Fair Rents

1. Do I have the right to register a Fair Rent?

Most tenants who were resident before 15th January 1989 have the right to register a fair rent under the Rent Act 1977.

If you pay rent, have exclusive occupancy of at least one room; do not have a resident landlord; or have "hotel" type services such as breakfast or the cleaning of your rooms; then you are entitled to register a fair rent.

2. What is a Fair Rent?

A fair rent is the market rent for the accommodation minus the premium due to the scarcity of accommodation. In areas where there is very high demand for accommodation, such as Kensington & Chelsea, a fair rent is considerably lower than a market rent.

The current definition of what a fair rent is provided by the courts in Curtis v. The Chairwoman of the London Rent Assessment Committee in 1997 [see Caselaw]. In brief the court stated that a fair rent is a market rent, adjusted for scarcity and disregards. The best comparable to help determine the rent is a "close" market rent.

3. Who decides what is a Fair Rent?

The fair rent is determined by the Rent Service, which is an independent service funded by the Department of the Environment. The role of the rent officer is to set a rent that he, or she, considers "fair" for what the tenant gets for his or her money. This could be higher or lower than the figure asked for by the landlord.

» Top

4. Who can apply for a Fair Rent?

Either the tenant or landlord can apply to the Rent Service to register the rent. The registered rent is set for two years unless there is an appeal, or a significant change of circumstance. By far and away the most common application is a landlord's application to increase the rent after two years.

However, it could be a tenant's application for first ever registration of a Fair Rent or, in exceptional cases, to decrease the rent where there has been a detrimental change to the tenancy, say, central heating is no longer inclusive.

» Top

5. What happens when a Fair Rent is applied for?

On an application to register a fair rent the Rent Service writes to both parties giving them 14 days to make any comments in writing, or request a Consultation with the Rent Officer. If a Consultation is requested then both parties are invited. The meeting is a relatively informal affair with all parties sitting around a table.

The rent set by the Rent Officer runs for two years unless there is an appeal. Both parties have the statutory right of appeal to the Rent Assessment Committee within 28 days of the decision.

The appeal is heard de novo, which means that the Rent Assessment Committee considers the matter afresh without considering whether they agree or not with the rent registered by the rent officer.

It is important to appreciate that the rent could go up or down, regardless of whether it is the tenant or landlord who has appealed. However, [in something like 80% of the cases] the rent is far more likely to go up than down. This statistic can partly be explained by the time it usually takes for the appeal to be heard - which is commonly up to six months in London. Consequently, when the Committee look at the rent afresh they will generally be considering a market where prices have gone up. The rent set by the committee runs for two years.

Similarly, to an application to the Rent Service, both parties are given the opportunity to make any comments either in writing or in person by requesting a Hearing.

The Committee is composed of three people including a valuer and lawyer. If you request a hearing and wish to rely on a written submission then they like to receive a copy at least 14 days in advance.

A hearing at the rent assessment committee is a formal affair. The Committee sits on a dais, facing the parties who are divided into two sides, landlord and tenant. Both parties have the opportunity to make their submission and to ask questions of each other.

Once the committee has made its decision, the only further appeal is on a point of law to the High Court. This is not an appeal on the basis that you think that the rent is too high but, that you think that the committee has not considered something that it is obliged to by law or, indeed, considered something that it should not have done by law.

The power of the High Court is limited to quashing the original committee decision and referring it back to be considered by a differently constituted Committee.

Appeals on a point of law are extremely rare. However, having said that, there have been a number of successful appeals by landlords that have significantly changed the way in which a fair rent is calculated.

» Top

6. Caselaw

Western Heritable Investment Company Limited v. Husband [1983] 3 ALL ER 65 HL.

This case established the principle that the best way of assessing a fair rent is by way of comparison with other rents. It was long established practice to compare with other fair rents, until the Housing Act 1988 introduced the assured tenancy let at market rent. It also suggested that another approach is to look at the return on capital. This approach is very rarely used and is somewhat outmoded.

There followed a number court cases which suggested that the best comparison was now with assured tenancies at market rents, such as BTE Limited v. Merseyside and Cheshire Rent Assessment Committee [1992] 16 EG 111 QB.

