scarcity adjustment
📖 What is scarcity adjustment? Meaning and definition
When a 'fair rent' is being determined for a property, particularly for regulated tenancies, the Tribunal first establishes what the property's market rent would be. This market rent is what a landlord could reasonably expect to get if the property were let on the open market today, considering its condition and usual letting terms. However, if there is a significant shortage (scarcity) of similar properties available for rent in the wider locality, this can artificially inflate the market rent.
The scarcity adjustment is then applied as a discount to this market rent. The purpose of this adjustment is to ensure that the fair rent is not influenced by this shortage. Essentially, the Tribunal assumes that the demand for similar rented properties does not significantly exceed the supply, and if it does, the rent is adjusted downwards to reflect this.
For example, in Greater London, a scarcity adjustment of 20% has been generally adopted. This percentage is applied to the market rent (often after deducting service charges) to arrive at a lower figure that is considered the fair rent, free from the influence of market scarcity. This process ensures that the tenant is not paying an inflated rent simply because there are not enough similar properties available.
📋 Requirements
- A fair rent determination is being undertaken for a property.
- There is a significant shortage of similar properties in the wider locality available for letting on similar terms.
- The market rent for the property has been established.
📝 Procedure
- Determine the market rent for the property, considering its condition and usual open market letting terms.
- Identify if a significant shortage of similar properties exists in the locality.
- Apply a percentage discount (the scarcity adjustment) to the market rent, often after deducting service charges.
- Calculate the final fair rent by adding back any service charges to the scarcity-adjusted rent.
💡 Examples
- A Tribunal determined a market rent of £430 per week for a property, then applied a 20% scarcity adjustment to the rent net of service charge to arrive at a fair rent.
- In a case concerning a property in SE10, the Tribunal relied on its knowledge of local rental values to determine the market rent before considering any scarcity adjustment.
- The Court of Appeal has emphasised that a fair rent is typically the market rent discounted for scarcity, which is the part of the market rent due to a significant shortage of similar properties.
- If the market rent for a property is £300 per week and a 20% scarcity adjustment is deemed appropriate, the rent would be reduced by £60 to £240 per week before adding service charges.
❓ Frequently asked questions
What is the main purpose of a scarcity adjustment?
The main purpose is to ensure that the 'fair rent' for a property is not artificially inflated by a significant shortage of similar rented properties in the local area. It discounts the market rent to reflect a situation where supply does not exceed demand.
Who decides if a scarcity adjustment is needed and what percentage to apply?
The Tribunal (specifically, the First-tier Tribunal, Property Chamber) determines if a scarcity adjustment is necessary and the appropriate percentage, based on their knowledge of local rental values and market conditions.
Does a scarcity adjustment apply to all types of tenancies?
The case excerpts primarily discuss scarcity adjustments in the context of 'fair rent' determinations, which are typically associated with regulated tenancies rather than modern assured shorthold tenancies.
How is the market rent determined before the scarcity adjustment?
The market rent is determined by what a landlord could reasonably expect to obtain for the property on the open market, considering its condition and usual letting terms. Assured tenancy market rents are often used as comparables, adjusted for any differences.
Can a tenant request a scarcity adjustment?
When a fair rent is being determined, the Tribunal will consider the issue of scarcity as part of its valuation process. Tenants can provide evidence or arguments regarding the supply and demand of similar properties in their area to the Tribunal.
Is the scarcity adjustment always a fixed percentage?
While a rate like 20% is generally adopted in some areas (e.g., Greater London), the Tribunal assesses each case individually. The percentage can vary depending on the specific locality and the extent of the scarcity identified.