Rent and Rent Increases

Background

Rent is the landlord's compensation for granting possession to the tenant, and the investor's return on his investment.  Non payment of the rent will clearly have important implications beyond the obvious problem of a mounting debt; if the landlord has a mortgage, then loss of rent may lead to default on the mortgage and damage to the landlord's credit rating.  The tenant may also lose his security of tenure since the landlord may use rent arrears as grounds to recover possession.

Rent defined

A good starting point is to take a look at the definitions of the terms.
In law, the tenant pays rent as compensation to the landlord for possession of the land.  The payment of rent is an essential constituent of the tenancy agreement¹, and by agreeing to the tenancy, the tenant is under a contractual obligation to pay the stated rent.

The rent payable by a tenant to his landlord, under an express covenant to pay rent, must be calculable with certainty at such time as when payment becomes due.  
Money payable to the landlord for services supplied to or consumed at the property (e.g. water, gas, electricity etc.) do not, at common law, count as rent, and would not, for example, normally be allowable in any housing benefit calculations.

Rent - when due

If no arrangements for payment of rent are specified in the tenancy agreement, then the rent falls due, by default, at the end of each rent period, be it weekly, monthly etc².  
Accordingly, best advice is that the timing of the rent payment is clearly stated in the tenancy agreement.
For obvious reasons, landlords typically require the rent to be payable in advance at the beginning of the week or month in question.

Rent is normally due on the morning of the day specified on the agreement.  If rent is payable on the first day of every week, the rent falls due on Monday morning.  If the rent is payable on the first day of every month, then again, it falls due on the morning of that respective day each month.  Similar rules apply for rent payable by quarter, and there are specified quarter days.

Rent Arrears

Although the rent is due on the morning of the day specified, the tenant has until midnight on the day specified to pay the rent³.  If the rent is unpaid by midnight, then it becomes overdue or owing.   The importance of such technicalities becomes evident later on when we consider grounds for possession following rent arrears and the exact timing of when the landlord is permitted to commence proceedings.
The rules concerning possession and Ground 8 of Schedule 2 to the Housing Act 1988 are an occasional cause of confusion to landlords.  The Act states that this ground applies when:

Both at the date of the service of the notice under section 8 of this Act relating to the proceedings for possession and at the date of the hearing -
a) if rent is payable weekly or fortnightly, at least eight weeks' rent is unpaid
b) if rent is payable monthly, at least two months' rent is unpaid
c) if rent is payable quarterly ...⁴

This means that if the rent is payable monthly on the first day of the month, one month's rent is unpaid once the rent payment day has passed (i.e. by the second day of the month).  It therefore follows that two month's rent is unpaid one month later (assuming no further rent is forthcoming),  giving the landlord reasonably quick access to the mandatory ground 8 for possession.  Usefully, for landlords, this time delay for monthly tenancies was effectively halved when the rent arrears period under Ground 8 was shortened from three months to two in 1997.

Landlords may also note that this means that, in effect, monthly tenants enjoy considerably less security under Ground 8 than weekly tenants - the landlord of a weekly tenant, by comparison, is required to wait until the beginning of week 8 (i.e. almost two full months) at the earliest before this ground can be invoked (this time period having been reduced from 13 weeks which was required prior to 1997).

Section 48 and "lawfully due"
There has been a spate of litigation over the principle of "lawfully due".  Since the introduction of the Landlord and Tenant Act 1987, rent is not lawfully due if the landlord has failed, by notice, to furnish the tenant with an address in England and Wales at which notices (including notices in proceedings) may be served on him by the tenant⁵.  Although a separate notice is not required, the notice must be in writing⁶, and a statement in a lease or tenancy agreement is sufficient if a reasonable tenant would conclude that that address was one at which he could serve notices, including notices in proceedings⁷.

Thus landlords should include a suitable notice under s.48 either within the tenancy agreement, or served individually on the tenant - otherwise the tenant can evade the action with a claim that the rent is not lawfully due.  
It has been suggested that a tenancy might be drafted such that the rent was stated to be payable 'two months in advance'.  A defaulting tenant might then fall within the domain of Ground 8 immediately the rent became overdue.  Since there have been no test cases, it is difficult to say with certainty whether this mechanism is helpful to landlords.  Apart from being 'tenant-unfriendly', it is likely that its frequent use would bring sharp criticism from tenants' groups and invite legislation to restore the timeframe back to that which was intended by the Parliament when the statute was originally drafted.

