Landlords can incur cost increases as a result of municipality property valuations escalating rates, rising insurance premiums, or as levies increase on sectional title property. Can landlords insist that their tenants help fund the difference by imposing a rental increase during the term of a lease?
No, A landlord may not increase the rent in any way during the lease period, unless provision for this was agreed to and included in the lease before it was signed.
While it is much more common in commercial leases, some residential leases contain clauses that allow landlords to pass any increase in their costs related to the property to the tenant.
There are any number of variables that may increase a landlord’s costs over the term of a lease. As the months go by, the Reserve Bank’s repo rate will rise and fall, affecting the prime lending rate and possibly what the landlord is paying on his bond, but Dubois has never come across an interest rate increase being passed onto a tenant.
The most common increases that would lead to such a clause in a lease being invoked are when municipal rates go up. Dubois says he has also seen the clause used to cover insurance-premium increases but notes that this is extremely rare.
What the CPA says on the matter
It is important to note that the CPA (Consumer Protection Act) prohibits landlords and tenants from “contracting out of Law”. Some suggest that this means a lease cannot contain a specific escalation percentage for the renewal, and that increases should be renegotiated at each renewal.
An increase in accordance with the Consumer Price Index is safest, but tenants will always prefer less, and landlords will always want more. In past years, escalations were an almost standard 10% but the market has changed and, in many cases now, the increase-percentage has decreased.
So, adding a rates-related increase on top of CPI might lose you a good tenant. Escalations need to be fair. That said, there is no legislation that governs the escalation rate.
What is the solution?
Are there alternative options for landlords, some of whom are facing large adjustments to their valuations, and therefore extensive rates hikes? Both parties need to negotiate in good faith, taking into account the tenant's payment history and other positive or negative information.
As long as the signed lease shows that both parties have contracted into allowing for a particular increase or cost, then such an increase would be lawful. Imposing a “special levy”: Even if it is legal, such a move would be very unusual and is not encouraged.
it is imperative that landlords factor in possible increases in levies, rates and the effects of interest rate increases or decreases when they buy an investment property and also when they come to marketing it. Better still, get a respected property agent who knows the market to advise you, and never over-extend yourself to the point where one increase or a defaulting tenant will push you into a situation where you are facing the prospect of repossession.
Article courtesy of Bizzcommunity & Shaun Dubois, principal of Just Property