Residential let legal expenses insurance helps cover the legal costs associated with disputes between landlords and tenants. Depending on the policy, it may cover repossession proceedings, rent arrears recovery, legal advice and representation. Optional rent protection can also provide financial support if a tenant stops paying rent. Limits apply.
Why may landlords need to consider legal expenses and rent guarantee insurance?
Higher mortgage rates, a stricter tax regime, stamp duty surcharges, and rising maintenance costs make it increasingly difficult for buy-to-let landlords to turn a profit on their investments. Therefore, the protection of rental income has become more important than ever.
In many cases, the business still runs smoothly and generates sufficient rental income to cover costs. Sometimes, legal disputes and rental arrears cause significant financial pressures on already struggling landlords. That’s when residential let legal expenses insurance may come into its own.
What is residential let legal expenses insurance?
The principal safeguard enjoyed by owners of buy-to-let property is landlord insurance. While this may protect the structure and fabric of the building and offer indemnity against claims of landlord liability (up to limits), it typically provides little in the way of cover for legal expenses in disputes with tenants for the recovery of rent that is due.
Optional residential let legal expenses insurance is designed to provide that assurance through compensation for the legal expenses involved in a wide range of otherwise costly legal disputes.
What does it typically cover?
As with many types of general insurance, the nature and extent of landlord legal cover may vary. However, the broad spread of legal disputes and issues typically covered may include:
- repossession proceedings – including the costs involved in evicting tenants, by serving notices and obtaining possession through court action;
- rent arrears disputes;
- legal disputes related to breach of tenancy agreement;
- disputes related to property damage caused by tenants;
- defence of legal action against the landlord;
- legal representation (if covered), up to prescribed limits; and
- access to a legal advice helpline.
Cover varies between insurers and policies. The features outlined above are intended as a general guide only and may not be included in every policy.
What is optional rent protection?
A typical addition to residential let legal expenses insurance is optional rent protection. It is also called rent guarantee insurance and is designed to provide the landlord with financial support if a tenant stops paying the rent – and in this regard, is a natural companion to landlord legal cover.
Although closely related, the two forms of insurance cover different risks. We have already seen how landlord legal cover works.
Rent protection or rent guarantee insurance typically pays the landlord a monthly income if the tenant falls into rent arrears. The cover may be activated after a given waiting period. Payments are then subject to policy limits and conditions and usually continue either until the tenant leaves the rental property or a maximum benefit period is reached.
Why tenant referencing matters
The relationship between the landlord and their tenants forms the basis of any landlord legal expenses insurance and rental income protection. Cover largely depends on the reliability of that relationship. For both the landlord and the insurer, therefore, the selection of tenants and the references that are taken up, become critical. Although no referencing process can eliminate risk entirely, thorough tenant referencing may help reduce the likelihood of future disputes or rent arrears.
For that reason, thoroughly rigorous referencing of prospective tenants is typically a requirement of any successful proposal for legal expenses and rent guarantee insurance. When taking up references, therefore, landlords may frequently ask prospective tenants for:
- credit checks;
- verification of their employment;
- rental affordability checks; and
- references from previous landlords.
Insurers typically demand that tenants’ referencing is completed before the tenancy starts, a clear and explicit tenancy agreement is in place, the landlord takes prompt action as soon as the rent falls into arrears, and the insurer’s claims procedures are followed.
When choosing rent protection insurance, and depending on the insurer and policy selected, you may be required to obtain:
- a credit agency reference sourced from a reputable and recognised credit reference agency;
- at least one satisfactory and relevant written character reference – typically, character references from close family members would not be considered appropriate.
Legal expenses insurance vs landlord insurance
This may help explain the extent to which legal expenses insurance and optional rental income protection provide additional safeguards to standard landlord insurance alone.
Standard landlord insurance provides some of the fundamental safeguards on which landlords typically rely. That is to say, protection against the risks of loss or damage to the structure and fabric of the let property, property owner’s liability, and, especially in the case of furnished accommodation, optional cover for contents – namely, building insurance, landlord’s liability indemnity insurance, and contents insurance, respectively.
