My Rent Increases Due to Clause 24

by John McKay

13:34 PM, 13th February 2016
About 3 years ago

My Rent Increases Due to Clause 24

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My Rent Increases Due to Clause 24

I have always tried to keep my rents low, and like many other full-time ‘professional’ landlords I have the ethos that I don’t increase rents on tenants in situ.  In recent years this has been relatively easy as interest rates have been low (though my HMOs have seen utility bills rise significantly). My Rent Increases Due to Clause 24

Clause 24 has overturned this philosophy and is forcing me to take action that hitherto I have never considered.  ARLA forecast that rents will have increased by 25% by 2020/21 and this assumes interest rates staying low.  It is impossible to make increases like that in one go, unless there is a change of tenants, so I have started the process now and many of my tenants are now feeling the first effects of Osborne’s indirect Tax On Tenants.  This is intended to be a snapshot of where I am with rent increases due to Clause 24 of the 2015 Finance Act, and also to show that many of my tenants are not in a position to buy.

First, I must say that 3 or 4 years ago I took the decision to start handing the tenant management over to letting agents though I generally look after the properties myself.  This handover has usually taken place at a change of tenant and means that for a lot of properties I do not have in-depth knowledge of the tenant’s circumstances, so I have not included them in this summary.

HMO 1

I manage two tenants that have been with me a long time, the other 3 are managed by the agent.

Adam – Ex army and in his late 50’s and been with me for nearly 7 years.  Adam is on his own and moved to the area to be close to his daughter and grand-daughter.  He works as a cook and is on a low income.  He enjoys the low-cost lifestyle and has no aspiration for his own place whether rented or purchased.  His double room is part ensuite with its own shower and basin.  His rent has been £72 pw ever since he moved in but has now increased to £77 (7% increase) with further annual increases planned.  The rent covers all utilities, broadband, council tax and a cleaner for the shared areas.  These facilities apply to all my HMO’s.

Trevor – Trevor has been with me about 5 years and is in his twenties.  He works as a journalist for a railway magazine and whilst I can’t say for sure, he also doesn’t seem to want to get his own place.  His rent has always been £65 pw for his double room but has now been increased to £70 pw (7.7% increase), with further rises planned on an annual basis.

HMO 2

Ella – She is a young Polish woman who has her own cleaning business and also works evenings at a local restaurant.  Ella would love her own home but does not have a long enough credit history in this country.  Her rent has just been increased from £65 to £70 pw due to clause 24 (7.7% increase).  Ela is a great tenant and very cost conscious so whilst I am concerned that after the next rent rise, she may well move on, I have little choice but to increase rents due to C24.

Thomas – Thomas is a nice Polish guy and is managed by a letting agent.  He has the biggest bedroom and currently pays £75 pw.  I will be talking with the letting agent with a view to increase it to £80pw.  He works shift at a salad packing company.  He again cannot buy his own house due to lack of credit history, and doesn’t want the extra cost of renting a house because he is on a low income.

Neil – A divorcee in his 50’s that wants to live locally to be close to his 4 sons, all of which still live with their mother.  He’s been with me 8 years and works on building sites but has no real aspirations to get his own place.  There was a recent exception to that when his ex-wife threw his oldest son out and Neil was trying to get Council accommodation for them both.  However the situation resolved itself.  The rent on his room has just been increased from £70 to £75 due to C24 (7% increase) and there will be further annual rises.

Gordon – He is a really nice fellow, in his early forties and works as a hospital porter.  Gordon had his own house but decided it was too expensive to run on his income.  He sold it and rented it back for a short while but then moved in to my house where he’s been for over 5 years.  His rent has been increased from £70 pw to £75 pw (7% increase).

This house offers exceptional value for money with 4 double bedrooms, and huge shared areas along with two bathrooms.  There is high speed broadband laid on to this property.

House 1

Gemma – This lady has been with me in this house for 5 years and another one of mine before that for a while.  She is a single mother of 5 and the wear and tear on the property is excessive.  There have been other difficulties, such as rent arrears, but she has an excellent guarantor and I also feel sorry for the kids who have not had the best of starts in life.  I have therefore persevered with the tenancy.  Her rent has always been £700pcm but I have just raised it to £735 (5% increase), with more annual rises planned.  Frankly I do not think she will be able to pay them as she relies on benefits, so I can see that I will have to evict the family to either upgrade the tenant to one that can afford the rise, convert to HMO, or sell.  If I sell the lady is very unlikely to find a suitable house within the Housing Benefit limits set but will hopefully qualify for some sort of discretionary payment, otherwise there are few options open to her.  I would add that this would most likely be the second property I’d sell, the first being one that houses a low-paid care worker and her family.