Distress

Landlords were, at one time, allowed the old common law remedy of distress when facing rent arrears.  Distress, quite simply allowed landlords to seize possessions belonging to the tenant up to the value of the outstanding rent.  This power is now largely unavailable to private sector landlords, although commercial landlords may still use it to seize office equipment and other valuables to recover debt on rented business premises.

The Distress for Rent Act 1689 was hailed as a major innovation for tenants' rights when it provided that the tenant and his family's bedding, essential clothes and his tools of trade could be protected from seizure.  Further legislative amendments have all but destroyed these powers for residential tenancies⁸.  
In the case of an assured (including assured shorthold) tenancy and the Rent Act tenancies which preceeded them, the landlord must obtain a court's permission before levying distress.

Although distress was still a remedy available to residential landlords with common law tenancies, it faces extinction with the recent introduction of the Human Rights Act.  The Government is to remove bailiffs' powers to seize private property to recover lost debts following legal advice that it breaches the European Convention on Human Rights.  The Law Commission recently recommended that the power of a bailiff to levy distress be removed by a requirement to seek a court order first.  The Lord Chancellor's department has been advised that the practice may breach conventions covering the right to private property, and the right to a fair trial.  
Residential landlords with common law tenancies may check with bailiffs (who exclusively now may levy the right to distress) on the current legal position before proceeding - the ancient powers of distress are fast disappearing.

Rent Demands

At common law, the landlord is unable to enforce a right of re-entry for breach of covenant to pay rent until he or she has made a formal demand for the rent.  Such formal demand must be made by the landlord or the landlord's agent, normally at the demised premises.  

Rent demands - legal requirements
There are two legal requirements that relate to rent demands:
The first requirement derives from common law and is stated here largely for historical interest. Traditionally, the rent must be: "...demanded on the premises just before sunset in sufficient time to count the money, and the demand must be for the exact amount to a penny."¹⁰

To obviate these somewhat inconvenient requirements, virtually all leases will now state the landlord can re-enter once rent is in arrears for a certain period, whether the rent "has been formally demanded or not".  
Secondly, and more importantly (since the requirement is statutory and therefore cannot be overridden), there is the requirement that any written rent demand given to a tenant must contain the name and address of the landlord.  The statute states:
"(1) Where any written demand is given to a tenant of premises to which this Part applies, the demand must contain the following information, namely -
(a) the name and address of the landlord, and
(b) if that address is not in England and Wales, an address in England and Wales at which notices (including notices in proceedings) may be served on the landlord by the tenant."¹¹

Initial study of the statute suggests that, as for the address required under s.48 described above, a landlord or agent should be able to use his business address or agent's address here in the form of "c/o ABC Lettings".  However, there appears to be no case law which allows the point to be decided with authority.

Rent increases

Throughout the 1970s and 1980s, inflation made it difficult for landlords to predict what a market rent for a property would be in the future, although in today's low inflationary times, inflation is becoming less of a factor with respect to rent increases.
However, market conditions change for a variety of reasons and landlords need to be able to adjust rent upwards, or even downwards, to match current values.
If the tenancy agreement does not contain a rent review clause, then the tenant is permitted to pay the contracted amount for the remainder of the fixed term.

Assured tenancies
There are three main methods by which landlords with assured or assured shorthold tenancies (AST) may increase the rent.  These are:

• by mutual agreement
• by using the statutory procedure (under section 13)
• by virtue of a rent increase provision incorporated into the tenancy agreement

The most common is by mutual agreement.  The landlord and tenant will simply come to an agreement regarding the new rent.  This would normally take place at the end of the previous fixed term, or during the periodic tenancy (although there is nothing in principle to prevent a rent increase being agreed throughout the fixed term) with the agreement of both parties.
This method is preferable since it is simple, dispenses with the need for the landlord to serve the prescribed form, and also more straightforward for the tenant who will in some cases find the statutory wording of the s.13 procedure (see below) a little intimidating.

