A brief guide for landlords, whose tenants can't pay the rent
More than half of landlords reported having lost rental income during the pandemic and since in the cost-of-living crisis accompanied by a sharp increase in market rents. The cost of living crisis continues to bite, many more landlords are worried about their tenant falling behind with the rent in the future.
It's important that landlords know how to deal with rent arrears before they escalate. In this article, Tom Entwistle, a residential and commercial landlord since the 1970s and founder of LandlordZONE draws on his experience to offer tips.
For more advice and an in-depth treatment of this subject, read also the Total Landlord Insurance article, what to do if your tenant can't pay the rent and falls into arrears. It cludes videos from Mike Morgan of the Property Redress Scheme's Tenancy Mediation Service, and evictions expert Paul Shamplina, founder of Landlord Action.
A key skill for any successful self-managing landlord is having the ability to manage rent payments effectively. Maintaining your cash-flow - especially if you have a mortgage or mortgages to pay - is a vital part of your property management skill set, much needed to avoid the ultimate sacrifice - losing an investment property that you've worked hard to acquire.
Having had missed rent payments - or constantly receiving late rent payments - from a tenant is an alarming prospect and very frustrating for any landlord. Rent arrears will cause you a good deal of stress and very often some sleepless nights.
But it's something you need to learn to deal with in a professional way and detach yourself away from the emotional side of the crisis if you are to maintain good relations with your paying customers - your tenants.
Getting angry solves nothing and it can lead to more trouble. You need to work through a logical process to deal with the situation, one which treats your tenants with respect, and is as helpful as possible in what is often a very difficult situation for them as well.
Everything you do in a landlord-tenant relationship should be planned and precise, planning for the worst case but hoping for the best. In my experience dealing with the average residential tenant means that 95 percent of them (19 out of 20) will pay their rent on time and look after your property.
It's the small percentage of tenants who can cause you trouble, the ones who deliberately go out to deceive you are the worst. With these types it's best to avoid them as tenants in the first place if you possibly can. Easier said than done, but you can at lease take measures to reduce this risk of getting stuck with a really bad tenant.
Always use a thorough vetting and selection process; carry out robust referencing with the tenant's previous landlord and employer, and consider taking further precautions like asking for a guarantor or taking out rent guarantee insurance.
These precautions, I would suggest, will be even more important when Section 21 is abolished under pending new legislation changes.
Get your tenants to pay rent by standing order - I always insist on this method of payment and I've never had a problem with tenants complying. I've found it is the best system ever to manage rent payments for residential as well as commercial tenants, for the small-scale landlord.
With a standing order payment, regular monthly payments go directly into your bank account. You know right away if there's a problem, when a rent payment has failed to arrive. You simply check online.
Standing orders are only cancelled for one of two reasons: there is not enough money in the tenant's account, or the tenant instructed the bank to stop it. You may get excuses like the bank messed-up, or I'm changing banks, but these don't usually wash with me.
I've never accepted rent payments by cheque because it's so hit and miss, and stressful every month wondering when it will arrive. Has it been delayed in the post? By the time you realise it's not going to arrive, days and sometimes weeks go by.
Has the tenant not sent one? How long should I wait to ask? When you do ask, invariably 'it's in the post' or 'I've changed banks and I'm waiting for a new cheque book', in fact every excuse under the sun. This game can go on for a long time.
So, with standing orders all you need to do is keep an eye on your bank balance online. You know exactly when the rent is due each month and if it does not appear you need to take immediate action.
Don't be tempted to delay taking action or your tenant will think you are too relaxed about it. Start with a friendly phone call, email or just call round to ask your tenant why the non-payment?
Request payment by cheque or cash in the meantime as the rent is now overdue.
Whatever the reason or excuse, always follow this up in writing and record the circumstances as a contemporaneous note in your tenancy' diary. It might seem harsh but this could be the first step in the eviction process, so documentary evidence is so important. Most evictions are due to rent arrears.
There may be a good reason for the missed payment and the tenant has just not had the forethought to warn you about it. Give them the benefit of the doubt and try to establish the reason. If it's a short term cash-flow issue you might agree a reduced payment for a time, to be made-up later when the tenant's finances get back on track. Always issue a receipt if you take cash.
I have a standard 'rent arrears letter' that I send out with a statement of rent payments received, when the arrears started and the arrears amount build-up over time, as and when they become due. I will document any rescheduling of payments and I will resend this statement to the tenant on a regular basis, as a reminder until the arrears are cleared.
The letter contains information about how the tenant can seek financial help and advice, how we can talk about their problems and try to resolve them in the short term, and finally the severe consequences of falling behind with their rent.
If there's a guarantor or rent guarantee insurance involved make sure you keep these parties in the loop from day-one. Always send them copies of your letters and statements so they know in good time what they may become liable for, the progress of the crisis and therefore they may themselves put some pressure on your tenants to comply.
Having had many instances of rent arrears or missed payments over the years I find that there's often a genuine reason and one that can be sorted out with a quick discussion. Don't be aggressive and come the heavy hand, it won't get you anywhere.
Perhaps there was a genuine change of bank, a late wage payment or just a heavy spending month, and a cheque will make-up for the missed payment, but invariably a missed standing order is a sign of trouble, a looming struggle on the tenant's part to pay.
