that the following data does not show the much higher scale fees for larger size HMOs such as large hostels or university halls of residence.

8.11 A wide variation in fees was evident (Table 8.3). Eighteen authorities charged a fee within the low band range of 31 - 133 per year. Nine authorities charged mid range fees between 233- 300 per year and six authorities charged fees in the 480 - 567 per year high band range. Some distinction in the fees set by urban and rural authorities could be detected but it was not robust. Of 14 designated rural authorities, 10 were in the low fee band but there were also 7 urban authorities with low fees. Two rural authorities (Dumfries and Galloway and South Ayrshire) charged mid range fees and two (East Ayrshire and Perth and Kinross) charged high fees.

Table 8.3 First year HMO licence fees and licence approvals

Source: local authority postal survey.
*Where no occupancy number range is quoted in brackets, a flat rate fee was assumed
Note (1) Higher fees will apply to authorities with scale fees related to HMO size.
(2) Authorities in italics are designated rural authorities defined by a population density measure of less than one person per hectare.

8.12 From a national perspective, a range from 93 to 1,700 for a 3 year licence (31 to 567 per annum) raises questions about the basis on which authorities set charges. Very little variation can be explained by the inclusion or exclusion of costs of investigative work as this was only be a factor in Glasgow.

8.13 The variations in fees across Scotland and the level at which they have been set has been a matter of some controversy. Landlord and agent representative organisations such as SAL and ARLA both commented on the fees charged by authorities. With membership in different parts of Scotland, SAL was unhappy about the wide variation in fees and regretted that the Executive had not set out rules for authorities to use to fix their fees and minimise the differences. ARLA believed that the levels at which authorities had set their fees was indicative of " a mistaken perception that landlords make a fortune from renting". It feared that the result of the fees and the upgrade costs would be to reduce income return and make landlords sell as property values rose.

8.14 The 10 private sector HMO owners who had paid a licence fee were less perturbed by the cost of the licence fee than may have been anticipated. Six were from the high fee band authorities of Glasgow and Edinburgh, two from the medium fee band authority of Dumfries & Galloway and two from the low fee band Highlands Council. None of the owners could be said to have been happy with the fee but only a minority was very critical. Eight owners did not view the fee as a significant issue. Some passed virtually no comment on it, in comparison to their strong views about standards and upgrade costs. Others made relatively low-key comments such as the Edinburgh owner who commented: " it covered the work the council did but was all the work necessary?" and a Highland Council area owner who thought, "it was reasonable for the work the council had to do". A Glasgow owner thought a fee of 1,700 for 3 years or " about 560 per year" was " not totally outrageous" but was " very unhappy" with having to pay 3,700 because he had an 11 person HMO -the one extra tenant cost an extra 2000. Only two private owners were outright critical of the fee, remarking: " extortionate" (Glasgow owner) and a Dumfries & Galloway owner who compared it unfavourably with the 72 he paid for a fire certificate: " the biggest bugbear about the scheme".

FEES IN RELATION TO THE OTHER COSTS OF OBTAINING A LICENCE.

8.15 The attitude of owners about the 'value for money' i.e. the reasonableness of the licence fee, could be based on various factors. One factor could be a comparison they make between the cost of the fee and other costs they have faced to obtain a licence. These could include preparing property plans, obtaining various certificates, paying solicitor's fees and most significantly, their HMO upgrade costs to meet benchmark and tenancy management standards. In the telephone interviews the owners provided rough estimates of their overall costs exclusive of the licence fee (no breakdown of the estimates was available). The relationship between fees, attitudes to fees and these other estimated costs is examined in Table 8.4.

