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Reducing the Risk of Rental Arrears
Any business is upheld by the effective management of its resources, and with property maintenance, agent fees and the costs of marketing a rental property; an interruption to regular rental payments can be detrimental to a landlord. Of course, rental arrears is not a desirable situation for anyone involved, with the even blindsiding landlords particularly when the tenants pass all prior affordability and credit checks before moving in.
But, a change in circumstance can be sudden and unforeseen, meaning that landlords and buy to let property investors must have measures in place to help secure the tenancies for their residents, and ensure their own income is maintained.
Communicating With Tenants
It is difficult to understate to value of having open, honest communication with your tenants. Transparency is something both tenants and landlords universally revere within the rental industry so addressing any issues regarding missing rent should first start with a discussion with the properties occupants. If a tenant feels more comfortable in detailing these issues to a landlord before the rental payments are due this provides them with time to try and reach a resolution.
In some cases a landlord is able to reach a payment plan with their tenant, giving them ample time to comfortably repay any owed amounts without jeopardising the tenancy or the landlord’s income. However, in times such as these were a large portion of the nation’s workforce is subject to furlough schemes, redundancies and at best an uncertain take home pay, renters and property owners may need to seek a ,more long term solution.
Of course, we understand that the intricacies of each tenant’s situation will vary, however steps can be taken to identify why the tenant is unable to meet their obligation to pay the rent. Radical increases in the costs of living, fluctuations in working hours and fleeting employment can all contribute to missing rent, and whilst none of these instances are the result of the property owner’s actions, making tenants aware of any financial help available to them can be the support they need to get back on their feet and address any arrears.
Using a Guarantor
Most applicable to landlord letting to students, first time renters and those with a poor credit history or low income, adding a guarantor to the tenancy agreement can be an essential safeguard for landlords. In the event that a tenant fails to pay their rent, the guarantor would then become legally liable for the outstanding amount. The guarantor will typically take the form of a family member or person close to the tenant and will be subject to the same financial scrutiny the tenant underwent in the referencing process in order to determine if they would be able to cover not only missing rent, but the cost of addressing any damage that exceeds the amount taken in the tenancy deposit.
It is worth noting that if the tenancy has been commenced under a joint agreement, as the requirement to meet the regular rental payments is shared equally among the occupants of the property the guarantor would need to cover the rent in full and not just a single tenants “share”. Whilst it is important to not understate the severity of rental arrears there are particular instances where guarantor would be devoid of their obligation to settle any missing rent; specifically if a new tenancy agreement is reached with the tenants.
Tenant Default Insurance
Typically coming in the form of an addition to standard landlord insurance policies, tenant default insurance, or rent guarantee insurance, allows landlords to claim for any missing rent accrued by their tenants. These policies will usually cover landlords in the event that their tenants fail to pay rent for up to 12 months, or to a specified amount of outstanding rent. Whilst the intricacies of each policy will differ depending on the chosen provider, tenant default insurance will sometimes also cover the legal costs of landlords pursuing outstanding rent, or seeking to reclaim possession of a property.
Perhaps the most thorough and comprehensive safeguarding measure landlords can take against rental arrears is simply ensuring they do not permit rouge or problem tenants into their property. Whilst this is certainly easier said than done, the tenant referencing process will shed light on the vast majority of renters that should be avoided. Putting a potential tenant through referencing will be the most revealing indication of not just the tenant’s financial ability to meet the rental payments, but their suitability for the property. The tenant will be subject to financial scrutiny through a credit check to assess if the applicant has any outstanding debts, alongside “affordability checks” that confirm the tenants current employment status and income. Many landlords and agents demand that a tenant’s income exceeds the annual rental charge for the property by at least three times. Additionally the tenant’s most recent landlord is contact for a reference, detailing if the tenant was ever late in paying their rent and if the property and its contents were in a habitable condition at the tenancies close.
Will Rent in Advance Help
Typically seen in areas where the demand for high quality rental accommodation far outstrips the supply, or when renting to students, it is not uncommon for landlords to ask their tenants to make significant contributions to future rental payments before they move into the property. For some this can be seen as a great compromise for a tenant that has failed or severely struggled with the financial aspects of the referencing process, proving them with a new home and the landlord with a certain income. It is important to note that in order to request any amount of rent to be paid in advance, the landlord must hold a written tenancy agreement with the occupants, with such requests being nullified by a verbal agreement between both parties.
