Bad debts are the scourge of many a business – and, for landlords of course this takes the shape of rent arrears.
Managing any rent arrears is important for the cashflow of any buy to let business and the bottom line of any profit you expect to make – an especially critical consideration at a time when changes in tax legislation and other government regulations are steadily squeezing your opportunities for running a viable business.
So, what are some of the steps you might take to reduce the incidence of bad debts and rid yourself of the curse of rent arrears? They fall under two broad headings – prevention and eviction:
- prevention, of course, is much better than having to find the cure for rent arrears;
- that means exercising particular care in your selection of tenants by insisting on taking up references and conducting proof of income checks by way of payslips or a certified bank statement on the prospective tenant’s account;
- references from friends of the tenant are obviously less reliable than from, say, their employer or, even better, from a previous landlord;
- when evaluating the references, of course, your main aim is to try and establish that they are indeed able to afford the rent and that their past record suggests they are not going to fall into arrears;
- this takes a fair degree of judgment on your part, which is likely to stand you in better stead the more experienced you are in doing it;
- especially if you are relatively new to the buy to let business, therefore, you might want to use a professional reference checking service – such as that offered by the National Landlords’ Association (NLA);
- if any doubts arise during the reference checking process, you might want to insist on the tenant providing a guarantor – preferably a home owner themselves and certainly one with a UK address;
- if you go down this route, make absolutely certain that the guarantor is fully aware of their responsibilities and obligations in that role in the event of your tenant defaulting on rental payments;
Rent guarantee insurance
- as part of your preventive or defence strategy, you might also want to consider the inclusion of rent guarantee insurance in your wider landlord insurance policy;
- just as the name suggests, the cover provides compensation – up to a maximum amount, for a given period – if your tenant defaults on the rent or does a moonlight flit;
- it comes packaged with legal protection insurance – to cover the costs of any legal action you may need to pursue to evict the tenant concerned. IMPORTANT: Please note that to enjoy the benefits of a rent guarantee policy, you must obtain one Credit Agency Reference (from a reputable Credit Reference Agency) and at least one satisfactory written character reference for each tenant. Failure to do so will render any claim invalid;
- at the first sign of any rental arrears, it is important that you talk to your tenant about them – and this relies on your having maintained a reasonable channel of communication and a good landlord tenant relationship from the beginning of the tenancy;
- the relevant legislation requires that you give the tenant every opportunity to clear the arrears – by attempting to agree a payment plan, perhaps;
- this might include coming to an agreement that any housing benefit to which the tenant is entitled is paid directly to you;
- it might also be the time for you to contact anyone who has stood as guarantor for the tenant and to put recovery of the outstanding rent into action by that means;
- if your efforts to recover any arrears from your tenant have failed, you are likely to want to take possession of your let property once again by serving one of two notices defined in law, before attempting to recover the outstanding arrears;
- a section 21 notice may be served for any reason and gives you automatic repossession of your property, but may only be used once the fixed term of an assured shorthold tenancy agreement has expired;
- a section 8 notice may be served for any reason given under the relevant legislation – including failure to pay the rent (with arrears that are longer than two months) and anti-social behaviour;
- if the tenant then refuses to leave the property, an order for eviction may need to be given by the courts and, if you served a section 8 notice, the court may also order the tenant to repay any outstanding rent at that time;
- failing that, you may need to consider legal action to recover the arrears, relying upon your legal protection insurance to cover the costs and your rent guarantee protection to compensate for arrears that have not been recovered through the courts.
Rent arrears are a curse for any landlord, but, having done your best to prevent their arising in the first place, rent guarantee and legal protection insurance may help you avoid the full extent of any loss.