How to legally increase rent to align with rising property prices
Making a lucrative return on investment is a landlord’s best measure of success in the business of buy to let. In a market where prices are constantly increasing (albeit slowly in the UK since 2016 and compounded by Brexit-based uncertainty), that means knowing how, when and by how much to increase rent.
House prices are expected to rise by £35,000 on average in the next five years, representing a 15.3 per cent average rise across Britain generally and a 20 per cent rise in the more expensive parts of London. The really dramatic increases, however, are expected up north, with a 24 per cent increase expected in the North West and a 21.6 per cent increase expected in Scotland.
On a local level, there are certain areas where house prices are rising so fast, in fact, that a daily increase is noticeable. In Berkhamsted, for example, the average house price stood at £683,356 in January and £717,231 in July. Over six months, that’s an increase of around £185 a day!
To continue reaping the rewards of a property that is increasing in value, landlords may want to find a way of increasing rent fairly, legally and, most importantly, without unsettling tenants. Understanding how to approach the situation with tenants, prioritising good lines of communication from the outset, is key to making this work.
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When can rent be increased?
In a contract for a periodic tenancy (rolling on a week-by-week or month-by-month basis) landlords cannot normally increase the rent more than once a year without the tenant’s agreement.
This means finding the right time is absolutely crucial as you’ll only get just one legal chance a year. In addition, increasing the rent more than once in a year would most likely frustrate your tenants even if it was legal.
For a fixed-term tenancy (running for a set period, often between six months and a year), meanwhile, landlords can only increase rent within this period if the tenant actively agrees. If not, the rent can only be increased when the fixed term ends
The only exception here is if there’s a clause in your tenancy agreement that sets out how and when you will increase the rent.
If the area your property is in suddenly increases in popularity, for example, with demand oustripping supply, it might be time for a fair and appropriate review of the rent.
It is worth bearing in mind that, while it’s important for landlords to make good returns on the investment put into their properties, sometimes keeping a good tenant is a better reward than increased profits.
How much can rent be increased by?
This is a point of contention amongst some landlords, who might argue about what is fair and what is not.
The UK government states that all rent increases must be “fair and realistic” and in line with the local average, but this is incredibly vague and difficult to enforce.
Take nationwide statistics with a pinch of salt. While they’re useful as a basic litmus test, it’s more important to look locally before you figure out how much more you should be asking from your tenants.
Look at properties similar to yours and work out what the local average is. As long as you stay within this rate then you can’t be accused of being unfair.
The most important thing is to ensure that the rent renewal date is set out in the tenancy agreement and that you adhere to this process, because otherwise it can lead to messy and unwanted legal action.
If a tenant feels that any rise in rent is unfair then they can take the dispute to a First-Tier Tribunal, where each party will be asked to plead their case to an independent jury. This is definitely not a situation you want to find yourself in, however, as it is likely to cause an irreparable rift between you and your tenants.
If you feel as if you are stuck in a situation where property prices are soaring but there’s nothing you can do about it then don’t despair, there are options to consider.
In a fixed-term contract, you could negotiate an increased rent with the tenants at the end of the term or you could speak with the tenant beforehand to agree on a rent increase and record this agreement in a written contract.
This is far more likely to work in your favour if you have a decent, long standing relationship with your tenants.