Section 13 procedure
The section 13 procedure applies to any assured periodic tenancy (including ASTs).  This might apply, for example, where a fixed term assured tenancy has ended, and the parties have not been able to come to an agreement regarding the new rent for a new fixed term, and the tenancy continues under a statutory periodic tenancy.
Unless the landlord and tenant are able to reach an agreement regarding the rent increase, the landlord is required to serve a rent increase notice under s.13.¹² There are several restrictions:

• the rent increase may not apply until the period of notice has expired (the notice period is normally equal to the period of the tenancy)
• the rent increase takes effect at the beginning of a new period of the tenancy
• the rent may not be put up sooner than one year after the tenancy first began (unless the tenancy is statutory periodic), or before the anniversary of the date when the last rent increase took place.

Once the notice has been served and expired, the new rent will apply unless:

• the tenant refers the rent increase to the Rent Assessment Committee, or
• the landlord and tenant agree on some other variation of the rent

Thus, for a monthly periodic tenancy which started as a 12 month fixed term in January 2001, the landlord is permitted to serve a s.13 notice of rent increase on his tenant in December 2001 to take effect on the corresponding date in January.  If the rent is referred to a Rent Assessment Committee, the committee will be required to determine the rent at which they consider the dwelling-house concerned might reasonably be expected to be let in the open market by a willing landlord under an assured tenancy having the same terms as the tenancy in question.
In practice, the s.13 procedure is rarely used by private sector landlords since they generally let under assured shorthold tenancies.  If, under an AST, the tenant does not agree to the revised rent, then the landlord is free to bring the tenancy to an end instead (under s.21).  The issue is of far greater importance to social sector landlords, many of whom let under assured tenancies where the tenant has greater security of tenure.

Rent increase provisions

Some landlords include a rent increase provision in their tenancy agreements - especially useful if the tenancy is for an extended fixed term (e.g three years) or on a long term assured periodic basis (e.g. housing associations). In such cases, the landlord will wish to include a rent review provision, perhaps on an index-linked basis in line with the rate of inflation.  
Such a provision has the effect of setting aside the bureaucratic rent increase procedures in section 13 of the Housing Act 1988.  The legislation treats these provisions in different ways.

Periodic tenancies
If the tenancy is a periodic tenancy which is assured or AST, then section 13 of the Housing Act 1988 will apply.  Section 13 says that the statutory rent increase procedure will apply unless the tenancy agreement contains a rent review 'provision' (or the parties come to a mutual agreement regarding the rent increase).
It is well-accepted that a rent review clause will qualify as a 'provision' if it determines with some certainty what the rent will be.  There is, however, considerable doubt about a clause that merely establishes a rent setting procedure or determines certain points (such as the timing of the increase) but not others (such as the amount).

The rent review clause should define the new rent with certainty, or allow the rent to be calculated with certainty.  For instance, a term which states that the rent is £500 per month and which will increase on a given date to £525 per month clearly meets the requirement and the rent increase will be enforceable without any further notice even if it takes effect within a year of the start of the tenancy.  Examples of appropriate rent review provisions are given in the next section (below).

This problem of rent increase provisions within ordinary assured tenancies has recently become a worrying issue for housing associations, because of the use of open-ended rent increase clauses which might specify only an annual rent review date but no mechanism for fixing the rent.  Because of the longer term nature of such lettings and the security of tenure offered to their tenants, housing associations have been reluctant to tie down future rents, perhaps for decades at a time, to a preset formula.  Yet, it now appears that these open-ended rent increase clauses are vulnerable to legal challenge.
A crisis  of significant proportions is emerging for these social sector landlords since it is entirely possible that previous increases under these provisions will also be declared invalid.  The effects are far-reaching and even possession actions taken by Housing Associations for rent arrears are affected.  In view of the attention this subject is now receiving, litigation is inevitable and necessary in order to remove the uncertainty which now prevails.

Fixed term tenancies
Although rent increase provisions in fixed term tenancies are not affected by the statutory s.13 procedure, there will still be a similar requirement that any rent increase provision specifies the rent increase with some certainty.  
The reason for this is as follows. A periodic tenant enjoys certain freedoms - he may give notice to his landlord if he does not agree with the proposed rent increase.  A tenant under a fixed term, on the other hand, does not have the same freedom (unless the agreement contains a break clause) and the Unfair Contract Terms Regulations will apply on any rent review clauses.
A rent increase provision in a tenancy agreement that specifies the future increase with certainty is unlikely to invite attack under the Regulations.  For example:

IT IS AGREED that the Rent shall be reviewed on [January 1st 2002] and that the Rent shall be increased to £ 525 per month.

