TOM’S GUIDES: Increasing the rent – how do I go about it?

With increasing costs, inflation hovering around the 10 per cent mark and mortgage rates approaching 6 per cent there’s lots of talk about increasing rents.

Many landlords are unable to absorb these extra costs without going into losses, so for them there’s little choice, they have to pass on some of these extra costs. For those landlords with deeper pockets, or those with little or no mortgage repayments to make, they can perhaps absorb some or all of the extra costs. But this is not always the best choice to make.

This article refers to English law. It is not a definitive interpretation of the law. Every case is different, rules change over time and only a court can decide -always seek expert advice before taking action or not.

Two schools of thought

The choice as to whether to increase rents or not during the course of a tenancy comes down to a landlord’s preference:

(1) landlords are often nervous about losing a good tenant if they put the rent up, and some leave the rent fixed, but with inflation so high that no longer seems a good idea. Tenants detest a big jump in rent if it falls too far behind and even though they may have had the advantage of a low rent for years, they always blame the landlord for a big increase.

A recent case reported by the iNewspaper stated:

‘When Zita Zutic Konak’s two-year lease on her north London flat was approaching renewal in March this year, she got a call from her property manager. They told her the rent on the two-bedroom home, which she shared with her husband and three-year old daughter, would be going up from £1,800 to £2,700 – an increase of 50 per cent.’

“I was flabbergasted and just so angry,” she said. “The woman explained to me that this was what other units in the building were going for, but for us, that price was just absolutely not possible.”

Clearly, a 50 per cent rise is stretching a rent rise to the limit and is arguably unreasonable, it’s not surprising the tenant decided to leave.

(2) Some landlords apply a small annual increase. This is far more acceptable and something tenants will more readily accept and even expect it. They get used to an annual increase along with all their other rising costs, and so long as this is not extortionate, it will rarely trigger a move.

Market rent or index linked?

There are broadly two methods of arriving at a fair rent:

(1) is to establish the going market rate for the location and the type of property through comparisons, either by consulting a local letting agent or by keeping an eye on local ads to get an idea what similar rentals are going for. Keeping the rent slightly below the market average will usually prevent your tenant from making a move.

You’ve got to remember that if a tenant moves out you could have a void period, repairs and decorating to carry out, and your time and all the administration work involved in selecting a new tenant, plus setting up a new tenancy, and perhaps a finder’s free from your letting agent to pay. In addition, a new tenant is an unknown quantity when compared to the one you’ve already got.

(2) the second method is to have a clause in your letting agreement fixing the increase to the cost of living index (CPI or RPI). The problem with this method is that market rents don’t usually keep pace with inflation, usually lagging this by some way, so strictly applying this method will take your rent level way above the local market rent.

Increasing the rent

If you decide to increase your rent, first determine the demand for rentals in your location. High demand for properties in an area means it is safer to go for a higher rent without the fear of losing a good tenant. Secondly, try to decide what is a fair increase as explained above. If your rents have fallen a long way behind the market level it may be prudent to increase by a smaller amount each year, rather than trying to catch up all in one go, as in the example cited above.

The rent increase rules

There are certain rules and procedures a landlord or her letting agent must follow when increasing the rent. Section 13 of The Housing Act 1988 provides the legal framework for when and how to increase rent and you have basically three ways to go about this:

1. By speaking to your tenant and negotiating a fair increase which is acceptable to both parties.
2. The increase is set-out in the tenancy agreement which binds both parties to a formula
3. Using a section 13 notice as set out in the Act.

By Negotiation is the best method, so that you can explain to your tenant the rising costs involved, your own circumstances as a landlord. Your tenant may have been living in the property for x number of years so you need to explain that it is only reasonable to expect an increase in the rent to a new level.

You cannot impose a rent increase on your tenant using this method. Arbitrarily telling your tenant that the rent will increase by x amount is not acceptable, the rise must be agreed.

If you can come to an agreement in this way this needs to be evidenced to avoid any further legal action, so have a duplicate form or simple letter to hand setting out the increase and get your tenant to sign, agreeing to the new rent and keeping one copy for yourself.

The second method, is if the increase is set out in your agreement, then both parties are aware of what will happen. Any tenant knows that he cannot remain in the property without paying a higher rent as time goes on.

A typical rent increase clause may read something like:

“The Landlord may increase the Rent after the Expiry of the fixed term of this Agreement, by giving the Tenant at least one months’ notice in writing prior to a Rent Payment Day specifying the amount of the new rent. The Landlord will not increase the Rent during the fixed term of the tenancy.”