This general principal was further endorsed in the case Spath Holme Limited v. The Chairman of the Greater Manchester and Lancashire Rent Assessment Committee [1995] 49 EG 128 CA.

However, the Court reconfirmed that the rent assessment committee was entitled to use whatever method they so chose but that there must be weighty reasons to depart from using open market rent comparables when readily available, [such as in this case]. The court also stated that the committee made should explain their thinking and calculations in full in the Written Reasons for a Committee's Decision.

Curtis v. Chairwoman of the London Rent Assessment Committee [1997] All ER 842.

In this case the Judge concerned himself with the valuation process and laid down the principle which guides the present valuation of a fair rents, the court stated that a fair rent is a market rent, adjusted for scarcity and disregards. The best comparable to help determine the fair rent is a "close" market rent. However, the court stated that it would still be possible to dislodge a market rent if it was not a "close" comparable. The court also stated that where the committee needed to make disputed adjustments for scarcity or other disregards it should show some working through, some arithmetic or percentages.

As a consequence of the Curtis case rents dramatically increased in Kensington & Chelsea and other areas with severe shortages of accommodation. Many tenants suffered financial hardship and some who were no longer able to afford the rent were forced from their homes. This led to government intervention in he form of "The Maximum Fair Rent Order".

» Top

7. The Rent Acts [Maximum Fair Rent] Order 1999

The Rent Acts [Maximum Fair Rent] Order 1999 limits the amount by which a registered rent can be increased. It applies to any application made to the Rent Service after 1st February 1999.

The maximum fair rent will be the existing rent plus the percentage change in the Retail Price Index [RPI] since the rent was last registered and additional 7.5% for the first application made after 1st February 1999, or an additional 5% for every subsequent application.

This is the maximum rent chargeable but it could be lower. The rent officer will continue to calculate the fair rent in the normal manner and then do a second calculation using the set formula. The rent then registered will be the lower of the two.

There are two exemptions to the rent cap.

The first exemption is the relatively rare case of a first ever registration.

The second exemption is when the landlord has carried out repairs and/or improvements since the last registration to a value greater than 15% of the existing rent. That is to say that the work done by the landlord would increase the achievable rent by more than 15%, without considering any other factors.
If either of these cases applies to you then it would be advisable to seek advice.

Landlord's improvements
Therefore, a tenant should be wary of a landlords offer to improve the property or facilities by, say, installing central heating. Such an improvement is likely to increase the value of the rent by more than 15% and put the rent outside the rent cap.

However, in 99% of cases, tenants have the right to refuse improvements.

Landlord's repairs
Repairs are a different matter. Clearly, it would be unjust if a landlord is able to derive a higher rent by neglecting their repairing obligations to such an extent that when the work is eventually done, the value of the work excludes the additional protection of the rent cap.

On the other hand, in a case where a landlord remedies a defect for which the rent officer has reduced the rent, it is only right that that the rent is similarly increased.

For example, let's say a tenant is renting a three bedroomed flat but the ceiling to one of the bedrooms is in such a dangerous state that the room is unusable. Although the landlord is responsible for the repair, he refuses to do anything. The tenant makes an application to the rent officer and the rent is reduced on this basis by 25%. Six months later the landlord finally does the repair. On re-application to the rent officer the rent cap would not apply, as the work would clearly be to a value of greater than 15%. In such an instance, it would only be right to add back in the deducted 25%.

However, the potential danger lies in the fact that if the rent cap does not apply then the rent officer must look at the prevailing level of market rents [see Caselaw]. If, as a consequence of the application of the rent cap in previous years, the increase in fair rents has fallen behind the increase in market rents, then the tenant could be in for a nasty surprise.

To date we have not had a case where this has happened. Indeed, it now appears to be generally accepted that fair rents are now in kilter with market rents after the dramatic increases following the BTE, Spath Holme and Curtis cases [see Caselaw].

Market rents in the central London Boroughs have fluctuated over the last couple of years. It is sensible to take a view over several years in order to iron out any wide variances. Doing this the evidence would suggest that market rents have shown modest increases. Therefore, it is arguable that fair rents should do likewise. Indeed, there is some support for this argument in the reasonable number of fair rents, which are being registered in Kensington and Chelsea at lower than the maximum fair rent.

