As we know, the government is under pressure from tenant support groups. Following a “disappointing result” in the recent local elections, we have seen the government cancel the proposed changes to Leasehold legislation and hold back on the publication of the Renters Reform Bill. The truth is, that these have the potential to decide the results of the next general election. I don’t discuss politics, and I won’t now, but I do want to discuss some of the issues that landlords are dealing with while we wait or hold back on making decisions about the future of our rental properties.
We have just had another 0.25% increase in the Bank of England Base Rate taking it to 4.5%, the 12th increase in a row which has attempted to slow down inflation. Many landlords are sheltered for a short time because they are on a fixed rate for the lifetime of their current mortgages, but many are coming to the end of their current arrangements and are facing huge increases. Mortgage costs are often the difference between profit and loss when combined with the loss of tax relief on interest.
Highly leveraged landlords may be given little choice but to sell at least some of their holdings in order to reduce their debt/outgoings. Those who are not so highly leveraged may have other options. Some landlords are planning to increase their mortgages in order to get through this time based on predictions that rates will begin to come down again by the end of the year. In reality, all businesses face this difficult time and the solution for most is to increase the sale price of their product – After all, that is what business is about. For us, that means increasing rents and I have been very surprised by a couple of things which have arisen from discussions about rent increases.
- Landlords do not know how to increase rents
- Neither landlords nor tenants understand the Rent Tribunal system
What Landlords Should Know About Increasing Rents
In my opinion, and that of most seasoned landlords, it is far better to increase the rent by a small amount every year on the anniversary of the contract than it is to leave it for years and then hit our tenants with a big increase. During discussions on this subject, it’s apparent that landlords are trying to keep the pressure off good tenants. That is really nice to hear, but unfortunately, when the day arrives, as in now, when the landlord can no longer maintain the property, pay the mortgage, and make a reasonable profit, the rent must be increased. When this happens there are two reactions. Many tenants are reading about rents increasing and mortgage rates going up and expect a rent increase. Others don’t connect mortgage rate increases with rent levels and, especially if the landlord hasn’t spent much money on the property, they don’t see the need for a rent increase. These tenants often talk about their bills increasing but don’t understand that their landlords must also pay those increases and the process can become very confrontational.
If Your Tenant Accepts the Rent Increase
Let’s talk about the tenants who accept the rent increase first. There is no need to serve a legal notice of the increase if the tenant accepts it and begins to pay when the increase is due, an email confirmation is enough. We cannot increase rents during a fixed term unless there is a clause allowing us to do so in the AST. We should only increase the rent once a year, and we must give a minimum of one month’s notice of the date that the increase is due. Personally, I always give 2 months because this allows the tenant time to adjust their finances and, should they decide that they cannot afford the increase, it gives them time to find another property and still give me one month’s notice to end the tenancy. In fact, many tenants do take time to look for alternative properties and this usually works out well for the landlord because it makes the tenants aware of the cost of comparative rental properties in the area. This often means that the tenant is willing to accept the nominal rent increase because they can see their costs would be higher elsewhere.
There is no need to sign a new contract unless all parties want to.
If the contract has expired, offering a new fixed term at an increased rent is another way of increasing the rent without a legal notice, but this can still be referred to a tribunal by the tenant.
If Your Tenant Does not Accept the Rent Increase
Moving on to the tenants who do not accept the increase. If you’ve got some wiggle room, try to negotiate with the tenant, but if you have set your increase at a level which is what you need to make the rental work, you should serve a legal notice. This is a notice covered under the Housing Act 1988 under Section 13 and therefore known as a Section 13 Notice (Form 4) Form_4_-_Eng.docx (live.com).
This Notice contains information for tenants on how to refer to the rent tribunal including –
“If you do not accept the proposed new rent, and do not wish to discuss it with your landlord, you can refer this notice to the tribunal. You must do this before the starting date of the proposed new rent in paragraph 4 of the notice. You should notify your landlord that you are doing so, otherwise, he or she may assume that you have agreed to pay the proposed new rent.
To refer the notice to the tribunal, you must use the form Application referring to a notice proposing a new rent under an Assured Periodic Tenancy or Agricultural Occupancy to a Tribunal (form 6). You can obtain this from the tribunal or a legal stationer.”
The Rent Tribunal Process
Up to this point, most landlords and tenants understand the process if not the detail. But what I’m seeing is unrealistic expectations from tenants and fear from landlords, who often decide to evict the tenant via Section 21 rather than “risk” a tribunal. A rent tribunal has no interest in individual cases, it’s a process.
- The First-tier Tribunal Property Chamber (Residential Property), used to be called the Rent Assessment Committee.
- During the first 6 months of a tenancy, any tenant can ask the tribunal to decide whether the rent is fair. Yes, even after a new tenant has just signed a contract agreeing to pay the rent, they can take this action and many landlords and tenants do not realise this.
- When a new AST is offered to an existing tenant at an increased rent, that tenant can also refer to the tribunal.
- When a Section 13 Notice has been served or the landlord has proposed an increase during a statutory periodic tenancy the tenant can, as we know, refer this to the tribunal.
How Does a Rent Tribunal Work?
- The tenant makes an application and should tell the landlord otherwise the landlord will expect the rent increase to be paid and when it isn’t this raises unnecessary issues.
