Banks, including some of the nation’s largest, have a legal right to raise rent by as much as 5 per cent for a short period of time in order to maintain profitability and ensure that rent is paid, the Supreme Court of Australia has ruled.
In a case that has the potential to shape how cities across the country rent out their buildings, the high court on Thursday rejected an application by the Bank of Melbourne to force landlords to make an average monthly rent increase of 3.75 per cent.
The bank, which has about $US10 billion ($12 billion) in assets, had argued that it had no obligation to increase rent to owners of bank-owned properties to make up for lost profits from mortgage-backed securities and other capital investments.
The court’s majority ruling found that banks and other financial institutions are subject to state laws that require them to provide rent increases at least in proportion to their profits.
The ruling comes as the Reserve Bank of Australia prepares to release a report on the role of the banks and their owners in Australia’s housing market.
It found that rents for bank-own properties rose by more than $US300 million between 2004 and 2011, when the banks had about $7.8 billion in assets.
But the banks’ argument that it was a private interest for them to increase rents had been rejected by the court.
It also found that the banks were not entitled to demand an average rent increase above 3 per cent because they were not financial institutions and not subject to the laws of their jurisdictions.
It was a case of a public interest law being applied to private interest, the court said, and it was not an exercise of public power.
“This is the first time a private party has been successful on an application for rent increases in this way,” the court’s ruling said.
“In a public policy context, it is a case for the court to consider whether the law was appropriate to the application and the amount of rent increase sought.”
The ruling means the banks will not have to raise rents in the way they would have otherwise.
The case is the latest in a string of decisions that have made the banking sector more powerful in the Australian economy.
The Bank of England in March abolished the requirement that banks have to provide rents of at least 3 per, and 7 per cent, in order for them, in the words of the bank’s former chief economist, Chris Williamson, to be considered “finance”.
The move followed the collapse of the Australian dollar, which was heavily subsidized by the Reserve Banks of Australia, the Reserve Banking Authority and the Commonwealth Bank of New South Wales, and the Australian Government’s decision in 2011 to close the Commonwealth’s mortgage lending network to banks and to reduce lending by the central banks.
The Reserve Bank also imposed a one-off 1.25 per cent annual rent increase on banks in 2013.
The Government has since increased rents on banks to 4 per cent in order “to support the financial health of the banking system”, it said.
The Supreme Court has also upheld rent hikes by big banks, including the Australian Federal Government and the Reserve, on occasions where the banks have not been deemed “financial institutions” by the courts.
The High Court ruling also has the support of the Reserve’s chief economist Chris Williamson.
“The Bank is committed to ensuring that the financial system remains healthy, robust and profitable for all stakeholders, and that rents are maintained in a manner that is sustainable,” he said.
“We do not believe that the current rent rises are appropriate to ensure a robust financial system.
We will review the case in due course.”
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