In the next assessment of the Renters (Reform) Bill, Richard Pulford, Associate Solicitor in the Dispute Resolution team, looks at the effect of rent increases and how they will likely be handled once the Bill comes into force.
As mentioned in previous blogs, the Bill will be subject to change as it is debated. There will also be the matter of enforcement once the Act is in place that is all going to be relevant to specific advice. This blog focuses on talking points and possibilities so that landlords and managing agents can start to prepare themselves as best they can, rather than trying to suggest solutions that may not exist.
When the Bill eventually comes into force, rent increases are going to be a crucial element for Landlords, agents, and tenants to be aware. In the absence of section 21 notices and therefore no extensions, landlords and agents will need to be on top of their statutory rights and the process that would need to be followed to ensure that the rental income from the property remains at a suitable level in line with the market.
When negotiating rent increases under an Assured Shorthold Tenancy, at the moment, landlords have a significant amount of leverage. Yes, they have the ability to invoke the statutory process via the section 13 route which will be discussed later in this blog, however, they also have the option of the no-fault section 21 notice. Landlords can serve the notice if the tenant does not want to pay the rent that the landlord is looking for. Even if above market rent, landlords can insist on the figure they are requesting and if the tenant refuses, the landlord can simply serve a section 21 notice, recover possession of the property and try to find someone who will pay what is being asked. This article is leaving to one side the commercial prudence of such a decision given the chances of finding a tenant above market rent; the costs of court proceedings and the prospects of the property being vacant/incurring new letting fees etc may mean that this in practice would not happen too regularly. However, whatever the short term financial impact on the landlord, it would still mean that a tenant would need to find somewhere else to live. This power imbalance is due to end.
When section 21 notices are abolished, landlords will need to rely on a different route to increase the rent. The government via their guidance on the Renters (Reform) Bill states:
‘In the new system, all rent increases will be via one mechanism which replicates the existing section 13 process.’
This will mean that landlords will need to serve notice on their tenant to increase the rent, giving at least a rental period of notice. Tenants will have the opportunity, as they do now with the procedure set out in section 13 Housing Act 1988, to challenge the proposed rental figure and argue that the increase does not reflect market rent. In challenging, the matter can be referred to the First-tier Tribunal to make a determination as to what market rent should be for that tenancy. This process has been around for some time and so will not be a surprise to more experienced landlords and managing agents, although it is rarely used, because, as stated above, Landlords can serve a section 21 notice and for that reason, tenants are more likely to compromise and agree to a higher rent.
The potential change and a significant issue to monitor will be the sheer volume of these claims and how these are handled. Whilst the statutory process is being used currently and so you may be wondering what the difference will be, arguably the realities of it will be night and day. At the moment, for the reasons set out previously and the looming threat of a section 21 notice being served, these sorts of disputes tend not to make it to the FTT. There is little benefit to the tenant because even if they are successful with their arguments, there would be nothing stopping the landlord from simply serving a section 21 notice, and they would have to vacate anyway. Tenants are not protected from this sort of retaliation like they would be with reporting repairs that the landlord did not want to carry out. Now that this threat will have been taken out of consideration, the argument for the tenant is ‘why not?’. Why not challenge the rental figure that is being demanded? There will be no eviction ramifications even if the landlord’s proposed figure is upheld, so why not try to get a bit more of a reduction? What is there to lose?
This likely progression leaves two main outstanding issues. Firstly, is there any chance of landlords being able to recover costs? If the dispute is going through the FTT, then the chances are that they will not be able to. Certainly not unless the tenant has been completely unreasonable, and I would suggest this will be a high threshold to reach/prove. The other issue that springs to mind is how the FTT will be able to handle the inevitable influx of cases to consider. There will be inevitable delays with the landlord not able to rely on the increased rent whilst the application is being considered even if they had been entirely reasonable with the requests made, followed the correct procedure, and gave the proper notice. Will there be an interim rent type structure similar to commercial leases? Unlikely, in my view. Maybe a new streamlined process? We can only hope. This may well be another situation where landlords will need to build in this extra complication with their rentals in future. Whatever happens, it will be interesting to see how these concerns are accounted for.
With the ever-increasing obligations being imposed on landlords and managing agents, if any guidance or advice is required, we would be happy to help. You can contact Richard Pulford on [email protected]. Alternatively, read further on the residential property and property disputes services at Boyes Turner.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.