RTA in focus: Rent Increases

RTA in Focus: Rent Increases

23 March 2020

This article is part of the RTA in Focus series. With a raft of reforms to the residential tenancies framework set to start on 23 March 2020, we’re giving you the information you need to ensure you understand your obligations.

You can access all the articles in the RTA in Focus series here.

Landlords can now only increase the rent once in any 12-month period in the case of periodic agreements.

One of the changes to the residential tenancies framework that has generated negative comments from landlords and property managers alike relates to the limitation of rent increases for periodic agreements.

Kellie Eagles, Property Management Director at Elders Queanbeyan/Jerrabomberra and Deputy Chair of the REINSW Property Management Chapter Committee, explained that REINSW lobbied strongly against the limitation.

“Where a landlord is fortunate enough to find themselves in a market where vacancies are tight and rents are rising, they should be entitled to maximise the return on their investment by increasing rents to meet the market,” she said.

Property managers need to understand when they can and can’t apply rent increases on behalf of their landlords, and the notice period that applies depending on whether a fixed term or periodic agreement is in place.

What was required prior to 23 March 2020?

Section 41 of the Residential Tenancies Act 2010 (NSW) previously set out that the rent payable under a residential tenancy agreement could only be increased where the landlord (or the landlord’s agent) provided 60 days’ written notice to the tenant. That notice had to specify the amount of the increased rent and the date from which it was payable. This was the case whether the increase occured during the term of the agreement or upon renewal.

In the case of a fixed term agreement for less than two years, section 42(1) specified that the rent could only be increased if the agreement so provides. Notwithstanding that the increase was specified in the agreement, 60 days’ written notice still had to be given in accordance with section 41(1).

Where the fixed term was more than two years, increases were limited to once every 12 months and the lease did not need to specify the increased rent or method of calculation (see section 42(2)).

What’s changed?

A new section 41(1A) has been inserted into the Residential Tenancies Act, removing the notice period where a rent increase is specified in a fixed term agreement of less than two years.

Previously, 60 days’ notice was required, notwithstanding that the timing and amount of the increase were set out in the agreement and the tenant knew of that increase upon signing.

Moving forward, in accordance with the new section 41(1A), 60 days’ notice will no longer be required where the increase is set out in a fixed term agreement of less than two years, where the date and amount of the increase is specified.

A new section 41(1B) has also been inserted into the Residential Tenancies Act, limiting the number of rent increases in the case of periodic agreements to only once in any 12-month period.

The amendments in practice

Kellie welcomed the addition of the new section 41(1A) as it provides guidance as to how the section operates overall in practice.

“This amendment clarifies the notice period required for rent increases where a fixed term agreement is in place,” she said. “Sixty days’ notice is no longer required where the increase is specified in a fixed term agreement of less than two years.

“But when it comes to renewals, the landlord or landlord’s agent must still comply with the requirements of section 41(1) and provide the tenant with 60 days’ written notice of any rent increase before the agreement is renewed.”

However, in the case of the new section 41(1B), Kellie said that the placement of an arbitrary limitation on rental increases is disappointing and fundamentally flawed.

“It’s wrong to impose restrictions on rental increases that inhibit a landlord’s right to use market conditions to dictate the rent they can receive for their property,” she said. “Market value should determine rents.

“The amendment will also prevent landlords from bringing rent to a market level in a gentle and incremental manner. Tenants may be hit with significant increases because landlords are prevented from gradual increases throughout the year in response to changing market conditions.”

According to Kellie, the amendment could potentially have the adverse consequence of inhibiting a landlord’s ability to improve the premises, both of their own volition or at the request of the tenant.

She gave the example of a tenant on a periodic tenancy requesting the installation of air-conditioning.

“If the rent was increased just three months prior to the request, the landlord may well reject the request on the basis that they have no way of recouping the cost of the improvement because they can’t increase the rent for at least another nine months,” she said.

“And what if the tenant is willing to accept a rental increase to have the benefit of air-conditioning? Surely the landlord and tenant should be able to come to a mutual agreement regarding an increase.

“The upshot is that there will be landlords who will hold off on making improvements until such time as they can increase the rent.”

Kellie advised property managers to discuss timing with landlords when they are considering whether to make improvements to the premises.

“It’s important that landlords are aware of when they can start recouping the costs associated with an improvement through an increase in the rent charged. If they can’t make an increase for up to a year, it may well influence their decision about whether to move forward with that improvement.”

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