House 2

Sonia and David –  This house is a SARB (sale and rent back) that I acquired 9 years ago.  They are an elderly couple that were going through severe financial difficulties, despite their quite frugal lives.  Derek had been irresponsible with their money and had to actually declare bankruptcy at a later date.  I purchased the house at a small discount but I made it a condition that I would replace the bathroom as it was well by its ‘sell-by date’.  They pay about 70% of market rent at present and it’s the same figure as we agreed 9 years ago, and whilst I haven’t increased it yet, I fear I may have to.  C24 will put great stress on the rents I charge so I will have to pass it on.  If they can’t pay then I’ll have to evict this lovely old couple who have lived in that house for nearly 40 years.

House 3

Chris –  This is another SARB and the gentleman had also got into a financial problem.  I bought the place over 8 years ago and he has enjoyed the same rental figure of £550 pcm since that date.  I have now increased it to £580 due to C24 (5.5% increase).

House 4

This house is managed by agents. I bought it in 2003 and it was on an estate which had been wrecked by gypsies resulting in making it like a ghost town with most houses boarded up.  This one was partly boarded.  I completely refurbished it and let it out at £600 pcm.  It has had a few tenants over the years and the rent has always been set at the same figure but due to C24 we just increased it to £675 and it was still snapped up (12.5% increase).  The estate has slowly come back into use and is now a decent place to live, but I was amongst the first few people to take a chance in buying one of the houses.

House 5

This is managed by an agent and whilst the tenant has been there for a couple of years on £550 pcm, we have just increased it to £600 due to C24 (9% increase).  There will be another rent rise next year.

House 6

Again managed by agents but had been empty for 14 years.  I spent a great deal of money to renovate it as it was a ‘real state’, and it is now let to a young family.  The rent has not increased since they moved in 4 years ago and I would have been happy to let it stay as it is.  I cannot do that due to C24 and we will be imposing a 5% rise soon.

House 7

This was my own home for 27 years and now houses a single mother of 2, handled by an agent.  The market rent would be around £1050pcm (according to a surveyor) but she has paid £825 since she moved in two and a half years ago.  She is a great tenant but I am now feeling pressure to increase the rent due to C24, which I would not do otherwise.  The lady is on a relatively good income but way below what she would need to earn to buy a house, unless she has about £150k to put down as a deposit.  If I am forced to sell this property she will struggle greatly to find a similar property on the rent I am charging, unless she moves out of town and further away from Cambridge where she works.  This will make it difficult for her children, they can walk to school from where they now live, and will vastly increase her travelling costs.

Like many ‘professional’ landlords I have always taken the view that I do not increase rents on a tenant in situ, and I think that is illustrated by just how long some of my tenants have been with me on the same rent as the day they moved in.  C24 has turned that upside down and I now must put them up.

Not one of my tenants has given notice since I increased their rents.

Related articles >>> http://www.property118.com/category/budget-2015-campaign/



Comments

Trendo

13:57 PM, 13th February 2016
About 3 years ago

similar story for me ..have so far increased rents ranging from 5% to 35% , no one has given notice and all accepted rises. BUT that just gets the rent level back to "market rates" . I have forewarned them that further rent rises are on the way to cover Georges new rules and to cover the Tenant tax.

Markb

20:29 PM, 13th February 2016
About 3 years ago

Reply to the comment left by "Trendo " at "13/02/2016 - 13:57":

Trend - I love the use of TENANT TAX….

In August or September last year I suggested on this forum and in my submissions to the finance bill committees etc, that the then “Restriction of Finance Cost relief” be called TENANT TAX.

I suggested it because that is what it is, and that is who will end up paying the tax. I have no Money to pay the tax & so I can either go bankrupt or increase rents - That is not rude, it is just fact!

As it happens, with great sadness, I too have increased rents by 15% this year and will do so again next year – the market has moved with me - encumbered and unencumbered landlords alike! Go figure!!! And so, for me, Tenant Tax is now neutral financially. My tenants will pay the tax and I will collect it like a good citizen.

