The Financial Times reported at the weekend that many estate and letting agents are seeing booming demand for rental property as first time buyers and foreign workers defer buying homes amid continued uncertainty over house prices.
Agents around London and the south east in particular are seeing up to 25% more activity in their letting business compared with a year ago. Much of this demand is coming from young professionals and City workers who are not prepared to gamble and buy into a weak housing market.
Where do professional landlords go for their buy-to-let insurance?
The result of this boom in lettings activity are fast rising rents in certain areas as strong competition amongst renters bids up prices. The Financial Times reports that landlords in these ‘rental hotspots’ are managing to secure significant rent increases.
Lucinda Richardson, lettings Manager at the Westbourne Grove branch of Winkworth said tenants renewing their agreement were typically paying 5-10% more per year, while new occupants are paying 20% more than they would have done a year ago.
Things to avoid
Therefore if a landlord is lucky enough to own residential investment property in areas of strong rental demand, what should they be doing? Firstly landlords should always be wary of offering a tenant a longer term contract than the standard 6 month fixed term tenancy in areas where rental demand is strong and rents are rising. Glynn Judd, head of lettings at the Surrey Quays branch of Kinleigh Folkard & Hayward reports that he is aware of tenants pushing for 18 month even 2 year fixed term tenancy. This is because once agreed most tenancy agreements do not allow a landlord to increase the rent during this fixed term.
Therefore the initial rent that the landlord agrees may look very appealing at the outset, but will it still look so good in 24 months time? During this time employing a standard 6 month fixed term tenancy a landlord could have legally raised the rent three times. The other alternative to a landlord is to opt for a periodic tenancy. For an explanation of the two different types of tenancy have a look in the Landlords Bible.
How to raise the rent
Fixed term tenancy
How a landlord goes about raising the rent will largely depend on the type of tenancy in place. Most landlords use a fixed term tenancy agreement such as the one available on Property Hawk. In most cases a landlord will opt for a 6 month tenancy although it can be longer. This means that without the tenancy agreement you as the landlord cannot put up the rent during this period, unless the tenancy agreement makes specific provisions allowing this. These specific provisions may be by way of an escalator clause for instance stating that the rent will go up by inflation after six months.
The vast majority of landlords avoid such clauses. This is because they are seen as overly prescriptive and inflexible. Most landlords opt to review the rent when they decide whether to re-let at the end of the fixed term tenancy. This way a landlord can judge the prevailing market conditions and work out what the rental market will bare at that particular time. For instance in places such as central London and parts of the south east, rental inflation is running well ahead of general inflation, therefore for a landlord just to track inflation would mean their rents are falling behind the market.
If a landlord decides to opt to re-let to the existing tenant then raising the rent is relatively easy as all they do is create a new assured shorthold tenancy with the new rent included.
The other type of tenancy that a landlord might employ is a periodic tenancy. These are tenancies where there is no specific end date. The two types of periodic tenancy are the contractual periodic tenancy in which from the outset there is no end date, or the much more common statutory periodic tenancy. The statutory periodic tenancy comes about when a fixed term tenancy lapses.
In the case of periodic tenancies, increasing the rent is slightly more complicated because the landlord will need to go through the formal procedure as set out in section 13 of the Housing Act 1988. If the landlord wants to increase the rent and intends to keep the tenancy on a statutory periodic tenancy, they can use the special form titled Landlord’s notice proposing a new rent under an Assured Periodic Tenancy or Agricultural Occupancy sometimes known as a section 13 notice. These section 13 notices can be created in Property Hawk’s Property Manager and are free to download. This form allows a landlord to propose a rent increase as soon as the statutory tenancy begins. For a contractual period tenancy a landlord can use the same form to propose an increase which will take effect one year after a tenancy begins. In both cases a months notice of the increase is required for rents paid on a weekly or monthly basis (more if the rent period is longer). With both periodic tenancies a landlord can propose further rent increases at yearly intervals, after the first increase.
Potential snags with raising rents
There are a number of potential snags for landlords when raising the rent. Not least amongst these can be scaring off perfectly good tenants by making the rent unaffordable. A landlord has to be therefore confident that they their existing tenant will be able to afford the new rent or that they will be able to quickly fill any vacancy and avoid a protracted void period.
Firstly, the snag with section 13 rent increases is generally a landlord can only raise rents once a year. In a fast moving market such as the one being experienced in parts of London and the South-East currently, annual rental increases will not keep pace with market rents meaning that a landlord towards the end of the 12 month rental period will have a rent below the open market value and therefore be missing out on potential rental income.
The other aspect about a landlord with a periodic tenancy who needs to use a section 13 notice is that it entitles a tenant who is not happy with the rental increase to apply to a Rent Assessment Committee for a determination of what rent a landlord could reasonably expect to pay if he or she was letting it on the open market under a new tenancy on the same terms. The committee has the power to agree the rent or set a rent higher or lower. The rent then fixed by the committee is the legal maximum the landlord can charge. The new rent will be payable from the date specified in the landlord’s notice unless the committee considers this would cause a tenant undue hardship in which case it may specify a later date. The landlord can propose that the rent is increased a year after the date on which the rent decided by the committee was payable.
Power of the Rent Assessment Committee
All this may sound quite daunting to a landlord. The reality is it shouldn’t be. Whilst on the face of it the Rent Assessment Committee seems to have a considerable amount of power, in reality they don’t. For a start they can only set a new rent if it is demonstrably unreasonable. The other factors that limits the scope of the Rent Assessment Committee and the tenant in ultimately setting rental levels is that the landlord retains the right to issue a section 21 notice.
This means that providing the fixed term period has come to an end by the time the notice has expired a landlords ultimate response to a rent that is unsatisfactory is to regain possession of their rental property and simply re-let it to another tenant at the rent that they and the market will bare.
What should landlords do?
The simple answer is that landlords should normally opt for a fixed term tenancy such as the free tenancy agreement available within Property Hawk’s Property Manager. A landlord should avoid the tenancy lapsing and becoming a periodic tenancy. They can do this by going through the motions of issuing a section 21 notice for possession even at the start of the tenancy to ensure that a landlord can bring the tenancy to an end. In this way a landlord is in the perfect position at the end of the fixed term to either re-let to the existing tenant at a higher rent, or if the tenant objects, to regain possession and then let their buy-to-let investment property to another tenant at the higher rent.
A word of caution to landlords in less high demand areas. Tenants can be sometimes unsettled by receiving a section 21 notice and therefore a landlord needs to approach the situation sensitivity and explain that the notice is a just a formal procedure and that they have no intention of seeing it through. The reality is for any landlord is that having a tenant paying rent, even if it is not the absolute top rate, is far preferable than having no rent at all!
Thanks for all the e-mails received last week on the Energy Performance Certificate (EPC.)
My mail box was absolutely bulging with your comments and it is something that we will be definitely revisiting in the coming weeks.