Expert Flags Legal Concerns Over Rental Contracts Tied to Interest Rate Rises

Rental expert Julie Ford has raised concerns about a growing trend of landlords and letting agents implementing contracts that adjust rents based on interest rate hikes. Such clauses are being used increasingly by landlords aiming to buffer themselves against surging mortgage costs.

Julie Ford from HF Assist voiced her apprehensions, stating that while the intent behind such contracts might be clear, they could be both “unfair and potentially illegal.”

She highlighted that the Bank of England (BoE) has hiked rates 14 times consecutively since the end of 2021, and another increase is anticipated on 21 September, to 5.5%. Using an example, Ford said, “If the 12 months fixed term tenancy began on 1st August 2022 with a monthly rent of £1,000, and the BoE raised its rates seven times from 2.225% to 5% in the subsequent year, tenants would experience a nearly 30% or £296 surge in their monthly rent in just 11 months.”

Ford flagged potential legal issues tied to such a steep rise. “Under section 13 of the Housing Act 1998, a fixed term tenancy can’t see a rent hike in less than 365 days – and the term ‘fixed term’ signifies that conditions remain unchanged for the stated duration,” she pointed out.

Addressing typical tenancy agreements which already have a clause adjusting rent based on the Rental Price Index (RPI), Ford questions whether this new mechanism would supersede the RPI clause or if tenants would face additional hikes linked to the RPI. She further challenged the legality of such practices, questioning if they’re “legal and enforceable.”

Ford stated, “Yes, rent can be increased within a fixed term if tenants agree, and signing an AST with clauses denoting interest rate-linked hikes might show tenant agreement. However, the uncertainty surrounding future BoE hikes makes it challenging for tenants to commit to unknown increases.”

Ford also touched upon the possibility of such clauses infringing the Tenant Fees Act 2019, although she believes the English interpretation of the act isn’t breached.

Shifting focus to consumer protection and related legalities, Ford remarked, “Clauses that hide variable rent amounts could be seen as unfair, given their lack of clarity and hindrance in making informed rental decisions.” She also cautioned that such practices might infringe misleading advertising regulations, jeopardise rent guarantee insurance, and complicate guarantor agreements.

Furthermore, Ford questioned the efficacy of referencing for tenants, as it’s grounded on their capability to afford the monthly rent. “If this changes unpredictably, how do we gauge affordability?” she asked.

She concluded by reminding that tenants still retain the right to appeal to the First Tier Tribunal within the initial 6 months of any AST if they believe the rent is exorbitant.