Service charges
If you have a variable service charge, the rent cap applies to your rent but not the service charge element. Such cases are unusual as it is common practice in regulated tenancies to incorporate any service charge into a global figure for the rent. It is in the tenant's interest to suggest this incorporation.

Where can I get details of the RPI?
The RPI or United Kingdom Index of Retail Prices to give it it's full title is published monthly and is obtainable from the Office for National Statistics on Tel: 0207 533 5874.

» Top

8. Overpayment of rent

Many tenants will have overpaid their rent on account of the initial successful appeal against the validity of the governments rent cap.

The Court of Appeal ruled on 20th January 2000 that the Government did not have the power to introduce the rent cap in the manner that they did and therefore, the rent cap was illegal.

However, the House of Lords subsequently overruled that decision on 7th December 2000 reconfirming that the rent cap is valid from 1st February 1999.

Consequently there was a hiatus of nearly a year when it was thought that the rent cap did not apply. To compound matters, the Rent Service re-issued the rent register indicating that the uncapped registered rent was payable from the effective date. Many tenants paid the uncapped rent from the date of registration. These tenants are entitled to reclaim this overpayment.

Under Section 53 of the Rent Act 1977, a regulated tenant has the right to reclaim an overpayment of rent up to two years after payment.

After the House of Lords' decision, the Rent Service in Kensington and Chelsea again re-issued rent registers for those effected, stating that the rent cap did apply. Therefore, no landlord should still be charging an uncapped rent. Indeed, it is against the law to charge a rent higher than the registered rent.

» Top

9. Evaluation of a Fair Rent

Working out what a fair rent is a very complicated process involving a number of stages. To put it as simply as possible, you need to establish the notional market rent for your accommodation if it was let on the open market in the condition, and on the same terms, that it was let to you. You must therefore disregard any improvements you may have made.

Once you have established the notional open market rent, you deduct an amount for the scarcity of accommodation. The resulting figure is the fair rent.

In working through this process, we consider the following:

personal circumstances
location
age and character of the property
tenancy terms
market rents
degree of modernisation
enhanced rental value
scarcity of accommodation

» Top

10. Section 70(1) of the Rent Act 1977

Section 70(1) of the Rent Act 1977 states that the rent officer shall have regard to

all the circumstances (other than personal circumstance) and in particular to

(a): the age, character, locality and state of repair of the dwelling house.

Personal circumstances
The rent officer cannot take into account factors such as whether you can afford the rent.

Location
Clearly one of the most important factors in determining the level of rent. Your home may be in a desirable residential area but are there other factors, such as having a bus stop outside your house, or a pub next door? What are the transport facilities like? Are the local shops conveniently located?

Age and Character
This includes a wide range of factors. For example, does your home have a lack of natural sunlight? Do you have to climb many stairs, as there is no lift? Does it have a poor layout with rooms opening off one another? Is your home modern or period? Is it above shops? What type of lettings is there in the building? For instance, is there a high turn over of people due to short-term lets?

State of repair
Obviously, if the property is in a poor state of repair then the rent should reflect this and you should bring this to the attention of the rent officer. It is irrelevant as to whether the disrepair has been reported, as the rent officer is making a valuation of what you get for your money.

» Top

11. Tenant's Improvements

Tenant's improvements are disregarded for the purposes of setting a fair rent. The rent officer is concerned with what the landlord provides for the tenant. A tenant should make sure that the rent officer is fully aware of any improvements he or she has carried out by providing a list.

» Top

12. Terms of the tenancy

This factor can of significant importance when comparing regulated tenancies with assured or assured shorthold tenancies [AST's].

Most regulated tenants are responsible for, at the very least, minor repairs and redecoration. Some regulated tenants have particularly onerous repairing responsibilities, for example, those holding over on the terms of a long lease.

In comparison, most AST tenants are not even responsible for redecoration.

Therefore, in comparing regulated tenancies with AST's a deduction should be made from the open market rent to take account of this extra cost so that the comparison is on a like for like basis. This figure could be 5% or 10% or even higher in the case of a full repairing lease.

It is also arguable that there are a number of hidden costs in the rent for an AST, which should be deducted so that any comparison with a fair rent is strictly on a like for like basis.

By their very nature AST's are for much shorter periods, one year being common term, and as a consequence there are extra letting and management fees.