I find that some tenants will cooperate to try and overcome their difficulties, but some, and I'm afraid to say a good number, will do their utmost to avoid contact with you when they are struggling. They will fail to answer their phone, or respond to emails or answer the door. They are either too embarrassed to face you or they just want to mentally bury their money issues and hope they will go away.
If you find your tenant is willing to cooperate with you, and is willing to accept help when they are perhaps going through a temporary money problem, then you should try your best to accommodate them.
They may otherwise be a good tenant, but in an energy crisis with high inflation and job insecurities they may need temporary help, like a rent holiday or a temporary reduction in rent, to be repaid over time.
Alternatively your tenant may be able to pay but has no intention of doing so and is being deliberately deceitful. Or they continually pay late or dribs and drabs, which makes your life difficult keeping track of it all.
Not being able to communicate means that you are not able to offer help and therefore the situation will inevitably lead to you going for an eviction. No landlord can be expected to house tenants for free indefinitely.
For serious arrears the tenant needs to have missed at least two monthly rent payments.
When a payment is missed your regular rent arrears statement showing the arrears as they build-up does three things:
1 - It keeps the tenant reminded of the arrears situation,
2 - It stops both parties losing track of the arrears position and
3 - It forms good evidence if you need to go to court.
The court needs to see that you have done everything in your power to settle the dispute before it reaches court under the civil procedure rules for rent arrears and possession claims.
Consider using an eviction specialist such as Landlord Action to handle this for you on a fixed fee basis and in a professional way.
Taking the legal route should be a last resort.
If you can get some cooperation, mediation should be your first port of call when you're having trouble reaching an agreement with your tenant yourself.
But at the same time, buy-to-let is a business and you can't afford to allow someone to keep living in your property rent free.
When your tenant is in two to three months' rent arrears, and it appears they either can't afford or simply won't make their rent payments, then you may have to make the difficult decision to serve an eviction notice.
This should be a last resort, but if you need to go down this route make sure your property is in good order and you have responded to any repairs requests, otherwise the process can be delayed if the tenant claims that you haven't done repairs or failed in any of your other obligations as a landlord.
Also, you need to be sure you have complied with all the necessary prescribed pre-tenancy actions, such as having an EPC, a current gas and electrical check certificate, you carried out right-to-rent checks , you protected the deposit and all the other appropriate notices you have to serve to allow you to use Section 21.
The Section 21 notice is a two months' notice normally served when rent arrears start, whereas a Section 8 notice is a two weeks' notice for rent arrears, and the arrears should be for more than two months.
Section 21 is only available when the fixed-term contract has expired, otherwise you need to use Section 8.
In my opinion rent arrears in a business tenancy is similar to a residential tenancy in that the first priority is to help your tenant through any short-term difficulty, but the handling of this calls for a more nuanced approach.
Again, as soon as the arrears start you should establish contact to find out what the difficulty is. A short-term cash-flow issue can be accommodated perhaps with a temporary rent re-scheduling, a rent holiday or reduction, to be made up over time. Again you need to send regular statements to clock the position at the start and as the arrears build.
It may be possible to help a commercial tenant out of their difficulties by suggesting a sub-letting of part of the premises or an assignment of the lease to another tenant. The RICS Code for Leasing Business Premises offers guidance here.
Whereas a residential tenant in persistent arrears is (for all concerned ) better out off out of the property, from the landlord's point of view, this is not necessarily the case with a commercial tenant.
When a commercial tenant is evicted a lot of the tenant's costs fall back onto the landlord:
1 - Full business rates in most situations become payable after three months
2 - Insurance premiums (which often double for a vacant unit) can no longer be charged to the tenant
3 - All repairs and regular maintenance such as painting fall back on the landlord
4 - Security issues arise with vacant units
5 - The landlord has to take care of standing charges for all services: gas, electricity, telephone, internet
These all fall on the landlord, along with a good deal of administration time.
The tenant is tied into a lease for its duration, and is responsible for all the costs regardless of paying the rent if this is a Full Repairing and Insuring (FRI) lease.
There are often advantages to the landlord, given that commercial units can take some time to re-let, especially in difficult economic times, to try to help the tenant through the difficulties and it is better to have the tenant in the premises, sometimes even if they don't pay rent.
With a commercial tenant who won't cooperate and won't pay rent there are two possible courses of action before resorting to forfeiture, the legal procedure for evicting a commercial tenant:
1 - Take the tenant to the county court (small claims) for the debt of rent arrears, or
2 - Appoint bailiffs who will visit the premises and distress for rent (Distress for Rent Act 1737) on goods if the rent is not forthcoming.
Bailiffs must also follow recent legislation changes known as Commercial rent arrears recovery (CRAR).
Often one or other of these two courses of action is enough to shock the tenant into keeping up the rent payments in future.
A key point about dealing with rent arrears is that you need to let your tenant know that you take the matter extremely seriously.
You do this by taking action as soon as a payment is missed.
Don't ignore it and hope the problem will go away or you will allow arrears to build up to a large amount and suffer big losses.
See the Landlord Action guide here:
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