How to legally increase rent as the value of your property rises
NRLA insurance partners Hamilton Fraser share how landlords can legally increase rent.
A landlord’s main goal in the buy to let industry is to make a high return on investment. Although the rate of growth in the housing market has slowed in recent years due to continued uncertainties surrounding Brexit, prices are constantly rising. This means that it is important for landlords to know how to legitimately increase the rent so that it reflects the rising value of their properties.
House prices The price of houses in the UK are projected to increase by £35,000 on average within the next five years. According to estate agents, Savills, the average price of a house in Britain is generally expected to rise by 15.3 per cent. Certain regions in the North are projected to see an even higher rise, such as in the North West, where house values are expected to rise by 24 per cent, and Scotland, where prices are predicted to rise by 21.6 per cent. By contrast, other areas are likely to see a less significant rise in house value, such as in Greater London, where prices are expected to rise by only 4 per cent.
From a more local perspective, there are certain areas where house values are rising at a significant rate on a daily basis. For example, in Berkhamsted the average house price rose from £683,356 in January 2019 to £717,231 in July of the same year, which equates to an increase of roughly £185 a day.
In order to capitalise off the increasing value of their property, it is important for landlords to understand how to fairly and legally increase rent without troubling their tenants. Clear and concise communication at all stages is key to doing this amicably and successfully.
When can you increase rent?
For periodic tenancy contracts landlords can typically only increase rent once a year without the tenant’s agreement. It is therefore imperative to find the right time to discuss rent matters with your tenant as you will only have one opportunity per year. It is important to approach this situation with sensitivity, as telling your tenants that you intend to increase their rent costs could cause anxiety for your tenants if not done carefully, even if you are within your legal rights to do so.
However, for fixed-term tenancies, which run for a set length of time typically ranging from six months to a year, landlords can only increase rent at the end of the fixed term, never during. The only exception to this rule is if there is a specific clause in your tenancy agreement that clearly states that you may increase the rent during the fixed term.
A good reason to review your rent may be if the popularity of your area increases, or if there are a lot of new developments being built. These are good indicators that it is time to re-evaluate your rent prices.
How much can you increase rent by?
The question of how much rent can be increased by is a topic of frequent debate among landlords. The UK government has stated that all rent increases should be “fair and realistic”, and in accordance with average costs in the local area. However, the vagueness of this recommendation makes it difficult to specify an amount.
National statistics shouldn’t be taken as a definitive guide as prices can differ significantly by region. It is more advisable to observe the rent costs in your local area before you determine how much you should be charging your tenants. You can do this by looking at properties similar to your own and noting how much their rent costs are. If your rent stays within a similar range as these properties, you will have more certainty that you are charging at a fair rate.
Before you take any action to increase your rent, you should ensure that the renewal date is clearly stated in the tenancy agreement in order to make sure that you avoid any discrepancies and that you are within your rights to raise the rent. If they have good reason to believe that the increase is unfair, tenants have the right to legally challenge a rent increase by taking the dispute to a First-Tier Tribunal, in which each party involved will be given an opportunity to plead their case to an independent jury, who will decide the outcome of the case. We advise you to avoid getting into a legal battle with your tenants as this is likely to cause serious damage to your relationship.
In order to avoid this from happening, we suggest you negotiate with your tenants to try to come to an amicable arrangement. For fixed-term tenancies, you could discuss rent increases with your tenants at the end of the term, or alternatively it may be better to discuss the possibility of rent increases before the end of the term to give them adequate warning. You should record this type of agreement in writing. Approaching the situation in this way is more likely to work in your favour, and will also allow you to maintain a good relationship with your tenants.
Although it’s important for landlords to make decent returns on their buy to let investment, there are times when it may be better to retain a good tenant with slightly reduced profits than to risk losing the tenant, because perhaps they simply can’t afford even a modest increase in the rent. In this situation you potentially risk a void period while you find a new tenant as well as the possibility that the next tenant may not be as reliable.
Section 13
If you are unable to come to a fair agreement with your tenant, your other option is to file a Section 13 notice, a clause of the Housing Act 1988 which allows a landlord to raise the rent on a property as long as there is reasonable notice given, regardless of whether the increase is stated in the tenancy agreement or if the tenants agree to it.
The landlord must offer the tenant a sufficient period of time between giving the notice and putting the increase into effect. This is generally one month’s notice for periodic tenancies and six months for fixed-term tenancies. Also, Section 13 notices cannot be issued less than a year apart, nor can they be filed less than a year from the start of a new tenancy. In general, rental increases should always be considered in terms of annual cycles.
If a tenant refuses to accept a rent increase, the best course of action may be to end the tenancy once the fixed term has come to an end, and then you can search for new tenants who will accept the increased rate. However, it is worth noting that on average a tenant will spend around four years in a property, and in the UK it takes 17 days on average to rent out a home. This means that if you make the decision to end a tenancy, your property is likely to be empty for nearly a month, or longer. In some cases, leaving your property empty for an extended period of time can invalidate your insurance, so it is important that you check your NLA Property Insurance policy.
A decision to end a tenancy is very much one that should be made based on your own personal judgement, depending on your local market and whether you are prepared to take the risk. Also, it is unlikely that you will be able to maintain a friendly relationship with any tenant that you have filed a Section 13 notice against, so careful judgement should also be applied here. Considering these possibilities, all decisions regarding rent increases should be approached with sensitivity.
Landlord’s intuition
Since the introduction of the tenant fee ban, 55 per cent of letting agents have reported that landlords have increased rents since June 2019. This has intensified a narrative which sometimes vilifies landlords, but the truth is that in the vast majority of cases, landlords are trying to adapt to new legislative changes whilst continuing to make an honest living from renting out homes.
Understanding how and when to increase rent prices without upsetting your relationship with your tenants, and also not compromising your own goals can be a challenge. However, it is made a lot easier if you are fully aware of the relevant laws and legislations, and you make an effort to be honest and transparent about it.
To sum up, it’s much better to get the issue of future rent rises clear right from the start of the tenancy. Ensure that potential rent increases are clearly outlined in the tenancy agreement and talk through the agreement in person with your tenant, drawing their attention to the issue of rent increases. Doing this should drastically reduce the chance of any confusion or disagreements with tenants when the time comes for you to increase the rent.
Finally, we recommend that all landlords stay informed when it comes to the political landscape and legislative changes in the private rented sector. The introduction of new policies is likely following the general election, and this could have an impact on rent increases. For example, the Labour party has pledged to introduce rent control policies, which will cap rent costs in many households. Therefore, it is imperative that landlords use their intuition, combined with knowledge of the market, their properties, and legislation in order to make appropriate decisions about increasing the rent.
If you are struggling with problem tenants who refuse to compromise on your rental increase demands, speak to one of our recognised legal suppliers.
