One of the most satisfying parts of being a landlord is seeing the rents rise on the properties you let out. In most cases, it can mean a greater income and increased profit on your properties. Intrinsically, it can be an indication of a property well bought and a portfolio well managed.
Whilst seeing your monthly rent increase can be a rewarding moment, it is important to consider whether increasing a property’s rent is the right thing to do. Rents can only be increased in line with the market rate, and it is important to consider a tenant’s ability to pay when doing so. Equally, landlords need to assess whether a slight increase in rent is worth potentially losing a good tenant.
If increasing the rent is the right thing to do, landlords must be aware of the different routes available for increasing rents depending on the tenancy type. Tenants can disagree with rent increases and appeal ones which they deem to be unfair or unrealistic. This necessitates that landlords be familiar with Section 13 notices and their appeals process.
When Shouldn’t You Increase Rents?
Rent increases are an enticing prospect for any landlord. It is only natural to want to earn more for doing the same amount of work. However, increasing rents is not and should not be a black and white decision. Higher rents may not mean higher profits and successful landlords are not necessarily the ones that aggressively increase their rents on an annual basis.
The greatest risk to consider when increasing rents is void periods. By increasing rents, you may be increasing the likelihood of experiencing a void period in the not-too-distant future. Consider a hypothetical property which is let out for £500 per month and on which you have decided to increase the rents by £25 (+5%) per month. This same property may have a one-month void cost of close to £650. Therefore, one month’s void could be equivalent to 26 months of increased rent. It is always worth working out whether a rent increase is favourable when compared to the increased risk of a void period.
It is also worth considering the moral case against increasing rent. Much as the media may focus on ‘slum landlords’ and those that give our industry a bad name, many landlords choose to make decisions which support their moral convictions. You would not let a property to someone that could not afford it. Equally, you should not increase the rent to such a point that your tenant cannot afford it. Most tenant referencing agencies will provide affordability ratings and it is good practice to qualify a tenant’s income. It can be worthwhile using this information to inform your decision to increase rents. Have the tenants’ circumstances changed? Was their affordability rating borderline in the first place? Making the morally right decision is not mutually exclusive to the financially prudent decision.
When Should You Increase Rents?
Common sense suggests that you should increase the rent on a property when there has been a material change in circumstances. It could be that local rental values have increased since the rent was initially agreed, or inflation has reduced the value of the current rent. The only restriction is that any increase in rent is deemed to be ‘fair and realistic’.
Ideally, the best time to increase rent on a property is between tenancies. This will avoid any risk of a tenant contesting the rent increase. Equally, you will be able to gauge how competitive your rent is by the interest you receive in the property. An abundance of applicants will indicate that your property is still competitively priced even with the increased rent.
Whilst the easiest route is to increase rents between tenancies, many landlords will seek to increase the rent during a tenancy. When doing so, there tends to be two schools of thought among landlords. Some landlords believe that you should consistently increase rent on an annual basis, the ‘little and often’ technique. In contrast, other landlords will stress the value of keeping good tenants and avoiding the risk of change, the ‘absolutely necessary’ technique.
Consistent rent increases – Little and often technique
Whilst some may consider the ‘little and often’ technique to be akin to penny pinching and not worth the risk, it does have some merits. Firstly, small annual increments can be far more palatable to tenants than a substantial rise after a number of years. For many tenants, the costs of moving will outweigh an extra 2-3% on their rent each month. Secondly, there is the argument of returns. The aim of property investment is to generate returns in line with the market. If the market rent or inflation rises, then it is only fair that your rent rise to a similar degree.
Periodic rent increases – absolutely necessary technique
On the other side of the scale, is the ‘absolutely necessary’ technique. Landlords who favour this route argue that good tenants are worth their weight in gold. It is far better to have a good tenant that pays rent on time and takes care of the property, than to run the risk of voids or replacing them with a less reliable tenant. In this case, landlords will avoid raising the rent until it becomes absolutely necessary to do so. Typically, this will be when the rent is sufficiently below the market average that the property still looks decidedly attractive even after a rent increase.
