Buying to let is a straightforward business proposition – your let property is a single business asset from which you intend to generate a steady stream of rental income.
In that simplicity lies one of the major risks your business is likely to encounter –reliability in receiving the rent you are due. This is where rent guarantee insurance may give you some peace of mind.
What is rent guarantee insurance and what does it cover?
Rent guarantee insurance is one of those insurance products that does exactly what it says on the tin. If your tenant accumulates arrears of rent that are not going to be repaid – or simply does a midnight flit and disappears – the insurance typically compensates you for your loss of rental income.
Naturally, the level of cover typically depends on the premiums you pay. In most circumstances, your insurance contract sets a maximum amount of rent payable, over a specified period of time, or until you have gained vacant possession of your let property.
Why do I need rent guarantee insurance?
On the 5th of January 2021, Citizens Advice reported that one in every four private sector tenants is currently in rent arrears – that is a total of some half a million tenants. The average amount of rent owed was £700 but the grand total of all arrears stood at an estimated £360 million.
In short, rental arrears remain a problem and are a bane in the life of any landlord. The coronavirus pandemic has only made matters worse, of course, but landlords and their representative organisations lent their support to a temporary halt to immediate court proceedings for the eviction of tenants who were less than six months in arrears.
Although reasonable landlords continue to exercise their judgment before leaping to the legal remedy of evicting tenants on the grounds of rent arrears or from pursuing absconding tenants through the courts, the potential recourse to the law might raise the question of whether rent guarantee insurance is at all necessary.
Securing any such court order is neither quick nor easy – not to mention the cost of your legal expenses.
For the heard-pressed landlord, therefore, rent guarantee insurance offers far more immediate financial relief – and the recovery of the rents owed can be pursued through the courts in the fulness of time. The latter is still likely to be a time-consuming and expensive business, with rapidly escalating legal bills.
For that reason, it is typically a condition of any rent guarantee insurance policy that the insured also has landlord legal expenses protection insurance – with the two frequently combined into a single policy – to cover the legal costs of evicting a tenant and pursuing the recovery of rent arrears through the courts
Exclusions – what rent guarantee insurance generally does not cover
As with any type of insurance, the exclusions from perils covered are as important to identify and understand as the risks covered by your policy.
Naturally, those exclusions may differ from one policy to another, but may typically apply in those situations where:
- your tenants are withholding payment of the rent due because they are in some dispute with you as their landlord;
- the tenants have accumulated arrears of rent because they have suffered an injury or been involved in an accident, they are sick or pregnant, or they are unemployed or been made redundant – and cannot, therefore, afford to pay the rent;
- if the tenants have absconded and remain untraceable, owing arrears of rent; or
- where you have been unable to recover arrears of rent from any deposit currently in the safekeeping of a third party – since registered deposit holders might sometimes refuse to allow any such financial recovery from the monies they are holding.
Rental arrears or the non-payment of rent by tenants are risks faced by the landlord or any buy to let business.
Financial indemnity against those risks is provided by rent guarantee insurance, which compensates you for the amount of lost rent or rental arrears – up to limits set out in your insurance policy.
Rent guarantee insurance is invariably tied in with legal expenses protection insurance, granting the policyholder the wherewithal to pursue the recovery of lost rental income that is due through the courts.