Managing Long-Term Tenants Paying Below-Market Rent: A Guide for Landlords
Wendy bought her property with a tenant in situ in 2013 and has only once increased the rent and then only by £20 per month. This is not uncommon and landlords who have kept rents low for long-term tenants, often grapple with the challenge of balancing rising costs and maintaining a positive tenant relationship. If you're in this situation, here's how you can approach a rent increase.
Assessing the Situation
1. Review the Market: start by looking at similar properties on platforms like Rightmove to understand the current rental market, taking into account the condition of the property. For Wendy who currently charges £850 per month, rents in her area appeared to be significantly higher, with similar properties listed from £1,400 per month. A reasonable starting point might be 10-15% below that, around £1,250.
2. Evaluate Your Goals: decide upon your motive and financial needs — maximising returns may be appealing or necessary due to a large increase in mortgage payments but also might involve finding new tenants, whereas keeping the current tenant and gradually increasing rent supports a more stable relationship.
3. Tenant Improvements: While Wendy's tenant has improved the property which is often the case with long term tenants, this does not grant them additional rights. The long period of discounted rent already balances this contribution.
4. Affordability: if you would prefer to keep your long term tenants over finding new ones, it might be worth having an open discussion with the tenant about what they can realistically afford to pay and reassessing their income on that basis.
Options for Rent Increases for an Assured Shorthold Tenancy
Their are various ways rents can be increased but the first thing to do is check your contract.
1. Mutual Agreement: All parties are free to mutually agree a rent increase, or decrease, at any time. Whether you are in a fixed term or thereafter, whether written, via text or verbally agreed. Being honest with the tenant as to why an increase is necessary is helpful in this situation. However, tenants are not obliged (and often unlikely) to agree so an increase cannot be demanded in this way and it's always best to document any agreement in writing. However, the tenant is deemed to have agreed if they make the first payment of the increased rent so can't change their mind afterwards, unless you agree of course!
2. Section 13 Notice: For periodic tenancies or for a rent increase to start at the end of a fixed term, this is the formal way to notify tenant's of a rent increase, which can be used no more than once every 52 weeks. Here is the link to the official form (Form 4) and guidance: [Section 13 Rent Increase Form]. A section 13 can't be used if there is a relevant rent review clause in the contract and landlords should read the guidance notes on the bottom of the form carefully to ensure it is completed correctly with the correct notice period given. Tenants can challenge a Section 13 notice by applying to a rent tribunal for adjudication, where you will be expected to provide evidence that your proposed rent is line with the local market.
3. New Tenancy Agreement: If the tenancy has gone periodic, creating a new agreement with the revised rent could simplify matters providing the tenants are happy to sign.
4. Rent Review Clause: Some tenancies have a rent review clause that normally specifies how often rent can be increased and by how much typically using a specific method of calculation with or without a cap. Rent review clauses are only valid if the tenancy is still in a fixed term or if it continues on a contractual periodic basis thereafter - they are not applicable if the tenancy has become a statutory periodic. Both the tenant and landlord are bound by a valid rent review clause although the landlord can choose to not implement it. If the rent has fallen far below market rent due to a rent review clause, the only way out of it is to persuade the tenant to sign a new tenancy agreement or failing all else, eviction. If in doubt, consult a letting agent or legal expert.
The above won't apply if you have a different type of tenancy, such as a regulated tenancy. Seek further advice in these instances.
The NRLA AST is a fixed term tenancy that reverts to a contractual periodic but without a rent review clause. Further guidance on the differences between a statutory and contractual periodic can be found here:
Approach with Empathy
Sudden steep increases can shock tenants and risk damaging the landlord-tenant relationship. A gradual approach, such as annual increases of 5-7% can be fairer and less disruptive.
Seek Professional Advice
If this feels overwhelming, consider consulting with a letting agent - they often offer a free 30-minute consultation. Their expertise can ensure the process is handled smoothly
A Broader Perspective
Landlords in Wendy's position are not alone. When rent remains below market levels for years, the relationship risks becoming unintentionally exploitative. Addressing this respectfully and proactively benefits both parties.
Communicating a rent increase can feel delicate, but following best practices can make the process smooth and respectful. Here are some guidelines:
1. Prepare Before Communicating
-Do Your Research: Ensure your proposed increase is fair and aligned with local market rates.
- Understand Legal Requirements: Familiarise yourself with the rules for rent increases in the UK, such as providing adequate notice and using the correct forms (e.g., Section 13 notice for periodic tenancies).
- Consider Timing: Avoid raising rent during a tenant's difficult periods or shortly after maintenance issues.
2. Approach the Conversation Thoughtfully
- Be Transparent: Share the reasons for the increase, such as rising property costs or market adjustments. Clarity builds trust.
- Express Empathy: Acknowledge that rent increases can be challenging for tenants and show understanding of their situation.
3. Present the Increase Professionally
- Write a Formal Letter: If meeting in person is not feasible, provide a clear, polite written notice of the increase. Include the new rent amount, the effective date, and any legal documentation, if applicable.
- Offer to Discuss: Invite your tenant to reach out if they have concerns or questions, showing you're open to dialogue.
4. Maintain Open Communication
- Avoid Surprises: Give tenants ample notice, even beyond the legal minimum if possible, to allow them to plan.
- Stay Positive: Highlight the benefits of maintaining the current tenancy, such as continued stability or improvements made to the property.
5. Be Flexible if Necessary
- Discuss Options: If the tenant expresses financial strain, consider adjusting the increase or implementing it in stages.
- Maintain Goodwill: A small compromise can preserve the landlord-tenant relationship and reduce the risk of vacancy.
By handling the conversation with professionalism and empathy, you'll foster mutual respect and minimise the likelihood of disputes.