8.16 With one exception, the owners with a medium-to-large residential letting business who had high upgrade costs, well in excess of their licence fee (3,000 - 6,000) generally considered the licence fee to be not a significant concern. On the other hand, where the fee and the costs were quite similar, the fee was more criticised. The owner with over 40 properties in Glasgow who thought the fee was " extortionate" had non-licence costs for the HMO of about 2,000 - only a little more than the fee of 1,700. Similarly, the very aggrieved owner in Dumfries and Galloway had spent about the same amount on non-licence costs (700) as the cost of the licence fee (750). Overall, although only a very small sample, it may be that when owners incur high non-licensing costs such as for significant property or fire safety upgrading work, the fee, being relatively less cost, attracts less criticism. When the fee is about the same as the other costs, it attracts more criticism.

Table 8.4 Attitude to the licence fee in relation to scale of rental business and other costs for one HMO

Source: telephone interviews with private owners

THE VIEWS OF THE UNIVERSITIES ABOUT LICENCE FEE LEVELS

8.17 The key difference between the universities as HMO owners in comparison to traditional private sector HMO owners is the sheer scale of the fees they have to face paying (although eventually the large portfolio private owners will have a considerable total fee as well if they retain their HMOs). Not surprisingly, the 3 universities in the study were more dissatisfied than the private sector HMO owners about the fees they were being charged. As one university described it, they felt they were, or would be, " bankrolling" the costs of the licensing schemes.

8.18 Information provided by the three universities is not fully comparable because of the different bases of calculation but it gives a clear message about just how much money is at stake for the universities - and for the local authorities. The fees in Table 8.5 are the estimated overall licence fee costs, subject to the qualifications noted. Within the parameters defined, the fees will cost the three universities well in excess of 300,000 over three years (plus the separate expenditure on their traditional tenement flats). The great bulk of this expenditure was not paid in the first year of the scheme. These costs reflect the situation of only three of 11 Scottish universities and further costs will arise, to varying extents, from the student accommodation owned by the other universities and by colleges. Information by the REHIS representative indicated that Motherwell College accommodation would need to provide 150 doors that met the fire resistance standard .

Table 8.5 Estimated licensing fees of the universities

Source: telephone interviews with university accommodation managers/ officers

8.19 Fees relate to numbers of lettings and the scale of their student lettings operations was considerable, with some very large catered-for, and self-catering halls of residence, comprising large numbers of student units. The universities had mixed property portfolios with unusual types of properties - old traditional halls of residence, new purpose built blocks and traditional tenement flats of different sizes. These traditional properties were subject to the standard licensing fee payable on the same basis as private owners. The institutional blocks were normally treated as single building HMOs and fees capped or linked to the bed-space numbers.

8.20 It has been their older halls of residence and modern purpose built student blocks that have caused the problems with the fees expected by their local authorities. The level of the fees that the universities were originally to pay had been subject of debate and dispute for much of the first year of the scheme over footprint rebates, anomalies and other, as one described it, " unfair elements" of how the calculation had been done. At the time of the research, Glasgow University's fees for its blocks had been agreed but none of its applications had yet been approved. After considerable negotiation, the university and the city council had agreed to 'cap' the fees (set a fixed limit) for the student blocks but the university believed that, in the end, it would make little difference financially. Dundee University considered the total fees it had to pay as ' unreasonable and unjustifiable'. The university has many more single flats with six students than blocks with 35 houses each accommodating six students. The blocks were treated as 1 licence but the flats were treated separately at a fee of 670 each. That was how the cost reached nearly 65,000. At the time of interview, Dundee University had made 38 applications and had 29 licence approvals.

8.21 Edinburgh University had protracted negotiations on fees for its owned student blocks. If it had been required to pay an individual fee for each unit of accommodation within its blocks, the cost would have been very high and not viable for the university. However, more realistic fees for its owned blocks had been agreed with the council. The university considered it a " good agreement" with councillors and officials having adopted a supportive approach to the university's needs.

8.22 Local authorities defended their fees for private and institutional HMO owners. From the postal survey, 26 authorities (81%) believed they had been set at a reasonable level. A point stressed by a number of authorities was that they had not started investigative work in year one and as such, the estimated costs of this, had not been built into their fees. A comment by South Ayrshire Council echoed that of other authorities " The fee is not even covering the cost of processing far less the costs of dealing with non-applications work". If, and when, investigative work started, higher staff costs would be anticipated and this would affect fees unless operational licensing costs continued to be subsidised within departmental or central services budgets. The lead officer in Aberdeen City believed that if the council approved a dedicated team to deal with the numbers of small HMOs and the investigation work for those not applying, " fees would increase massively and this would have a bad effect on the numbers of three and four person HMOs" resulting, in his view, in a loss of accommodation.