There is also the hidden cost of void periods when the property is empty due to gaps in finding another tenant or while the property is cleaned, redecorated or generally done up. Some professional managing agents advise to landlords to allow one months rent to cover these expenses. Therefore, it could be argued that the yearly rent for an AST should be reduced by one month before providing a comparison on a like for like basis for a fair rent.

» Top

13. Working out the market rent

The best way to do this is to get a local estate agent to give you an estimate of your home if it was let on the open market under an AST tenancy.

Remember that adjustments would need to made to this figure to take account of any improvements that you may have carried out [see tenants improvements], and differing repairing responsibilities and other terms of the tenancy [see terms of tenancy].

Alternatively, you could try to find out if there are other tenancies in your block let on the open market and then compare that accommodation with your own.

In making the application, your landlord may provide details of open market lettings. You can use these as a base for comparison but always try to get a copy of the contract to actually confirm the rent stated. Also, try to get as many details as possible - it may sound like your flat but has it been interior designed with gold taps? Does it have a modern fitted kitchen, central heating or a higher level of services?

The Rent Assessment Committee maintains a public record of open market rents it has determined under Sections 13, 14 & 22 Housing Act 1988.

» Top

14. Degree of modernisation

It is extremely rare indeed to find an open market tenancy that has not been modernised with central heating, fitted kitchens and bathrooms. Invariably, the letting will also include as a basic minimum, curtains, carpets and white goods the kitchen such as a washing machine, fridge, cooker, dishwasher etc. in the parlance of modern lettings this is "unfurnished".

This is simply because it is extremely profitable for a landlord to modernise a property before letting.

If we are using an AST by way of comparison, then in order to work our way back to a figure for the notional market for the accommodation as it actually is, i.e. unmodernised, then a significant deduction needs to be made.

Amortisation of cost approach
This is a landlord's favourite approach to trying to remove that element of the rent, which is due to modernisation. The reason being is that it hides the enhancement of rent made by modernisation.

Amortisation cost works by totalling the cost of the work and writing it off over a period of time. So, let's say that the cost of putting in a new bathroom and kitchen is £10,000 and it is estimated that they will be renewed in 10 years. The cost of modernisation over that period is £1,000 per year. The landlord will argue that this is the amount that should be deducted from the open market rent to arrive at the notional market rent for our unmodernised regulated tenancy.

The method of amortisation of cost produces an inflated figure for the notional market rent.

» Top

15. Enhanced Rental Value approach

Most managing agents accept the principal that a rent is significantly enhanced by modernisation and that the return to the landlord is far greater than the cost. The enhancement obviously varies from property to property but can easily be as much as 100%.

Take for example, central heating. Many regulated tenancies do not have central heating, whereas most modern tenants would not consider renting a property without it. The cost of installing central heating is relatively inexpensive to the additional amount of rent that can be charged.

Because of this factor it is virtually unheard of for a landlord in Kensington and Chelsea to let an unmodernised flat on the open market.

However, we do have one very good illustration o the enhancement of rent through modernisation.

» Top

16. What is scarcity?

The scarcity factor is the major difference between a fair rent and a market rent. Rents are significantly higher in areas where there is a great shortage of accommodation, such as Kensington and Chelsea. It is this premium that the scarcity calculation seeks to remove.

Section 70(2) of the Rent Act 1977 states that

…for the purposes of the determination it shall be assumed that the number of persons seeking to become tenants of similar dwelling houses in the locality is not substantially greater than the number of such dwelling houses in the locality which are available for letting on such terms…

Unfortunately, there is no set formula to calculate scarcity in any given area and we are reliant on experience and the evidence provided by various indicators and trends. Such indicators are things like:

statistics showing population growth
council housing lists indicating local demand
lack of council house building
estate agent magazines and other publications commenting on the letting market
newspaper articles
specific factors such as the very large market for company lets in the central London Boroughs

The easy way out is to simply adopt a figure used by the Rent Assessment Committee. They issue Written Reasons for their decisions, which are useful in many respects and they always include a set percentage for scarcity, commonly at present around 35%. Unfortunately, the committees invariably do not say how they have arrived at their figure for scarcity, hiding behind their favourite phrase, "using our knowledge and experience"

» Top

Designed, Developed and Hosted by Content and Code