The technique that you choose will usually depend on your personal preferences and the value you place on the tenant. Some less experienced landlords can operate on the extremes of the scale, being either too skittish about increasing rents or overly keen. In practice, reasonable tenants tend to understand reasonable increases.
Increasing Rents on Fixed Term and Periodic Tenancies
The Assured Shorthold Tenancy (AST) is the most common type of private tenancy agreement in the UK. Agreements of this type will typically specify a fixed term period of between 6 and 12 months, after which the agreement will operate on a periodic basis (month-by-month) or a new fixed term agreement is signed.
You will not be able to increase the rent on a property midway through a fixed tenancy unless the tenancy agreement includes a rent review clause. If a rent review clause is included in the agreement, it will often specify a review date and either a fixed value for the increase or a statement which indicates the rent may be increased in line with the market rate. If the agreement does not include a rent review clause, you will need to wait until the fixed term expires before either agreeing a new fixed term agreement or increasing the rent on a periodic basis.
Periodic tenancies allow for rent increases so long as they are limited to once every twelve months. You can increase the rent on a periodic tenancy through mutual agreement with the tenant or through issuing a Section 13 notice.
The Process for Increasing Rents
There are three main avenues for increasing the rent on a property where the fixed term has elapsed, or which is let on a periodic basis. You can issue a new tenancy agreement, come to a written mutual agreement with the tenant, or issue a Section 13 notice. In all these instances, you must provide the tenant a minimum of one month’s notice.
The first process is to renew or issue a fixed-term tenancy agreement. If the tenant is open to this, you can sign a new tenancy agreement which specifies the increased rate. The additional benefit of this process is that it provides a degree of future security to both the landlord and tenant. However, some landlords prefer to avoid pursuing a fixed term tenancy as this may encourage tenants to seriously consider their position and can instigate a move.
The second option available is to come to a mutual agreement on the price. This is perhaps the simplest and most employed process when increasing the rent. For the increased rent to be valid, the tenant must firstly agree to it. If the tenant does agree to the increased rent, then a written agreement must be created and signed by both parties.
Should a tenant not wish to sign a new fixed term contract or agree to the increased rent, you can choose to issue a Section 13 notice.
Issuing A Section 13 Notice
A Section 13 notice refers to Section 13 of the Housing Act (1988) and allows landlords to increase the rent on a property without receiving the written agreement of the tenant. When serving a Section 13, it is important to be aware of the following restrictions:
- Section 13 notices can only be served once every 52 weeks.
- The minimum notice period for monthly or weekly periodic tenancies is 1 month. However, yearly tenancies must be provided a 6-month notice period.
- The notice cannot be served on a tenant during a fixed term tenancy.
- The new rent must be implemented on the same timeline as the current agreement. If the rent on a monthly agreement is payable on the 1st of the month, then the new rent should become applicable on the 1st.
- In cases where there is not a written tenancy agreement and therefore no fixed term, Section 13 can only be served 52 weeks after the start of the tenancy.
When using a Section 13 notice, you must fill out the Tenancy Form 4, which is available on the government website. The form itself is quite self-explanatory and will guide you through the required fields. As this is a legal document and can be contested by the tenant, it is important to ensure that you meet all of the above criteria and that there are no spelling errors present. The completed document can then be provided to the tenant.
Once a Section 13 has been served, the tenant can either agree to the rent increase, challenge the increase, or do nothing. If the tenant does not challenge the increase before the date specified in the Section 13 or pays the new rent, it is implied that they have accepted the rent increase.
Can Tenants Contest Rent Increases?
Tenants can contest a Section 13 notice if they wish. They can do this by raising the increase to the first-tier tribunal (Property Chamber) before the first payment of increased rent is due. A panel of professionals will consider the tenants case and determine the market rent of the property.
