How to increase rent - the right way!
Tue 17 Aug 2021
If you haven’t increased your contract-holder’s rent recently, it might be worth considering. Some landlords choose not to increase their rents for existing contract-holders, even if they stay for some years. Oddly, this can actually cause problems for both the contract-holder and the landlord.
From a contract-holder’s perspective, when they do eventually look for a new dwelling, they may feel that rents have ‘skyrocketed’ in comparison to what they’re currently paying. For example, because of inflation, if a dwelling was rented for £1,000 a month in 2017, that monthly rent would need to have risen to £1,075* by 2020 in order for the landlord to be collecting the same ‘value’. And market rents in the local area may have risen at an even higher rate, say to £1,150, so your contract-holder may feel they are now having to pay a fortune in comparison to the original rent.
From the landlord’s perspective, they would essentially be losing £75 a month, which is £900 a year - nearly a full month’s rent. This is money that could have been put towards paying down the mortgage or helping fund essential dwelling maintenance, such as redecorating or fixing a fence. Or it could have been used to part-fund a new energy efficient boiler, which would help contract-holders keep their utility costs down and go some way to satisfying the need for rental dwellings to be more energy efficient in the future.
What would be better and easier all round is for the landlord to make small increases each year in line with inflation. In this case, it would be +2.5% per year, which is a £25 increase in the monthly rent every 12 months.
It’s worth being aware that housing associations typically raise their rents once a year, every year, as stated in an agreement with their contract-holders. The amount is decided by the Government and social contract-holders are given at least 4 weeks’ notice. For example, in 2020/21 rent increases of up to 2.7% were allowed, while for the current 2021/22 year, housing associations can raise rents by 1.5%.
When can landlords increase the rent?
If we are managing your dwellings we would normally recommend if rents should be increasing and handle the whole process for you, however if you are self managing, you need to abide by letting rules when it comes to increasing rents. There are three ways that you can legally increase your dwellings rent:
· By agreement
· By a rent review clause in your occupation contract, or
· By the statutory notice procedure.
Most rent is increased by agreement, normally by the contract-holder signing a new occupation contract at renewal. This is the best way to increase rent to avoid a challenge.
You can also increase (or decrease) rent during a fixed term by agreement. It is better if there is some reason for this, for example increasing the rent after carrying out improvements to the dwelling or after letting the contract-holder keep a pet. You should have proof of agreement, ideally a signed document or letter, although it is possible to argue that the fact that the contract-holder pays the increased rent is proof of agreement in itself.
If it’s a struggle to reach an agreement, then rent review clauses are the way to increase rent during a fixed term and the statutory notice procedure is the proper way to increase rent during a periodic contract.
Rent review clauses
If your contract-holder doesn’t agree to a rent increase then the only way you can legally increase rent is via a validly drafted rent review clause in the occupation contract.
Not all contract-holders have this and for 6 months and maybe annual occupation contracts they may not be necessary. However, if the fixed term is going to be longer than a year – it should ideally include a rent review clause or the same rent could apply for the whole of your fixed term.
Rent review clauses must be ‘fair’ which means they cannot just state that the landlord can increase the rent to whatever they like. The increase must be referable to something – either an agreed percentage rise or by linking it to an outside index such as the CPHI Index.
It is also very important when increasing rent under a rent review clause that you follow the procedure set out in the clause – otherwise your increase could be invalid.
The statutory notice procedure
This is only available for assured and assured shorthold contracts (under s13 of the Housing Act 1988), can only be used for periodic contracts and can only be used only once every 12 months. It is the proper way to increase rent during a periodic contract if you cannot reach agreement.
You have to use the special ‘prescribed’ form which gives the contract-holder one months’ notice of your proposed new rent. If the contract-holder does nothing, the new rent will take effect at the end of the month. However, if the contract-holder thinks that your proposed rent is not a market rent, they can refer it to the First Tier Tribunal for review.
Its always a bit of a risk for contract-holders to do this though as the tribunal can put the rent up as well as down – their job is to set a market rent. So, if this happens, be sure the rent is at or just below the market rent for the dwelling. You can do this by checking with your local Moginie James office. It is useful as a way to increase rent if your contract-holder doesn’t sign a renewal form or liaise with you to agree a new rent.
Be aware: what you can’t do is just write to the contract-holder, at any stage, telling them that the rent is going up. Unless you are following the procedure set out in your rent review clause, your contract-holder will be entitled to ignore this and carry on paying the old rent.
How do you approach rent increases fairly?
To increase the rent on a regular basis, it’s worth being aware of a few ‘rules of thumb’. Firstly, although it’s ideal to increase rents according to inflation, this isn’t always possible. Rents typically rise in line with wages, so if your contract-holder isn’t receiving inflationary wage rises each year, they may not be able to afford to pay more rent. If they’re a good contract-holder, it might be more hassle than it’s worth to raise their rent and risk losing them as a result.
Secondly, you should regularly review how much rent similar dwellings locally are charging. Rents might be falling for some reason, so you could be better leaving things as they are, but if rents are rising fast, then it’s worth finding out what’s happening to your contract-holder’s individual circumstances to see what rise they could cope with – ideally increasing rent by at least the rate of inflation.
Finally, if you are looking at increasing the rent, is there anything you can do to help the contract-holder want to stay and encourage them to feel that the increase is fair - especially if they have been with you for some years? For example, if the appliances are a bit old, it may be a good time to replace them. Does the décor need refreshing? Perhaps you can agree a convenient time to repaint the dwelling.
If you haven’t yet checked out whether you’re charging a fair market rent to your contract-holders, do contact your local Moginie James office and we’ll be happy to discuss what you should do next.