UPDATED: consider these things before you increase your tenant’s rent

With interest rates rising and this reflected in mortgage rates, landlords are being forced to contemplate rent increases. If you go down this road you need to be aware and follow the rules.

As landlord you can’t legally increase your rent whenever you like, or by any amount you see fit. You need to follow certain rules if you decide that the rent is inadequate and you need your tenant to pay more. Keeping your rent reasonably in-line with local market rents is sensible because if you allow the rent amount to fall too far behind you will find it difficult if not impossible to catch it up.

If you can agree a new rent which is acceptable to both you and your tenant, all well and good. If not you have to follow the correct legal procedure using Section 13 of the Housing Act 1988. This is subject to change with the introduction of the Renters (Reform) Bill 2013, currently passing through Parliament.

The economic environment has changed considerably within the last 12 months making it more likely that you will need to consider a rent increase, even if you have not done this before with your long-term tenants. With inflation hovering around 10 per cent in the UK and mortgage rates approaching 6 per cent many landlords will have no choice but to increase if they are to avoid running at a loss.

Before embarking on the process of increasing your rent, consider these points:

1  – It could force good tenants to leave.

It might not be a large amount you’ve increased the rent by, but don’t underestimate how this could offend a good tenant who pays rent on time and looks after the property. If you reward good tenants who want to stay and make your property their home for a long period of time, does it really make a difference to get a bit extra each month? Consider carefully if you’re prepared to put your property back on the market if the tenant doesn’t accept the increase…

2 – Can the rental market sustain an increase?

Should your tenant decide not to accept the increase they may give you notice to leave. During a periodic term, this will be 1 month. This will mean you will need to prepare your property for market, take photos, book in any repairs and try to arrange viewings with a potentially disgruntled tenant in place. Along with this, you’ll have your fees for advertising and management percentages to fork out, unless you self-manage.

The agent’s fees can be reduced if you go it alone or use an online letting agent. Once on the market, you don’t know if it will let for the increased amount. You also need to consider seasonal variations; such as the decline over the Christmas period, and general market conditions i.e. is supply exceeding demand?

Currently the market is strong in most areas, so bringing the rent to a market level, or ideally just below that, should not trigger a move, but until you try you will never know. Speak you your tenant and explain the situation you are in, with your increased costs and what the market rent should be.

3 – Can the tenant afford a rent increase?

Let’s say your tenant accepts the rent increase, can they even afford it? Affordability checks at the initial referencing stage were based on the rent price then and their salary at that point in time. As we know from being a landlord – things change. There is a chance they may not be able to afford the increased amount. Also consider that they may be earning less than before if they changed jobs. Plus, it’s well documented that wages aren’t increasing at the same rate as rents, particularly in the South East and London.

4 – An increase could lead to your tenant falling into arrears.

If your tenant accepts the increase, not wanting to leave the property but also not seriously considering the implications on their finances, it may lead them to fall into arrears. Even a difference of £50 a month could trigger this, particularly if a tenant’s wages aren’t increasing but their monthly outgoings are. It could end up costing you a significant amount if you need to issue court proceedings for possession based on rent arrears. There are currently more landlords dealing with tenant arrears and this is only set to worsen with the cost of living crisis, tax changes  and rents predicted to rise even faster than wages due.

5 – Will you be left with a void period?

If your existing tenant leaves because of the rent increase, you could be left with a void period because there is no guarantee you can quickly find a new tenant. Void periods can be very costly, even a 1 month void means you’re not only missing out on a month’s rent, utility bills and council tax, you will also have to pay the mortgage that month. Many investors rushed to complete purchases before April this year when the increased stamp duty tax rate affecting landlords came into play. Although the rental market is strong, not all areas are in high demand, so do your research and determine if there is enough demand before embarking on an increase.

6 – Do you really need to?

If you’re currently achieving a good yield then remember this is a long term investment based also on the capital growth of the property. Of course there are these increased expenses for you as a landlord and particularly with the new tax regime post 2017, your profits will be affected. But on balance it might be better to keep hold of a long-term tenant that looks after your investment and pays the rent in full and on time each month.

7. Consider small incremental increases

If you rent has fallen a long way behind with your long-term tenant don’t thing about going for a large increase in one go. Consider small incremental increases to bring you rent back into line over a period of years. You tenants should appreciate the need if you explain this to them and that you are only increasing by a smaller amount that is really necessary. If you increase annually by a small amount your tenants will usually accept this without question and even come to expect it as they see all their other costs increasing.

8. Using the legal process

If you decide you really must increase the rent but cannot come to an agreement you must you the legal process.

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:

1 – 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.

2 – 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.

3 – 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.

4  – 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.

9. The Section 13 notice

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.

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.

10. Keep an eye out for the new regulations – 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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