Avoiding rent arrears
A survey of landlords and tenants commissioned by the NLA towards the end of last year found that 40% of landlords earn little more than enough to break even each month, meaning just one missed payment can leave them financially vulnerable.
Late payment of rental income is one of the main risks faced by any landlord. Rent arrears can leave landlords financially vulnerable, making it difficult to pay the mortgage on the property that a tenant is living in. Where landlords have a portfolio of properties, rent arrears in one property can quickly erode margins and impact on the profitability and sometimes viability of a portfolio.
There are a number of measures landlords can put in place to minimise the risk of arrears. Best practice is for landlords to vet their tenants carefully before the start of the tenancy, ensuring all the financial checks and references are satisfactory. Many landlords also meet prospective tenants in case gut instinct tells them a tenancy is likely to have problems.
Even with all these checks completed, landlords, like others in business, have to be prepared for any situation to change, whether it is an employed person losing their job or a family break up. It is important for landlords to be ready to adjust to changed circumstances in the most pragmatic way possible.
As with many other aspects of being a landlord, the key to avoiding arrears is careful planning and developing a good working relationship with your tenants, so that they are able to be open about any financial difficulties they are experiencing or expecting.
“If the landlord knows what’s happening, they can work with the situation,” NLA Chairman Carolyn Uphill advises. “Being a successful landlord requires effective communication, which in turn can help to reduce missed payments and voids that can have severe financial implications.”
Keep on top of rent payments
However a landlord chooses to manage rent payments, it is crucial to monitor receipt closely. A tenancy agreement should stipulate when and how regularly rent should be paid. Ideally, tenants will set up monthly bank transfers. If weekly rent is provided for in the agreement, make sure you provide a rent book as failure to provide one is a criminal offence. This applies even if the rent is paid electronically to the landlord's bank account.
Not every landlord has the time or ability to set up a failsafe checking system. However, there are specific tools to support landlords in this area. NLA Rent Manager is an online landlord software package that enables landlords to improve their management of rents, including setting up a rent schedule, entering payments, being alerted to and tracking rent arrears and recording all tenant communications. There is no need to install software, and the solution can be accessed from any location. It’s also free to all Full NLA Members.
Taking a pragmatic approach
If the rent has not or does not appear to have been paid, there is no reason to wait before making a polite inquiry. There may have been a legitimate banking or administrative issue, which can be easily resolved or the tenant may have made a genuine mistake. Landlords are advised to get in touch with the tenant by phone, email, or in person to find out why the rent has not been paid. If you have more than one tenant, check the tenancy agreement to see if they are jointly and severally liable for the rent.
If it appears that the problem is serious, a landlord should arrange to meet or speak with the tenant as soon as practical to discuss their circumstances. It is important to remain calm and professional at all times and keep clear records of all communications.
The reasons for arrears are many and varied and can include issues such as changes in relationships or employment circumstances. Landlords need to recognise the warning signs, then intervene promptly but also sensitively.
Depending on the reason for the late or non-payment, the NLA advises that it may be worth considering negotiating a repayment plan, which brings the arrears back under control. If a landlord has a good relationship with the tenant and both parties are keen for the tenancy to continue, it may be possible to agree a temporary adjustment to the rent and or a way to spread out repayment of any accrued debt. Make sure any new agreement is recorded in writing and signed by you and the tenant(s).
If the problem looks likely to become long-term, a landlord may decide to discuss with the tenant options for how the tenancy can continue. For example, if the tenant cannot afford the rent payments, it may be worth checking if they plan to apply for some form of financial support from the state. If this is their first experience with making an application, they can assess their eligibility via an online tool at www.gov.uk/benefits-adviser. The NLA also recommends other advice services such as the Citizens Advice Bureau (www.citizensadvice.org.uk), The Money Advice Service (www.moneyadviceservice.org.uk) and debt advice charity Step Change (wwww.stepchange.entitledto.co.uk)
Alternatively, your tenant may wish to end the tenancy early. This can be a good option if all parties agree, as it ends liability for rent payments and allows the landlord to move on and find new tenants. It is common practice in circumstances such as these to agree to end the tenancy as soon as replacement tenants have been found to minimise the financial impact to your business.