Choosing to replace the name “Restriction of Finance Costs Relief for just individual landlords” with “Clause 24” was and is a bad idea. Calling it “Alice in Wonderland Tax Grab” is equally as bad an Idea. Unless you are a member of Santa’s family and are thinking that child 24 my benefit from inheritance better then you or unless you want to shun the Jub-Jub bird rather then fix the issue, then these are useless names that actually work against us in getting traction. - If you just said “what ?” to the above then my point is proven simply.

I suggest we pick a name that everybody understands and can relate to and that might make them enquire more and engage. Create a single narrative and repeat it un unison simply and often so that that even an accomplished journalist like Rachel Royce cant share correctly. Traction will only happen when those that have to pay the tax - TENANTS realize that they will have to pay it. And, when those that will not get the work to maintain or improve because the landlord has been squeezed and has no maintenance monies left to employ them realize it.

I proudly paid into crowd funding for the legal challenge and support a national Newspaper rebuttal and advertising campaign. Lets Get Tenant Tax on the radar and then, and probably only then, will our vorpal blade go sincker-snack!

Ps: If Tenant Tax gets repealed, I will drop my rents back to current levels.

Dr Rosalind Beck

21:25 PM, 13th February 2016
About 3 years ago

Hi John.
This is a very important article, not just because it shows how we are being forced to increase rents, but because it offers a snapshot of real tenants - importantly, it shows how none of them are in a position to buy. This is the same with my tenants. If they wanted to buy they would as there is no shortage of houses for sale in my area. Frankly, the only one I can think of who would be in a financial position to buy is a young chemist who moved to this area for a good job, so he would have the necessary credentials. However, he needs to be mobile in case the next step up the ladder involves moving to another area entirely. He also has no family connections here. Apart from him, I have similar tenants to yours - a range of people who may be low-paid, foreign etc., and not frustrated buyers at all. It is so annoying how we have to keep trying to combat these stupid myths perpetuated by ignoramuses who try and make out our current tenants would buy the homes we rent to them if we put them up for sale.

Chris Byways

21:38 PM, 13th February 2016
About 3 years ago

Reply to the comment left by "Trendo " at "13/02/2016 - 13:57":

That however has to be not less than 12 months from the previous increase? And providing 28 to 90 days notice, and getting the tenants agreement.

The new model tenancy agreement was updated for Feb 2016

This does not facilitate the "tenant tax" increases, so would need to be carefully changed to allow that increase, for example

"the rent will not be increased more than RPI plus any cost resulting from Statutory Regulations and Taxation associated with this property"

2/2016 model AST.

OPTION 3: Option for landlord to increase the rent annually by reference to the Consumer Prices Index
1.1 The rent is £ (insert amount) per week/month (delete as appropriate) for the first year of the fixed term.
1.23 Subject to compliance with the requirements specified in clause B6.3, the Landlord may increase the rent on each review date by a maximum of the percentage change in the Consumer Prices Index over the preceding year. This must be calculated by reference to the last index published before the date on which the Landlord serves the notice under clause B6.3 and the index published 12 months prior to that.
1.24 The requirements are that the Landlord must serve a rent review notice on the Tenant not less than 28 days but not more than 90 days before the relevant review date specifying:
(a) the percentage by which the rent will increase on the relevant review date; and
(b) the new rent payable from the relevant review date.
1.25 If the Landlord fails to comply with the requirements specified in clause B6.3, rent will continue to be payable from the relevant review date until the next review date at the rate payable immediately before the relevant review date.
1.26 In clause B6 “review date” means the first anniversary of the start of the Tenancy and each anniversary of that date.

Can anyone modify this to make it legal and suitable?

Gary Dully

3:21 AM, 14th February 2016
About 3 years ago

Reply to the comment left by "Chris Byways" at "13/02/2016 - 21:38":

Hello Chris,

As I haven't seen a link to the model agreement on this post, I googled it and as directed to a Government website, so I think I have got the right one.

I have just read this Model Tenancy Agreement and if introduced, the way to avoid the clause is to make the tenancy unsuitable for the agreement.

The model agreement is for fixed terms of 2 to 3 years or more.
It is not recommended for Holiday Lets, Corporate Lets or HMO's.