Another option is to give your tenant another fixed term by signing a new tenancy agreement at the higher rent. It means that anything stated in the old tenancy no longer applies and the parties can agree a higher or lower rent in the new tenancy.

If there is a rent increase clause in the tenancy involving the cost of living index, and it takes the rent out-of-line with the market, there is no reason why the landlord or agent cannot negotiate a surrender and re-grant of the tenancy at any time.

An important point to note about rent increase clauses is that when the tenancy becomes a periodic one, any increase clause does not survive the transition into a statutory periodic tenancy. If you have a rent increase clause in your fixed term tenancy, as soon as the tenancy goes beyond the fixed term you will no longer have the right to use the built-in clause.

Using the Section 13 Notice

Section 13 of the Housing Act 1988 is a statutory mechanism in the Act that enables the rent to be increased for any type of assured tenancy. There are a number of specific rules to comply with:

The section 13 notice applies only in periodic tenancies, it cannot be used during a fixed term tenancy. If the fixed term is very long, because of this it is important to include some kind of rent increase mechanism in the tenancy agreement, most standard agreements will include one of these. If this is absent, unless the tenant voluntarily agrees to an increase, it will not be possible to increase the rent during the whole fixed term.

A section 13 notice cannot be used where there is a contractual periodic tenancy that contains a rent review clause. However, where a fixed term tenancy becomes a statutory periodic tenancy a rent review clause will no longer apply. To increase the rent the landlord or agent must then use the section 13 procedure or obtain the tenant’s agreement.

A section 13 notice is a prescribed form, that means the wording must comply with the Act as it dictates what wording needs to be on the notice (there is a free Form 4 notice online – see below) and what it must look like. When a section 13 notice is served the notes explain to the tenant how to fill in the form and it also explains to the tenant how to go about appealing the rent increase.

Once served, a section 13 notice cannot be used a second time until after 12 months. The first time can be served immediately after the fixed term. So with a six month tenancy, you can serve a section 13 notice at the start of a statutory periodic tenancy. But if the tenancy is a periodic one from the outset, the 12 month limit applies from the start of the periodic tenancy.

The Section 13 Notice – prescribed form

The landlord serves a notice of increase of rent in the prescribed form (Form 4). This includes information for the tenant advising them of their right to refer the increase to a https://www.gov.uk/courts-tribunals/first-tier-tribunal-property-chamber.

Once the notice has been served with the proposed increase in rent it cannot take effect earlier than a minimum period set out in the Act: for a year’s fixed term that is six months, less than a month, it is one month and for a tenancy of a month or more (but less than a year), it is one period of the tenancy. The increased rent will apply from the expiry of the notice period, unless either the tenant refers the notice of increase to the tribunal or landlord and tenant agree to a different rent.

When the increase is referred to the First-tier Tribunal it must be done before the notice period expires on a prescribed form. The tribunal will determine a market rent for the property, a rent that could reasonably be expected to be obtained in the open market for a similar property let on similar terms.

The new prescribed rent will apply from the date specified in the landlord’s notice of the increase, however, the tribunal has the power to apply the rent from a later date if this would otherwise cause the tenant undue hardship.

Landlords have been increasing rents

The Office for National Statistics’ data shows that average PRS rent increased on average by around 4.8 per cent in the year to April 2023, with a rise of 5 per cent in London. However, this is the average, so some tenants are experiencing increases far higher than this depending on supply and demand in the area.

If you want to keep your rents in line with your costs it is generally good, in a situation where inflation is at a high level, to try keep your rents at or near the market level, otherwise they will fall too far behind and that makes it even more difficult to recover lost ground.

The Renters (Reform) Bill

The Bill has yet to become law, but there will be changes. The new Act will remove the fixed term tenancy. It will end the use of rent review clauses and only allow rents to increase once per year. Rent increases will be through one mechanism, replacing the existing section 13 process under the Act, and landlords will have to give 2 months’ notice of any rent change. That’s how things stand at this time unless there are changes as the Bill passes thorough Parliament.

The Renters’ (Reform) Bill white paper said it plans to end the use of rent review clauses, “preventing tenants being locked into automatic rent increases that are vague or may not reflect changes in the market price” and it goes on the say that “any attempts to evict tenants through unjustifiable rent increases are unacceptable”.

In cases where increases are disproportionate, the Government says it will “make sure that tenants have the confidence to challenge unjustified rent increases through the First-tier Tribunal” and it will “prevent the Tribunal increasing rent beyond the amount landlords initially asked for when they proposed a rent increase”.

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