The tribunal is able to refuse a rent increase if the landlord has not met the requirements of a Section 13. Providing an insufficient notice period or proposing a start date for the new rent which is not in line with the period of the tenancy are both reasons for refusal.
If the notice period is deemed valid, then the tribunal will determine a market rent. The aim is to assess what rent your property could achieve if it were on the market with the same terms as the current tenancy. In assessing this, the tribunal will consider both comparable rental properties and the state of repair of your property.
When the tribunal has determined the market rate, they will inform both the landlord and tenant. The new rent they determine can either be the same, lower or higher than the original rental increase. It is unlikely that the tribunal will overturn rent increases which are considered fair and in line with the local market price.
The new rent decided by the tribunal will be applicable from the date stated in the Section 13 notice. If the tenants appeal has surpassed the date of the Section 13 notice, you could be owed backdated rent.
Tips for Increasing Rent
Maintain A Good Relationship
It is always worthwhile ensuring you have a good relationship with your tenant. It can make the whole process of managing a tenancy easier. This includes the process of increasing rents. When you have a positive relationship with your tenant, it is easier for them to empathise with you and any rent increases you propose.
Value Your Tenants
The value of a tenant is not wholly expressed by the rent that they pay. Tenants who take care of your property, pay their rent on time and plan to stay for the long-term are worth keeping. It can be worth maintaining a competitive rent which may be below market rate to encourage such tenants to stay longer.
Whilst rounding makes life easier, precise numbers tend to convey a sense of accuracy. It can be tempting to round to the nearest £100 or £10, precise numbers can sometimes be more palatable to tenants. By increasing your rent by a precise number, rounded to say the nearest pound, you are suggesting to the tenant that you have put thought into what is the fair rent for the property. This can be especially effective when combined with a written explanation.
Provide an Explanation
It is always good practice to include an explanation for why you are increasing the rent. By doing this, you help the tenant to understand why their rent is increasing. The rationale you provide could be anything from a couple of lines of explanation, through to a detailed paragraph which includes your working out and calculations. Some landlords even include examples of other properties which have been listed in the area to indicate that their rent is in line with the market. Though you should be careful not to include other listings which appear more attractive than your own.
Regular Rent Reviews
It is worth specifying regular rent reviews from the outset. If tenants sign up for an initial 12-month contract, you may want to specify that you will conduct a rent review annually on this day. Doing this helps to normalise rent increases and prepare the tenant for when they may come. Even if you choose not to increase the rent, it can be worthwhile sending over a written correspondence which details any rising costs and why you have chosen not to increase the rent. This can add an air of professionalism to the process and endear you to the tenant.
Couple Rent Increases with Value-Add Work
It can be worthwhile to link rent increases to other positive actions. As an example, if you let the property with white goods and the fridge is becoming old, it could be worth offering to replace the fridge when the rent increases. This may be something which you would need to do eventually anyway. However, by linking it to the rent increase you can make the increase appear more palatable to the tenant at little additional cost.
Provide Sufficient Notice
The legally required notice period for rent increases is one month. However, it can pay to be courteous to your tenants. Providing advanced communication and an extended notice period of two or more months is unlikely to work against you. The additional notice period can give tenants the time to prepare their finances and will reflect positively on you should the increase ever go to a tribunal.
Disclaimer: This ‘Landlord Vision’ blog post is produced for general guidance only, and professional advice should be sought before any decision is made. Nothing in this post should be construed as the giving of advice. Individual circumstances can vary and therefore no responsibility can be accepted by the contributors or the publisher, Landlord Vision Ltd, for any action not taken, or any decision made to refrain from action, by any readers of this post. All rights reserved. No part of this post may be reproduced or transmitted in any form or by any means. To the fullest extent permitted by law, the contributors and Landlord Vision do not accept liability for any direct, indirect, special, consequential or other losses or damages of whatsoever kind arising from using this post.
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