Equally, the rent increase provision, instead of giving a specific figure, may specify a formula such as the Retail Price Index (RPI) such that on a given date or at a given interval the rent will be increased by the current RPI.
For example:

IT IS AGREED: that the Rent shall be reviewed on [January 1st 2002] [and annually thereafter] and that the Rent shall increase by a proportion equal to the RPI (Retail Price Index) as published for the month [of December] immediately preceding.

Price Indices
Practitioners can use prices indices not only to include in rent review provisions, but also to advise landlords on appropriate annual rent increases.  Obviously, with the current system of market rents, the setting of rents is a matter of commercial policy for the particular agent or landlord.  However, in the writer's opinion, this is an area where some professional and firm guidance can be given since some landlords are prone to 'overcook' their rents.  There is rarely justification, for example, in supporting a rent increase exceeding 10% per annum in a climate where RPI is hovering between 2 and 3%  and average earnings are growing at about 5% (unless of couse the rent was underpriced initially).  

Annoyance indexing
There is, for example, a trend in the United States towards what I would term 'annoyance' indexing.  Here, a landlord might calculate what it will cost the tenant to move, in terms of removal expense, new lease fees, reconnection fees and of course time and annoyance of moving.  The landlord then pitches the rent high enough such that it exceeds the overall market increase, but not high enough to make the tenant any better off by moving.  Perhaps a good short term measure for the commercially astute landlord, but, I believe, not good for the industry as a whole - the annoyance is likely to rub off against the landlord or agent's reputation and the renting industry in general.

Readers of Letting Update will notice that we now publish RPI figures quarterly in order to help landlords and agents calculate appropriate rent increases.
Unlike house prices, there is no readily available national rent index.  Sadly, the rent index published for several years by the University of York was discontinued at the end of 2001.  Local rent figures are currently published by Rent Officers and it is hoped that the Rent Officer service will soon provide a similar service on a national level.

Unfair Terms Guidance

Perhaps one of the most important recent developments for the letting industry in 2001 is the publication of Guidance of Unfair Terms in Tenancy Agreements by the Office of Fair Trading (OFT).  The OFT has drawn up this guidance to explain why it considers some standard contract terms used in tenancy agreement to be potentially unfair under the Unfair Terms Regulations¹⁵ (a fuller report on this guidance will be given elsewhere in Letting Update).
The OFT recognises that price variation clauses have potential for unfairness in consumer contracts, and of course rent increase provisions will come under this heading.  Price variation terms may be unfair if they have the object or effect of:

"(l) providing for the price of goods to be determined at the time of delivery or allowing a seller of goods or supplier of services to increase the price without in both cases giving the consumer the corresponding right to cancel the contract if the final price is too high in relation to the price agreed when the contract was concluded."

According to the OFT, if a contract is to be considered balanced, each party should be sure of getting what they were promised in exchange for providing the 'consideration' they agreed to provide.  A clause allowing the supplier to increase the price (ie the rent) has clear potential for unfairness, being one of the consumer's key contractual obligations.

The guidance continues:
Rent Increases.  Rent increases may be agreed between the parties, but legislation restricts the freedom of landlords to impose rent increases in particular circumstances and in particular kinds of tenancy.  The concerns of the OFT arise where terms allow the rent to be increased arbitrarily by the landlord without reference to clear and objective criteria or an independent valuer.
Example:
We have seen tenancy agreements in a form which enable the landlord to increase the rent during the fixed term with the following clause:
"the Landlord may increase the rent at any time by giving not less than one month's notice in writing prior to a rent payment day specifying the new rent.  The Tenant will then pay the new rent on and from that rent payment day."

