Dealing with rental arrears is difficult at the best of times – COVID-19 has made that situation even harder. So what can you do to prevent payments from falling behind?
It doesn’t take long for tenants failing to pay their rent to become a big problem. Many landlords rely on rental income to pay the mortgage on their investment property, so tenants who can’t (or won’t) pay their rent can be a financial nightmare.
While there are some tenants who do the wrong thing on purpose – breaking leases, absconding, refusing to pay rent, refusing to vacate or squatting – for other tenants the inability to pay their rent is often beyond their control. Financial hardship due to job loss, relationship breakdown, unforeseen expense, death or illness can result in even the best tenants finding themselves financially compromised.
Around two-thirds of all landlord insurance claims are for loss of rent – and the main culprit is because of rent arrears. To help our clients, here are six tips to help minimise rent arrears:
- Get the right tenant in in the first place. Tenant selection is critical, so thoroughly screen tenants using every resource at your disposal such as checking tenancy databases, calling up referees, speaking to previous landlords and agents, and verifying employment and income.
- Once you’ve secured a great tenant, don’t get complacent. Be sure to conduct regular property inspections and be mindful of any signs the tenants might be about to do a runner (e.g. no furniture, bags packed, services disconnected).
- Avoid the ‘you never said’ argument by being crystal clear about the rent payment procedure, adopting a zero tolerance policy for rent arrears and addressing late payments immediately. Your documented plan for tackling arrears should include timeframes for when you are going to take action (e.g. phone calls, letters, formal notices, tribunal/legal proceedings) and be clear about the legal requirements.
- Build good rapport and a positive working relationship with your tenants. Disgruntled tenants are more likely to break their rental agreements, abscond or default on rent. On the other hand, happy tenants are more likely to pay their rent on time, stay in the property longer and look after it as if it were their own.
- Open and transparent communication with tenants can often mean that they notify you early if they are experiencing payment difficulties. Knowing there is a problem gives you the opportunity to implement a plan to tackle the arrears before the situation reaches the point of no return.
- Be prepared. You need to understand the legislated procedures and also why and how you can seek restitution or eviction. If you end up needing to evict or go to court over the matter, having all your paperwork in order will help your case and any subsequent insurance claims too.
COVID-19 and rent arrears
The unprecedented economic upheaval of COVID-19 has resulted in financial pain for tenants and landlords alike. Hundreds of thousands of people have found themselves unemployed or facing greatly reduced working hours… and therefore incomes.
Federal, state and territory governments have moved to ease some of the financial burdens with relief packages including the increased JobSeeker payments, JobKeeper wage subsidies and various schemes for households and business. The states and territories have also implemented temporary emergency amendments to residential tenancy legislation and established programs to support tenants and landlords.
Moratorium on evictions
A key measure introduced across the nation (though the details vary from state to state) is a restriction on evictions for rent arrears directly due to the tenant suffering COVID-19 related financial hardship.
Prior to the emergency measures, if tenants fell into arrears and a solution to the situation could not be negotiated, the landlord/agent would move to evict the tenant for non-payment (after which the landlord could claim for loss of rent on their landlord insurance). Changes to legislation have meant this is no longer possible. Unless there are exceptional circumstances, such as the tenant causing property damage or using the premises for illegal purposes, in general the tenant cannot be evicted for COVID-19 related rent arrears for a period which ranges from three to six months.
For many landlords, this leaves them in a precarious financial situation, with no rental income and unable to evict defaulting tenants to get paying ones in. In most instances, claiming for rental losses on landlord insurance will be limited. For example, RentCover Ultra and Platinum policies offer up to six weeks for rent default (to a max. of $1,500 per week) and up to six weeks for tenant hardship (up to $1,500 per week).
So what can you do to minimise rental arrears during the non-eviction period?
Landlord/agent and tenants need to discuss the specific financial position of tenants and owners of the rental property.
The “no eviction” provision is only for tenants who are suffering financial hardship due to COVID-19 (definition of hardship varies between the jurisdictions but generally means at least 25 per cent reduction in household income). If the tenants have not been impacted by COVID-19, then it is business as usual for the tenants and landlord with the tenant expected to pay their full rent as normal.
If the tenant or landlord has been severely impacted by COVID-19, then some jurisdictions have provisions for the lease to be broken with minimal or no penalty if either party needs to end the lease on undue hardship grounds (for example, the tenant knows that they will not be in a position to repay the arrears or a reduced rent, or the landlord must sell the property or move in themselves).
If the tenants are staying in the rental, but are having difficulty paying their rent, then negotiating mutually agreeable arrangements is required (mandatory conciliation is stipulated in many jurisdictions). If a solution is unable to be agreed upon, the appropriate authority (e.g. Fair Trading, Consumer Affairs) can step in.
Rent reductions or rent freezes
In most instances, if a rent reduction is negotiated, then the tenant does not have to repay the difference between the previous rent and the newly negotiated rent once the agreed timeframe ends.
Impact on insurance: It should be noted that landlord insurance will not cover the difference between the previous and new rent amount. So, for example, if the tenant previously paid $500 per week in rent, but has negotiated to pay $350 per week, the landlord cannot claim the $150 difference on their insurance. This is because the rent has been negotiated and agreed between the parties and is effectively the new rent amount in the lease agreement. However, if the tenant does not pay the new negotiated rent and falls into arrears, the landlord may be able to make a loss of rent claim, but the claim would usually be based on the new negotiated rent, not the previous weekly sum. At EBM RentCover we are considering each claim on a case-by-case basis.
A rent freeze can also be negotiated whereby the tenant does not pay their rent for an agreed period of time. In general, the tenant will be liable for the full rent amount to be repaid once the agreed period ends, though landlords usually cannot charge interest on these arrears.
Impact on insurance: As such an arrangement has been negotiated and agreed by the parties, the landlord is not able to claim loss of rent for this period as the amount is due to be paid by the tenant at the end of the agreed period, so the landlord has not suffered a loss but agreed to defer payment (if the landlord agreed to a rent waiver for the period, i.e. no rent is payable or owed, again this has been negotiated and agreed and does not constitute a rental loss). If the tenant is not able to repay the rent owed at the end of the agreed period, the landlord may be able to claim through their insurance for rent default, subject to the terms, conditions and limitations of the policy.
Any changes to the tenancy agreement including rent adjustments, such as reductions, freezes or waivers, should be put in writing and detail how long the arrangement will be in place and what happens if circumstances change. Landlords should also notify the insurance provider of renegotiated rent arrangements. Changes to rent arrangements do not affect building, contents or liability provisions in the policy.
It should be noted that if rent arrears are not due to COVID-19 financial hardship, then tenants can still be evicted in most jurisdictions. Tenants can also still be evicted on other grounds, except for rent arrears due to COVID-19. In these situations landlords/agents need to act quickly to minimise losses, follow the procedures to legally evict and submit an insurance claim to recoup losses.
A final word
Defaulting on rent is a situation both tenants and landlords want to avoid. COVID-19 has greatly increased the number of tenants facing the possibility of rent arrears and landlords are having to look at ways to minimise potential losses with the usual avenue of eviction temporarily closed to them. Government moratoriums on evictions and other tenancy matters has meant everyone involved in the investment property market – landlords, agents, tenants and insurers – must work together to find viable solutions for those impacted by the pandemic. At EBM RentCover we are assisting our clients wherever possible. Contact us for guidance.
*While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you need us we are there, contact 1800 661 662 if you have any questions.
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