Landlords will commonly ask a future tenant to pay at least one month’s rent in advance; however, there is no legal threshold on the amount of advanced rent a property owner cam request. If a landlord wishes to take advanced rental payments it is essential that they distinguish this sum from any amounts taken as a deposit, confirming with the tenant not only the amount taken, but when the next rental payment is due. Some landlords insist of the residents paying the final months’ rent in advance also, meaning that rental payments taken at the outset of the tenancy could also apply to its close.
Of course, whilst obtaining multiple months’ worth of rental payments upfront provides landlords with the upmost in financial security in regards to the particular tenant falling into arrears, it does also create a high financial barrier for tenants to overcome before renting your property, pushing some renters to other opportunities.
Standing Order for Rent
Whilst this may only be seen as an issue for first time renters, it has been known for some tenants to accumulate significant amounts of rental arrears simply through poor organisation. Some occupants can site some confusion through being paid weekly and having to hand over rent to the landlord on a monthly basis, whilst simply forgetting is far from a fan favourite.
Whilst this neglect can of course have serious influence over the income a landlord is reliant on, and only working to deteriorate the relationship between the property owner and their tenants; thankfully a fairly simple solution can be found. Requesting that the tenants contact their bank to establish a standing order payment be made to the landlord will remedy the chance of outstanding rent. Having the tenants set up a standing order will not only address any disruption to your income, but spare you the laborious task of chasing upcoming rental payments each month. Some landlords have been known to offer small rent reductions to their tenants as an incentive for their cooperation on the matter. This method can also be of great use to the tenant, allowing them to maintain a better understanding of their finances through the predictability of the same amount being taken on the same day each month without question.
Evicting a Tenant for Rental Arrears
If a tenant begins to accumulate excessive amount of rental arrears, as a final resort the landlord may choose to seek possession of the rental, evicting the tenant from the property in the process. In doing so the landlord will need to issue the tenant with either a section 21 notice, or a section 8 notice; specifically citing grounds 8, 10 and 11 as the basis for the latter.
It is important to note that each of these will come with a minimum notice period for the tenant; these periods have been extended during the corona outbreak to offer increased support to the unprecedented levels of tenants faced with an uncertain financial situation during this time. Below we will detail the notice period as they traditionally have been prior to COVID-19.
If the landlord chooses to proceed with a section 21 notice, this simply states that they wish to reclaim possession of the rental property at the close of the tenancy period. Because of this when issues the tenant with this notice, the property owner is not required to state any justification for their possession order, as the fixed term of the agreement would be over and the move would be supported by The Housing Act 1988. If a landlord chooses to serve a tenant with a section 21 notice is isn’t strictly because of any wrong doing by the tenant; however, for tenants that are missing their regular rental payments with only a few months left on their agreement, a section 21 notice may be the right choice.
Section 8 Notice for Rental Arrears
Whereas a section 21 notice “removes” the tenant at the end of the tenancy period, a section 8 notice allows landlords to obtain a more immediate solution to missing rent. When the rental property owner commits to serving the tenant with a section 8 notice, they must give clear reasoning for doing so, presented through the various “grounds” that comprise the notice.
Providing that the tenant in question has accumulated over 8 weeks in rental arrears if the payments are to be paid either weekly, fortnightly or monthly; or if the tenant has not paid rent for 3 months if the rental is paid quarterly or annually, the landlord is able to site ground 8 of the notice. With this in mind, the ground 8 will only be upheld if the occupant of the property has the outstanding arrears at the time the notice was served and when the case is presented to court. However, landlords can enjoy some peace of mind in knowing that this is a mandatory ground, meaning that the property must be returned to the landlord if the grounds are satisfied.
Because of this stipulation, ground 8 is often favoured by landlords; however, despite the two remaining citable grounds for rental arrears being discretionary, they still have major application. With this in mind a landlord is able to issue a tenant that has any amount of outstanding rent with a section 8 notice, citing ground 10. Whilst this is used by landlords to address rental arrears, the specifics of ground 10 make tenants with smaller amounts of outstanding rent less susceptible to eviction, instead serving them with a money order. If the court rules that the tenant is to be served with a money order, they must settle their rental arrears, potentially even the landlord’s legal costs.
The final appropriate recourse for rental arrears when serving a section 8 notice is ground 11. This varies from both grounds 8 and 10 as the occupants of the rental property do not have to have any outstanding rental arrears during the time at which the notice is served. This is because ground 11 is used to address tenants that consistently neglect to make punctual rental payments; whilst also preventing residents from making trivial payments towards any owed amounts to cease the eviction proceedings.
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