The Landlord's Guide To Renting

Part 2 -  Rent Increases

In Part 1 of the Guide, we examined all kinds of repairs - initial repairs, urgent repairs and general repairs. Repairs and maintenance cost money. Property outgoings increase every year. So it is natural that landlords look to review the rent as and when they can to compensate. This newsletter looks at rent increases.
 

Rent increases are based on market rent

Rent increases are in line with market rents, not events – rents do not increase every time that interest rates, council rates or land tax increase – as the news headlines may lead you to believe.

In Australia, market rents for residential properties are increasing currently, which signals more demand for than supply of rental properties. This is stimulating property investment.

According to the Australian Bureau of Statistics, the median rent for households in the 2011 Census was $285 pw, compared with the 2006 Census figure of $190 pw. This represents a 50% increase in rents in 5 years.

Landlords need this knowledge to increase rents -

• How and when to increase rent
• How tenants can challenge rent increases
• How tenants can ask for rent reductions

How to increase rent during a fixed term tenancy

When a lease starts, it is a fixed term tenancy.

Landlords and tenants agree on the rent at the start of the fixed term tenancy. The starting rent is a fixed rent and cannot be increased during the fixed term unless a rent review formula has been included in the lease.

Rent review formulas are often included in fixed term tenancy of more than 12 months. Normally, the rent review formula is applied annually. There are three variations - to increase – 1) by a set $ amount, or 2) by a % amount, or 3) by the CPI (Consumer Price Index). The landlord must give 60 days’ notice of increase to activate the rent review formula.

Because it is agreed in the lease, rent increases made according to the rent review formula cannot be challenged by the tenant as being excessive.

Landlords have a free hand to increase rent during a fixed term tenancy of 24 months or more without a rent review formula, but tenants have the right to move out with 21 days’ notice or to challenge the increase as excessive.


How to increase rent during a periodic agreement

A tenancy does not end when the fixed term tenancy ends. The tenancy continues as a periodic agreement until it is terminated or until it is replaced by a new fixed term tenancy.

During a periodic agreement, the landlord and tenant continue to be legally bound by the terms and conditions of the lease, but the landlord has a free hand to put up the rent.

The landlord must follow these rules when putting up the rent -

• The landlord gives 60 days’ notice, that is, 2 months’ notice.
• The landlord can use the model form of Notice of Increase which can be downloaded from the NSW Fair Trading website:
  • The landlord issues the notice to notify the new rent, and the date from which it is to be payable – the date is to be at least 60 days after the notice is delivered;
  • The notice must be signed, dated and properly addressed to the tenant;
  • The notice may be delivered by mail, or by hand to the tenant, or be placed into the letterbox or faxed. If the notice is mailed, then ordinary mail may be used and 4 working days are to be added. All that is necessary is that the landlord proves proper delivery – it is not necessary to prove that the tenant received the notice.
• The rent increase can be timed to commence when the fixed term ends. To do so, the rent increase notice must be given at least 60 days beforehand.
• The rent increase notice may prompt the tenant into discussing a renewed fixed term tenancy or into giving notice to vacate. By entering into a new fixed term tenancy, a tenant can ‘lock in’ a new rent for the new fixed term.
• The rent increase amount is up to the landlord, but may be challenged by the tenant as excessive if it is not in line with current market rent.
• The landlord cannot take retaliatory action to terminate a tenancy simply because the tenant challenges the rent increase.
• The landlord cannot ask for the rental bond to be ‘topped up’ to reflect the rent increase. The landlord is only able to ‘top up’ the rental bond to reflect 4 weeks current rent, if they enter into a new fixed term tenancy.

This table illustrates how housing costs - LHS (including rents, electricity and prices) are increasing faster than general inflation - increases in the Consumer Price Index – RHS (All groups) annually in the years ended 30 June 2005 to March 31 2012. Source: Australian Bureau of Statistics


The tenant’s choices when receiving a rent increase notice

The tenant has these choices –

• To accept the rent increase, which many tenants do if it is in line with current market rent; or
• To negotiate with the landlord to have the rent increase reduced or to have it withdrawn - if the rent increase is reduced, no new notice is required - the increase takes effect from the original date set for the increase to be payable; or
• To challenge the rent increase as being excessive by applying to the Tribunal within one month (30 days) after receiving the notice for a determination of the rent - the time limit is extendable if the tenant has a good reason; or
• To terminate the lease by giving notice - which is three weeks (21 days) notice if given during the periodic agreement, or a fortnights (14 days) notice if given before the end of the fixed term; and move out.
   

How tenants can challenge a rent increase in the Tribunal

The tenant must persuade the Tribunal that the rent increase is above current market rent for similar properties in the area. Although the main consideration is market rent, the tenant may point to other factors, such as –

• the rates and other outgoings have not increased
• the fittings and facilities provided are no longer available
• the state of repair has deteriorated through no fault of the tenant
• the tenant has carried out improvements
• it is too soon since the last rent increase

In Tribunal decision 2012/97, the tenant challenged a notice to increase the rent by $70 per week from $760 per week to $830 per week. The rent had not been increased for some time. The tenant provided evidence of the market rental of other properties in the area, that the property was unrenovated with a 1960s style kitchen with linoleum and had wall paper from the 1970s. The Tribunal found the tenant had shown that the rent increase was excessive and set the rent at $800 per week for a 10 month period (the maximum period the Tribunal can set the rent is 12 months).

This decision illustrates that it is better to carry out regular rent reviews and to increase the rent by small amounts, rather than occasionally by a large amount.

Increasing the rent annually is common. During a periodic agreement, the rent can be increased more often than annually. During fixed term agreements of two years or more, the rent cannot be increased more often than every 12 months under the Tenancy Law.

Are rates, levies and taxes able to be passed on to a tenant?

No. The Tenancy Law prohibits landlords from passing on Council Rates, Water Rates (except water usage), Strata Levies, Landlord’s Insurance, Land Tax – whether as assessed, or as increased after the lease commenced.
 

Q: How rent can be reduced? A: If the landlord fails to repair

Often the rent increase notice is the trigger for a tenant to complain about the condition of the property. A tenant may request repairs be carried out in return for agreeing to the rent increase, and may even apply to the Tribunal for a rent reduction until the repairs are carried out. The Tribunal has the unenviable task of sifting acceptable complaints from exaggerated complaints; and deciding if any reduction of rent is justified, and if so, by how much the rent is to be reduced.

Rent reduction claims are capped to a 12 month period and must be made while the tenancy is current.

These two Tribunal decisions illustrate rent reductions for failure to repair –

Experienced landlords keep their properties in good repair to be able to regularly increase rents, which tenants do not mind paying to continue the tenancy.

The Landlord’s Guide to Renting has been produced by Cordato Partners Lawyers, as part of its Property Law practice. It contains a brief outline of the Tenancy Law.

Because it is a general guide, is not intended to be relied upon for any specific tenancy situation. For those situations professional advice should be obtained.

If you would like to receive the Guide as a pdf email attachment rather than as a hard copy, or would like further hard copies of the Guide to distribute to clients, friends and relatives -
Contact us by email – info@propertyinvestmentlawyer.com.au or by phone (02) 8297 5600 (speak to Sally Wade). Our office is located at Level 5, 49 York Street, Sydney NSW 2000 (near Wynyard Station).

Also visit our website – www.propertyinvestmentlawyer.com.au to view the Guide and other property investment information.

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