How to Deal with Tenant Rent Arrears in 2017
Upad research recently highlighted that rent arrears are the biggest issue landlords face. Rent arrears cases increased in 2016, and are set to do the same in 2017.
James Davis, Upad Founder and portfolio landlord, recently gave his view on why we were seeing this particular turn of events, commenting, “Rent arrears are becoming the fastest-growing problem for landlords across the UK and this will no doubt be the biggest issue in 2017.
“The rise in arrears throughout this year, isn’t just a coincidence, but tallies with when the new 3% stamp duty surcharge came into force for landlords in April. Any cost that a landlord faces eventually gets passed onto the tenant and this has inevitability caused rents to rise.
“Not only have investors had to contend with the new stamp duty surcharge, but from April 2017, they are also facing plans to limit tax relief on mortgage interest payments. These increased landlord costs will only make matters worse for tenants already struggling with affordability.
“The Chancellor needs to think carefully about the damage that is being done to the lettings market, particularly if it is to become more relied upon than the sales market going forward in the wake of Brexit.”
While each landlord will choose their own path in light of the recent and upcoming changes in the rental market, which may or may not lead to their tenants falling into arrears in 2017, it pays to be prepared.
What If My Tenant Doesn’t Pay the Rent?
As a landlord, this is likely your number one fear. Depending on your own situation, you could be relying on your tenants paying the rent to cover your own mortgage costs, your bills, to run your business as a portfolio landlord, or to put into your pension pot.
A tenant not paying the rent is serious, particularly if rent is your primary or exclusive income source.
Why Don’t Tenants Pay the Rent?
It is important to recognise that the vast majority of tenants who fall into arrears don’t do so on purpose. There will be times when a tenant isn’t getting along with a landlord and so decides to withhold the rent, but most of the time there’s a genuine underlying reason why you’re not getting your rent. This doesn’t help you – you can’t save or spend someone’s explanation after all – but it’s useful to understand why a tenant is in arrears as it can inform your next steps.
Tenants may fall into arrears if:
- They lose their job
- They have an unexpected drop in their hours or their wages
- Their overall cost of living means buying essentials leaves them short when it comes to paying the rent
- There is a change in their life circumstances which suddenly impacts their household income, such as a relationship breaking up or a joint tenant moving out
Of these circumstances, the only one you as a landlord can perhaps do any preparation for is the final one, though if one half of a couple moves out two months before the end date on your tenancy agreement, you still need to collect the full rent for those two months.
How to Take Action When Tenants Fall into Arrears
For many landlords, a tenant not paying the rent is an unusual occurrence.
So, when the rent doesn’t arrive on time, what do they do? There is no suggestion landlords should be getting on the phone or writing letters one day after the rent was due, but at the same time this situation shouldn’t be allowed to drift.
It is far better to address the situation sooner rather than later, otherwise before you know it the tenant will be eight weeks in arrears and you’ll be contacting the council to have housing benefit paid directly to you, or be looking at how you can start eviction proceedings.
Making Your Position as a Landlord Clear
While your assured shorthold tenancy agreement states the rent amount and the day it is due, when the rent is late it is time to get in touch with your tenant. Depending on the type of relationship you have with your tenant you might use informal contact at first, such as a text message or a short email. Communicating in this manner is not a problem, but you should be prepared to escalate your communication quickly should the rent still not be forthcoming.
The bottom line is that if people are having financial problems and are unable to meet all their obligations, the creditors shouting the loudest and contacting them most frequently are the ones that are likely to get paid.
Use Straight Talking, but Offer Solutions
As a landlord you need to be clear about the consequences of your tenant not paying their rent:
- They could lose their home
- They could face legal action
- They could affect their ability to rent another property in the future
Yet at the same time, you can offer solutions based on their circumstances:
- Agree for them to repay their rent arrears over the next few months by way of increased rent payments until they have caught up
- Accept the remaining one month in arrears until a specific time when you will expect to be paid or to be able to discuss a repayment plan
- Ask them to pay what they can this month, then hold the remaining balance in arrears subject to a further discussion
What works for each landlord will be different, so choose the approach that fits your business as well as your relationship with your tenant. If you have a tenant in a situation where they “can’t pay” this will usually be easier to deal with if you have a tenant who simply “won’t pay.” In the latter situation you may wish to, and be entirely justified in doing so, take a tougher approach.
Should I Factor Tenant Circumstances into Whether I Put the Rent Up?
Many landlords admit to struggling to balance the need to manage their property or their portfolio as a business versus the human element of knowing their tenants are helped if you keep the rent at its current level.
The bottom line is that you manage your property as a business, so you need to look after yourself first and foremost. At the same time, it is prudent to consider your tenants’ circumstances before you decide to put the rent up, without this being the primary or only influence on your final decision.
In some situations, you may well face a choice between putting up the rent knowing the likely outcome in a few months’ time is your tenants falling into arrears, or serving a section 21 notice, hope your tenants leave without the need for eviction proceedings, then advertising the property at the higher rent while accepting you may have a void period while you find a tenant. This isn’t an ideal choice for landlords, but depending on your circumstances it could become reality in 2017.
As with the option of initiating informal contact over rent arrears, it may be worth having an informal discussion with tenants if a rent increase is likely to be on the cards in 2017 and you think it may place the tenants in difficulty. If you are going to be putting the rent up in 2017, think about the different ways you can approach this with your tenants.
Dealing with Tenants’ Rent Arrears in 2017
If you find yourself with tenants falling into rent arrears in 2017, make sure you take action to deal with the situation rather than hoping it will resolve itself. While some tenants will catch up in time themselves, it is far better to open lines of communication with your tenants at the earliest opportunity and look to resolve the situation in a positive and proactive manner.
Though in some cases, tenants falling into rent arrears will lead to you needing to instigate the eviction process, by taking action and speaking with your tenants as soon as you can, you will usually be able to work out a solution that both helps your tenants and ensures you get all your due rent.