The rent reviews are complicated in their notice periods, as if the Landlord misses the window of review, the rent can't be changed until the next review period the following year.

The agreement is not mandatory either, although that may change shortly, it also spells disaster with Clause 24, as the effects are different for each landlord concerned and if this contract is used the tenants would not accrue rent arrears after any notice of rent increase due to it exceeding an unforeseen rent rise over and above the Consumer Price Index far in excess of the examples given of say 1.5% + CPI.

So if I was forced to issue a contract like this, I would keep the fixed term as short as possible, then evict each tenant after 6 months, raise the rents after each tenancy, charge extra administration fees at the start up stage, make sure the inventory was enforced, make charges against the security deposit or change my business model to Serviced Accommodation or switch to commercial lets.

Thankfully it isn't mandatory at the moment, when that happens, brace yourself either for a win with the judicial review case or for a slow death by a thousand cuts.

It is quite clear that the authors have not considered Clause 24 or a levy that may appear at the next budget, so your proposal for a change taking into consideration Clause 24 is perfectly reasonable, the question is, will we be allowed to insert it?

Gary Dully

3:47 AM, 14th February 2016
About 3 years ago

I've just gone back over this agreement and I would suggest that you use clause 6.2 and put in a maximum percentage rate of say 25% to 50%, explain why and then get your tenant to sign it.

Then at the review time, you could say, good news..... I only have to increase the rent this year by 7%, but that's simply due to the Tenant Tax (Clause 24), introduced by the Government.

The chances of me doing the fixed rent for the full term clause or CPI rate clause will be NIL!

Monty Bodkin

8:31 AM, 14th February 2016
About 3 years ago

Reply to the comment left by "Chris Byways" at "13/02/2016 - 21:38":

That however has to be not less than 12 months from the previous increase?

No Chris, the rent can be increased as often as a landlord wants, provided the tenant agrees.

(And why would a landlord want to continue a tenancy if a mutually agreed increase couldn't be negotiated?)

You are getting confused with the section 13 procedure which is of limited practical use for AST's.

Chris Byways

10:38 AM, 14th February 2016
About 3 years ago

Yes it is the DCLG version
https://www.gov.uk/government/publications/model-agreement-for-a-shorthold-assured-tenancy

.... that anyone will find by googling Tenacy agreement.
It is designed to persuade users to go for 2 or 3 year agreements but can also be used for 6m. Why it is 50 pages, and then have to run off two copies, when the NLA version is 4 pages I don't know.

I used it once (modified), because the RPI clause sounded better than my 'no increases for in-situ tenants' policy. I now intend using only the NLA one.

INTRO:-
"Detail
This document has been updated, as of February 2016, to reflect relevant legislative changes. If you are renewing your tenancy agreement, please use this version of the model tenancy agreement instead of the previous one, as this has been updated to reflect changes in the law.
This model tenancy agreement also contains guidance on its use and clauses. It has been designed by the government for use when the landlord and tenant are entering into a shorthold assured tenancy agreement in the private rented sector.

It will be particularly relevant for use when the parties are entering into a longer term tenancy of 2 or more years. It, therefore, contains provisions relating to rent reviews and those which enable the landlord or the tenant to end the tenancy during the fixed term if their circumstances change.

The model tenancy agreement is made available free of charge and can either be completed online or downloaded and completed manually. If the agreement is completed online, it will need to be printed off for wet signature.

It is intended to be used in its entirety without any deletions or other amendments. It allows for particular boxes to be ticked and text to be inserted in certain sections.

Two copies of the agreement should be made - 1 for the landlord, the other for the tenant. It is the responsibility of either party to keep the agreement in a safe place as it will need to be referred to during the tenancy.

The use of the model is entirely voluntary. There is no legal requirement to use it - although landlords and tenants will be able to do so with confidence."

Alan Loughlin

10:44 AM, 14th February 2016
About 3 years ago

There is mentiom here of the model agreement being for lengths of 2 or 3 years.
Many leases preclude this, on this development the only agreements permitted are for 6 or 12 months. What happens here?

Douglas Barley

10:49 AM, 14th February 2016
About 3 years ago

Reply to the comment left by "Ros ." at "13/02/2016 - 21:25":

Hi John & Ros Me too I have properties in several areas and my tenants fit the list from john so well that I thought I was looking at my own portfolio!

Douglas

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