Interest rate rise clauses in rental contracts a ‘can of worms’ says expert

A rental expert has warned that a reported increase in landlords and agents using contracts that feature rent increases based on interest rate rises is a potential ‘can of worms’.

Her comments follow reports that letting agents are increasingly using clauses like this at the behest of landlords keen to offset rising mortgage costs.

But Julie Ford of HF Assist says that while she can understand why landlords would want this security, “it would be unfair but could be illegal”.

“Firstly, the Bank of England (BoE) has increased rates 14 consecutive times since the end of 2021, and is expected to raise again on 21 September, to 5.5%,” she says.

Giving an example she says: “If the 12 months fixed term tenancy started on 1st August 2022 at a monthly rent of £1,000, the BoE increased its rates seven times from 2.225% to 5% over the next year.

“This would see the tenants’ monthly rent rising by just under 30% or £296 in 11 months.”
But while a huge leap for the renters, Ford says it will also have problems in law.

“Under section 13 of the Housing act 1998 a fixed term tenancy cannot have its rent increased in less than 365 days – and a fixed term contract implies that the terms and conditions are fixed for the duration of the term specified,” she says.

Interest rate

“Most tenancy agreements already have a rent increase clause which is linked to the Rental price index (RPI), would this new practice override this clause or could the tenants see a further increase annually in line with the RPI?

Ford says the key question here “is this practice legal and enforceable” and she argues it would not be.

“Yes, you can increase rent in a fixed term contract if the tenant agrees, and arguably signing an AST with clauses stating the [link to interest rate] increases, would indicate that the tenant has agreed, but as we do not know what each BoE increase will be can the tenants confidently agree to an increase, they do not know they can afford to maintain.”

The argument that it breaches Section 14 is correct and Ford says on balance of probability a judge wouldn’t allow rent arrears to be accrued in such an untransparent way.

Tenant Fees Act

She also wonders whether such interest rate clauses breach the Tenant Fees Act 2019, which is clear that rent paid at the start of the tenancy cannot be higher than the rest of the tenancy.

Unlike Welsh tenant fees ban act which says ‘the rent cannot be higher or lower in consecutive payments.’ in England it cannot be lower than the first payment, so she is confident it doesn’t breach the English version.

Consumer protection

“But now we move onto Consumer protection, adverting standards and contract law,” says Ford.

“Clauses that present undisclosed variable rental amounts would understandably be deemed as an unfair clause as it not only lacks transparency but also doesn’t allow the prospective tenant to make an informed decision about the rental,” she says.

“Advertising a property for rent at one price but with the knowledge this will not be the continued price could fall under misleading advertising rules.

“It could also affect a landlords rent guarantee insurance and any guarantor agreement that may be signed.

How would referencing of these tenants also be accurate, as referencing is carried out based on the tenants affordability of the monthly rent, but if this is to rise by an undisclosed amount what affordability do we asses on?

“It is also worth remembering that the tenant still has the option of submitting an appeal to the First tier tribunal in the first 6 months of any AST if they think the rent is too high.”