In a previous article we wrote about the introduction of the Short Term Lets licence scheme in Scotland from 1 October 2022 and the reasons why it has been implemented (some of the stated aims being to reduce the impact of anti-social behaviour in Airbnb type lets and to improve the availability of housing in popular tourist areas).
We have recently been involved in the purchase of a camping and glamping business located in Highland Scotland. The transaction has revealed the very broad scope of the Short Term Lets licensing regime – along with some consequences of the legislation that were possibly unintended.
Types of Property that need a Short Term Let Licence
What some business owners (and potential buyers) may be unaware of is just how many types of holiday accommodation need a licence from the Local Authority to operate legally. The answer is: virtually all of them, subject only to some very limited exceptions. It is wrong to assume that only “traditional” holiday let properties such as flats, cottages and houses are affected. In fact, the legislation applies to almost all types of accommodation offered for let on a short-term basis, including those such as glamping pods (unless part of a caravan site with a separate caravan licence), geodomes, yurts, tents, tipis, wigwams, shepherd’s huts and more. This may be surprising to many people, such as farmers who have perhaps invested in a shepherd’s hut or a couple of wigwams on their farm and hadn’t appreciated that these too would require a licence. It may be difficult to understand why rural businesses of this type would need to be covered by the same type of strict licensing regime as, for example, a tenement flat in the heart of Edinburgh’s New Town, but that is indeed the situation.
Effect on Purchase and Sale of Short Term Let Businesses
What has also become clear is that the licence scheme raises issues for the sale of properties and businesses with short term let elements, particularly when considering the different ways that the legislation applies to existing and new hosts.
In December 2022, the Scottish Government announced a 6 month extension to the date by which existing hosts need to apply for a licence, from 1 April to 1 October 2023. At the time of writing, the legislation to confirm this extension has not yet been passed, but it is expected imminently. Assuming that it is, the effect is that existing hosts don’t need to apply for a licence until 1 October 2023 – until then, they can continue to run their business as before. Provided they have applied for a licence by that date, existing hosts can also continue to operate after 1 October while their application is being determined by the Local Authority.
The position for new hosts is very different. From 1 October 2022, no new host can operate a short term let business without a licence in place. Before the licence is granted, they can advertise but cannot take bookings or receive guests – even if their licence application has been submitted.
What is key for the purchase and sale of short term let businesses is that these different rules apply to existing or new hosts (i.e. those who own and operate the business) rather than existing or new businesses. Even if a property has been operated as a short term let for many years (as was the case for the transaction we were recently involved with), there is no grace period for the incoming owner – as far as the legislation is concerned, they are a new host and therefore cannot operate the existing business without first obtaining a new licence.
The timescales within which Local Authorities must make a decision on a licence application are lengthy – 9 months for new hosts and 12 months for existing hosts. In addition, licences are not transferable from one owner of the property to the next.
All of this creates something of a dilemma for the prospective purchaser of an existing short term let business – there is an obvious risk for them in buying the property without a licence in place.
The situation is also less than ideal for the seller, who is likely to be keen to move on or retire. While they currently don’t need to go to the trouble and expense of applying for a licence, they could find themselves with no option but to keep running their business for much longer than anticipated while the licence position is resolved. From 1 October 2023, the seller will also need to submit their own licence application.
Possible Solutions?
Without further legislation to correct these kinds of anomaly, it is difficult to see a quick and simple solution to this issue. One possible option could be to make the missives conditional on the grant of a licence to the buyer as the new host. While this protects the purchaser, it is likely to be disappointing for everyone, potentially leading to a lengthy delay between conclusion of missives and completion. There is also an added complication in that Scottish Government guidance on this issue advises that a person who is not the owner of a property can only make an application for a STL licence if the applicant exercises control over the occupation of the property. Thought would need to be given to how to achieve this in each particular case.
At a minimum, the missives would need to oblige both parties to co-operate in relation to the purchaser’s licence application – applying for a licence is an administratively burdensome process, involving submitting a number of documents that the seller will need to provide, such as floor plans, a site plan, gas safety certificate and fire safety checklist.
Another option may be to complete the purchase on payment of only part of the agreed full price, giving full control of the property and application process to the purchaser, but with a deferred additional sum then being due to the seller if and when the licence is granted.
Our Advice? Plan Early
All those involved in short term let businesses – and particularly sale / purchase matters – would be wise to consider the issues raised by the licence regime as early as possible in the transaction in order to try to find the best way forward for everyone involved.
For more information and advice in relation to short term lets, please contact a member of our team.