Hi,
Rather a long answer but to diagnose I have included some background info on the rather technical way that Rover show the coolant temperature and how they manage fuel intake. Despite the knock I think that the 1.8 k series is a stunning engine and I own a number of '75s as well as my freelander.
The coolant temperature gauge indicates the temperature of the engine coolant. When the engine reaches normal operating temperature (range between 75-115 degrees), the gauge rests at the mid-point of the temperature scale.
The engine coolant temperature gauge is driven by a CAN message from the ECM (the "brain" that controls the engine). The ECM derives the engine coolant temperature from an engine coolant temperature (ECT) sensor. This fitted on the aluminium hose connector to the right of and below the head when looking into the engine bay.
The temperature gauge is fitted with a return magnet causing the gauge to return to zero when the ignition is switched off. The coolant temperature gauge is only operative when the ignition switch is in position II or when diagnostics are selected.
When the engine is hot, the gauge will display normal temperature until the engine has been running for more than 15 seconds. This prevents the gauge moving to the red sector of the gauge if the ignition is turned off and then on after a journey. The 15 second delay allows for the engine to be started and coolant circulated, allowing the gauge to display the true average temperature.
The oxygen content of the air contained in the cylinders can be calculated by the ECM using information from the MAP sensor and the IAT sensor. The pressure of the air in the intake manifold will vary according to the following factors:
A The position of the throttle valve (driver input).
B The atmospheric pressure (altitude and weather conditions).
C The mechanical condition of the engine (volumetric efficiency).
The pressure in the intake manifold, downstream of the throttle valve, indicates how much air has flowed into the cylinders. This will decrease at higher altitudes as the air becomes 'thinner' or less dense. This will also mean that there will be less oxygen contained in the air which will be available for combustion of fuel.
The temperature of the air will also affect the oxygen content. Air which is cool has molecules packed closer together than hot air, therefore; cooler air contains more oxygen for any given volume than hotter air.
From the above information, the ECM can calculate how much air has been induced into the cylinders. By comparing these values to a fuelling map stored in the ECM memory, the amount of oxygen induced into the cylinders can be calculated.
The values obtained from the ECT sensor, engine oil temperature sensor and TP sensor provide 'fine tuning' to the calculations.
The ECM also "looks" at the temperature sensor to assist in the determination of fuel quantity at the injectors to determin idle speed when the O2 sensors are not yet up to temperature.
This would lead me to believe that if you are not experiencing any other symptoms that there is a problem with the sensor as it does record the temperature...just a little off.
The 1.8 K series runs at about 80 degrees in this weather rising to 105 before the fan cuts in. It looks like your sensor is only showing temperature above the "norm" i.e. when you are stationary and teh temperature rises.
"Sensor" problem could also mean the wiring to the ecu so check that out first before you spend.
Always check the fluid levels and make sure you have a fluid level indicator, I believe that they were added after 2000 but I read somewhere that there is a retro fit kit available.
Cheers
Mark