This clause is likely to be deemed unfair for several reasons:

• the price increase has not been agreed in advanc,
• it does not allow the consumer the right to cancel the contract if the consumer does not agree to the increase (being a fixed term tenancy),
• the rent review clause could be invoked at any time, even several times in the same year

Inclusion of a term which gave the consumer fair and reasonable notice of any increase, limited such increases to once per year, and allowed the tenant to terminate the tenancy agreement on reasonable notice would be the preferred drafting style¹⁶.

The OFT guidance states that rent variation clauses are more likely to be fair as follows:

• Where the amount and timing of any rent increases are specified (the precise amounts for each year or within narrow limits if not precisely stated), they effectively form part of the agreed price.  As such, they may be regarded as core terms setting the price, provided the details are clear, in plain intelligible language, and are adequately drawn to the tenant's attention.
• Terms which permit increases linked to a relevant published price index or outside the landlord's control, such as the RPI, are likely to be acceptable.
• Also likely to be fair are rent review clauses which allow for an increase in the rent to be determined in the light of objective factors by a person who is independent of the landlord.  A fair alternative, where the parties cannot agree a new rent, is to agree that the matter should be referred to an independent expert.

'Predator' rent clauses
There are occasional reports of tenants who have agreed to sign tenancy agreements which on the surface, contain rent increase clauses which purport to raise the rent perhaps two or three years into the tenancy, to a vastly increased level, generally out of the affordability of the average tenant.  Shelter expressed great concern following this trend in the mid-1990's and has labelled them 'predator' rent clauses since the real purpose of these clauses was that they were invoked as a short cut to repossession.

For example, in February 1994, Bankway Properties v Dunsford, the landlord, a BES investment company, Artesian Competitor plc granted an assured tenancy to Mr Penfold-Dunsford and Mr Leech.  The initial rent was £4680 pa and the tenancy provided for modest reviews until February 1996 where the rent was to be increased to £25,000 pa.  The landlord initially obtained a possession judgement for rent arrears, but the Court of Appeal held the rent increase clause to be unlawful and unenforceable.  It was held to be a device to deprive the tenants of the protection of an assured tenancy by imposing a rent increase they could not possibly afford.  

Rent Act Increases
The process for increase of fair rents has also undergone much scrutiny in the courts.  A recent case concerned the legality or otherwise of the rent capping order, introduced by the Labour Government in 1999 (Fair Rents - Max Fair Rent Order 1999) which set a ceiling that landlords could impose on Fair Rent increases.  Previously, they had been allowed to catch up to market levels but Government imposed a cap that restricted future increases to 7.5% in the first instance and 5% thereafter.  In the Court of Appeal, (R v Secretary of State for the Environment, Transport and the Regions and another ex parte Spath Holme Ltd, 2000) the measure was held to be ultra vires or unenforceable much to the satsifaction of Rent Officers who felt that the measure represented unnecessary meddling over their own powers and professionalism.  However, the decision was reversed in the House of Lords and the legality of such increases will continue to remain uncertain until landlords hear whether their application to have the case heard at the European Court of Human Rights (ECHR) is successful.


References:
1. See C.H. Bailey v Memorial Enterprises,[1974] WLR 728 CA, Lord Denning at p732.
2. Coomber v Howard [1845] 1 CB 440
3. Dibble v Bowater (1853) 2 E&B 564
4. Housing Act 1988, Schedule. 2, Ground 8.
5. Section 48  LTA 1987, Marath v MacGillivray, 1996, 28 HLR 484 CA.
6.  Rogan v Woodfield Building Services (1994) 27 HLR 78.
7.  Ibid and Drew-Morgan v Hamid-Zadeh [1999] EGCS 72.
8.  The Distress Amendments Act requires that distress may only be carried out by a bailiff appointed by the court.
9. Housing Act 1988, s.19(1)
10.  Treseder-Griffin  v Co-op Insurance (1956) 2 All ER 33.
11. Landlord and Tenant Act 1987, s.47
12. Housing Act 1988, section 13 - Landlord's Notice Proposing a New Rent Under an Assured Periodic Tenancy or Agricultural Occupancy (Form No. 5).
13. Housing Act 1988, s.14(1)
14. Unfair Terms in Consumer Contracts Regulations 1999 (UFTCCR).
15. Ibid, UFTCCR, Sched. 2, Para 1(l)
16.  A good example is given in Drafting Residential Leases, Bennett, 3rd Edition on p108.