8.23 Mixed views emerged from the eight case study authorities as to whether owners who had voluntarily applied for a licence and paid the fee were effectively subsidising the local authority's costs of dealing with owners evading licensing. Aberdeen, Fife, South Ayrshire and Highland felt this was not an issue as they had not started any investigative work and any current deficit was being subsidised from other budgets or central funds. Dumfries and Galloway believed that cross subsidy of non-licensed owners by those who come forward to be licensed " would always be the case". Glasgow also said that yes, in as much as its fees covered " the whole system - including prosecutions", then the willing owners were meeting the cost of the council pursuing the unwilling owners. Edinburgh took the opposite view " because the fee does not reflect investigative work - unlike Glasgow" - yet as previously noted, it was planning to increase its licence fee by 10%.

GRANT SUBSIDY

8.24 The provision of grant subsidy to HMO owners is a related issue. It would appear from the replies to the postal survey that local authorities were not in a very 'giving mode'. The principal means of grant support is the mandatory entitlement of up to 20% grant towards approved costs (of up to 9,315) for providing a satisfactory means of escape from fire where a notice is served under s.162 of the Housing (Scotland) Act 1987. Twelve authorities (38%) said that grant support was normally made available only if s.162 a notice was served but there was no information on how frequently that arose. Three authorities (9%) said they would offer a means of escape from fire grant on a discretionary basis without the need to serve a s.162 notice. A similar number indicated that discretionary improvement and repair grants could be offered. The overall sense of the results was of very restricted use by local authorities of any available grant aid towards HMO owners, either for fire safety works or general property upgrading to meet licensing standards

SUMMARY OF KEY FINDINGS

8.25. The research data on licensing costs was very limited:

• Only a third of local authorities provided information on the first year costs of operating their mandatory licensing scheme
• Only half of local authorities provided information on whether the first year of their mandatory licensing scheme had operated with a surplus or deficit

8.26 In the first year of the scheme:

• Of the 11 local authorities that provided operational cost information, their annual costs varied from 1,400 to 760,000
• Of the 16 local authorities that provided information, 13 reported an operating deficit for the first year of the scheme. All but one deficit was under 17,000
• Generally, across local authorities, it did not appear that a solid financial framework was in place to accurately identify the costs of operating mandatory licensing schemes
• There was considerable variation in licence fees across local authorities. Just over half of authorities charged fees of between 31 and 133 per annum or equivalent. Nine authorities charged between 233 and 300 per annum and 6 charged between 400 and 567 per annum or equivalent
• While most rural authorities had low fees so too did a number of urban authorities
• Generally, private sector HMO owners expressed limited criticisms of the licence fee they were charged. Most, faced much higher other licensing costs connected with plans, certificates and property upgrading compared to the licence fee
• The 3 universities in the research were more dissatisfied with the licence fees than the private owners of HMOs
• The 3 universities faced protracted negotiations with local authorities before reaching an agreement on acceptable charges for their student blocks and halls of residence
• Even after agreement with their local authorities, the three universities faced licence fees for student blocks and halls of residence, estimated over 3-4 years, at a minimum of 300,000 excluding the licence fees for traditional tenement flats that they owned
• Nearly all local authorities defended their fees as reasonable
• There were contrary views by local authorities as to whether applicants who had applied for a licence and paid their licence fee were effectively subsidising the costs of authorities investigating non-compliant owners. Some thought this was inevitable. Others denied it, pointing out that their schemes were in deficit despite the fees paid
• The provision of grant aid by local authorities to HMO owners to meet part of their costs in upgrading their properties to obtain a licence was very limited.

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