Residential let legal expenses insurance offers still further financial safeguards by covering the cost of legal expenses in the event of disputes with tenants. Policies may vary from one insurer to another, but this typically covers the cost of serving legal notices to tenants, the court proceedings necessary for repossession of the property, the pursuit of arrears of rent through the courts, and legal advice and representation.
Unless optional rent protection or rent guarantee insurance is also in place, legal expenses cover alone may not usually replace or provide compensation for the lost rent itself.
Cost versus risk
If you are weighing up the merits of residential let legal expenses insurance and optional rent protection, the exercise is similar to decisions about many other types of insurance – namely, weighing the risks against the costs.
However carefully you select your tenants, seek references, and cultivate a positive relationship, there remains a risk of disputes that ultimately lead to legal action. Disputes might arise over unpaid rent, damage caused by your tenants, behaviour that you or neighbours consider unacceptable, or a host of other reasons. The appropriate insurance may provide the legal support you need.
When coupled with optional rent protection, you may have access to financial support that helps reduce the impact of lost rental income even when a tenant falls into arrears and does not pay the rent that is due. This may help reduce some of the financial uncertainty created by tenant rent arrears.
The cost of reassurance such as this, of course, comes down to the price of the premiums you pay. That cost must also be considered in the context of the policy limits (the amount of legal assistance provided, and the rental income guaranteed), plus the exclusions and conditions of the particular policy or policies you choose.
FAQs
You may be unfamiliar with some of the benefits of residential let legal expenses insurance and the means for protecting rental income. Therefore, some of these frequently asked questions may help:
Does landlord insurance cover unpaid rent?
- standard landlord insurance typically does not cover unpaid rent;
- residential let legal expenses insurance may help to cover the costs incurred in pursuing disputes with your tenants and further, optional rent protection to provide financial compensation for unpaid rent (limits apply);
What is optional rent protection?
- typically coupled with residential let legal expenses insurance, optional rent protection may provide a continued income to help replace rental income lost through unpaid rent, subject to policy terms, conditions and limits;
- the amount of compensation and the duration of payment (which typically ends when the tenant has left or the property has been repossessed) may vary from one policy to another;
Do tenants need to be referenced?
- a condition typically applied to any legal expenses or rent guarantee insurance is that tenants must be rigorously referenced before any tenancy is granted (see the section: Why tenant referencing matters);
- the condition is understandable given the importance of the relationship between landlord and tenant in minimising the risks of future disputes or rent arrears;
When does rent protection pay out?
- if the tenant fails to pay the rent when it falls due, it is the landlord’s responsibility to immediately inform the insurer;
- however, the tenant is first given the opportunity to repay any arrears and, for that reason, rent protection typically only pays out after the completion of an initial waiting period;
- after that interval, rent protection usually pays out until the tenant has vacated the property or the property has been repossessed, with total payments up to pre-agreed limits.
Key takeaways
- standard landlord insurance does not usually cover unpaid rent;
- legal expenses insurance may help cover the costs of tenant disputes and repossession proceedings;
- optional rent protection may provide financial support if a tenant falls into rent arrears;
- tenant referencing is often a requirement of cover;
- policy limits, waiting periods, exclusions and conditions apply.
Concluding thoughts
In the current economic climate and against the background of increasing regulation of the private rented sector, many landlords may struggle to maintain a viable income stream. The challenge is made still worse if costly legal disputes arise with your tenants or they fall into rent arrears.
Residential let legal expenses insurance and optional rent protection or rent guarantee insurance may help you manage the financial and legal risks associated with tenant disputes and rent arrears.
Disclaimer: This article is provided for general information purposes only and does not constitute financial, legal or insurance advice. Cover, eligibility criteria, terms, conditions, exclusions and limits vary between insurers and policies. Landlords should review policy documentation carefully and seek advice from a specialist insurance broker or professional adviser before arranging cover.