- The Tribunal has only one job – to determine whether the proposed increase brings the rent in line with local rents charged for similar properties or not.
- The Tribunal has three options depending on the result of their investigation:
- Agree that the proposed rent is in line with local rents.
- The proposed rent is more than other local rents and reduces it to the local average.
- The proposed rent is less than other local rents and increases it to the local average.
If the tribunal reduces the increase, we are legally bound by their decision until a year later, as is the tenant if they support the increase.
These last two are what most tenants are unaware of. Some tenants may approach a tribunal with the mindset that the rent is too high and they aren’t always prepared if the tribunal disagrees with their assessment.
Helping a Tenant Understand Their Rent Increase
There is information available which is worth sharing with a tenant who doesn’t accept a rent increase, it may not make them change their mind, but it will at least make them aware that rent increases are part of the economy and that rents will increase from time to time like everything else.
How to Make Sure Your Rent is In Line with Market Rates
Unfortunately, Local Reference rents are no longer used to set the level of Local Housing Allowance (rent) element of universal credit as it once was and is now only a useful guide.
“the VOA seeks to ensure that the information published in the tables is up-to-date and accurate as at the date shown however, none of the information on our website constitutes professional advice
the information in the LRR tables provides a general guide. It does not constitute any predictor or guaranteed indicator of how much housing benefit entitlement a claimant is likely to receive. Nor does the information provide any guaranteed indicator of the condition of or trends in the private rental market”
One thing worth noting is that if your rent is currently below the Local Reference Rent then it is well below the average in the area for private renting. Put this information together with local rents which can be found on Rightmove and Zoopla and you will have a decent guide about where your rent should be. This doesn’t mean that you cannot charge a higher rental rate, unfortunately there is now an increasing shortage of properties available for rent and some tenants are offering more than is asked to secure a property. This will impact the cost of rents due to supply and demand market forces.
What Happens If the Tenant Doesn’t Pay the Increase?
If you don’t hear from the tenant and they don’t go to the Rent Tribunal you can expect that the increased rent will be paid when it’s due. Failure to pay the increase means that arrears will arise and when they reach the equivalent of 8 weeks rent you will have mandatory grounds for eviction under Section 8. You can issue a section 8 with 2 weeks’ notice that you intend to use the eviction process. It will probably take some time to reach this level and you should keep the tenant updated on the increasing total of rent arrears by email.
If the increase was part of a new fixed-term tenancy and it comes to an end, or at the point where it has only two months to the end, with arrears mounting, you can issue a section 21 with two months’ notice that you intend to use the eviction process.
I wrote about the eviction process, in detail, in this article Be Prepared to Regain Possession of Your Property at any Time – Landlord Insider (landlordvision.co.uk)
We need to think long and hard before we rush into evicting a tenant, especially if that tenant has been a good tenant up to this point, though the media will tell you that there are thousands of tenants looking for a property to rent, they won’t all be the right type of tenants for your properties. I have learned to my considerable expense that a bad tenant is not only very expensive financially it is also a huge burden on your health and wellbeing both of which are more important than profit. The other consideration is the cost of an eviction which can run into thousands if a legal service is used, the tenant stops paying rent, you have slipped up on your paperwork or legal obligations and even when you get the property back there will inevitably be repairs and replacements and the tenant’s deposit may be gone in rent arrears or the tenant may not be liable for the costs.
Will Rental Demand Diminish?
It’s a misconception that all people who rent cannot afford to buy property, although there are many people in this group of renters, there are many people who are not ready to buy yet and others who like to be free to move when they want to without the hassle of selling. There are also people who rent from private landlords because they cannot afford to buy a property in areas that they want to live in; this may be where family and friends live, where the education is better, close to a place of work, convenient for transport … There are also, of course, people who desperately want to own their own homes and are saving for the deposit and there has recently been some good news for those tenants, which is also good news for landlords.
Martin Lewis, speaking about Skipton Building Society offering 100% mortgages and their criteria based on a good record of rent payment.
“So, Skipton Building Society’s criteria of requiring a good rental track record to prove someone can make mortgage payments is sensible, and so I cautiously welcome it, done carefully after advice, as an option for some.”
Skipton said tenants aged 21 and over may be able to take out mortgages at between 95% to 100% of the value of the property they want to buy. In return, they will need to demonstrate a strong track record of paying their rent, with evidence of a minimum of 12 months of rental history, as well as passing affordability and credit checks.”
Sadly, these days the notion of a CCJ appears not to have the fear factor it once had, many people have several and see them as part of their lives. I have often had applicant tenants who declare CCJs and I wonder if there are landlords who accept people with them? We need something to remind prospective tenants that a good credit history really matters, this is not only good for those of us who take a risk with them but its also good for them to build up a good credit rating and habit of living within their means, because, as every homeowner knows, everything costs far more than we anticipate and the last year has increased that massively because of the increased utility costs which no one saw coming and which have squeezed most budgets.
I well remember the 100% mortgages which enabled young people to buy their first homes and I really welcome them back. I have had the pleasure of offering a home to many young people who were saving and who eventually bought their own homes. It’s wonderful to be a part of that journey. So apart from the fact that they are encouraged to pay their rents in full and on time I look forward to many more of my tenants becoming first-time homeowners.