Increasing the rent – LAWFULLY!

As interest rates increase, so too are repayments on residential and commercial or retail mortgages increasing. Landlords of all forms of investment property are reviewing their costs and looking at ways to make sure that they can be met. One of the most obvious ways is to increase the rent being paid by a tenant.

Generally, leases will contain a way of increasing the rent once every year by way of a rent review. Sometimes, these clauses can be quite confusing and difficult for both landlord and tenant to understand.

Usually there are three (3) set ways to increase the rent. These are:

1)    increase in line with the consumer price index (CPI)

2)    fixed percentage increase

3)    market rent review

Let’s have a look at each of these:

1)    Increase in line with the consumer price index (CPI)

Given our current interest rate environment, this is a very topical method! The consumer price index, or CPI, is a measure of inflation. The Australian Bureau of Statistics publishes the CPI for locations around Australia, so it is very easy to find out what it is in Darwin or Alice Springs and apply that to your particular circumstances.

Usually, there will be a formula in your lease and you need to use this figure as part of that formula to work out what the new rent is meant to be.

This method is considered to be quite fair as it is independently calculated and means that rent increases are keeping pace with what is happening in the economy.

2)    Fixed percentage increase

As the name indicates, this is a fixed increase that takes place on a given date or at particular intervals set out in the lease as agreed between the parties. For example, the lease might say that there is to be a fixed increase on the anniversary of the commencement date at a set rate of 2%.

This method provides certainty for both parties. However, as noted above, it may not keep pace with inflation and place a landlord in a difficult position from an expenses perspective.

3)    Market rent review

A lease will provide for an independent valuer to assess what the rent should be at a specified time - usually the end of the lease term, when an option is about to be exercised - and, depending on where the market is at, the rent may go up or down.

To prevent a fall in rent, landlords may include what is known as a ’ratchet clause’ which says that the rent is not allowed to be less than the rent a tenant paid in the previous term. However, these types of clauses are not allowed when it comes to retail properties, but do exist when it comes to the leasing of commercial premises.

Particularly given the current state of the Australian economy and the rapid rise in interest rates, both landlords and tenants must be aware of their rights and responsibilities when it comes to addressing the matter of rent for the various types of investment properties. Rent can be increased, but all landlords must ensure that this is only done by following what is set out as agreed in the lease.

Have a query about increasing rent under a current lease? Please call Peter Walker or Samantha Hansen on (08) 8941 6355 or email peter@bowden-mccormack.com.au or sam@bowden-mccormack.com.au.

For the buying or selling of any property, please call us on (08) 8941 6355 or email conveyancer@bowden-mccormack.com.au or hannah@bowden-mccormack.com.au