In any business managing cashflow and client invoices is the cornerstone of good management, being a landlord is no different.
In this article we will explore the basics of keeping on top of Rent Arrears not before first asking the advice of some lettings experts.
Rent Arrears Expert Roundup
Keeping on top of rent arrears
Some wise words from the industry's leading Letting Agents, Landlords and Property Advisers.
Lets see if we can go into some more detail.
The following is based on procedure and guidance from Adam Hosker.
Wrote 2 November 2015.
Enquiry Form & Tenant Referencing
Keeping on top of Rent Arrears starts with the initial steps - being the Enquiry Form and Tenant Referencing Process.
- Enquiry Form
- Credit History Reference
- Tenant History Report
- Previous Landlord Reference
- Verifying Employment
- Verifying Benefit Entitlement
- Guarantor Reference
- Proof of Identity
The enquiry form is a vital aspect in providing the information you need to conduct a Tenant Reference.
This is where you get their address history, previous landlord details, employment details and other essential information.
The personal questions "have you ever been in rent arrears?" or "have you ever had a CCJ?" give you a highlight of risk and potential decline but if answered honestly can open the conversation to increasing bond or obtaining a guarantor to reduce that risk.
Surprisingly, a comprehensive enquiry form can also help you gain possession off the property if the tenant has later shown to mislead you - perhaps about their credit history, employment or even pets. A tenancy agreement saying "No Pets" is one thing but an Enquiry Form with a tick and signature saying they dont have pets - can show the court you were misled with a clear intent for a Tenant breaking tenancy agreement.
As such Ground 17 of Section 8 of the Housing Act - allows you to ask the court for possession if a tenant mislead you on their application.
Credit History Reference
Often described as the most important step to referencing a tenant, is checking their details with Credit Reference Agencies. With come caveats a Landlords should be aware off.
There are many companies that offer this service. They mostly get there data from one of three services Equifax, Experian and Call Credit.
You will want to use the credit referencing agency with the most data - that is often proposed as Experian, followed by Equifax with Call Credit the lower cost service with less data. Using a service by Call Credit may not be comprehensive enough to check a tenant, with many credit institutions not reporting data to them.
A good credit reference agency will verify the Address History of a tenant ensuring the data you hold marries with the address history provided to you on your enquiry form - this often prevents the tenant putting down a fake address off another landlord to hide their bad rental history.
The address history is made up of Electoral Roll data and the addresses provided to credit companies or utility providers.
Credit referencing agencies will check data on County Court Judgements (CCJs) and Bankruptcy’s which can show a landlord how well a perspective tenant manages their finances.
If we see here past defaults or bankruptcies, you may consider rejecting the applicant or ensuring you obtain a large deposit and home owning guarantor. The greater concern for landlords is recent defaults, bankruptcies or missed payments - which is a high indication the tenant is currently having financial difficulties of which you don't want to be involved in.
The credit reference should also conduct fraud checks against the CIFAS database the UK’s independent fraud prevention service. It aims to detect and prevent fraud, and protect people whose names, addresses or other details are used fraudulently. Which certainly helps a landlord to ensure that Mr Smith is in fact Mr Smith.
This can also help verify identity as you may get applicants using false names - often an occurrence with dodgy tenants using rented properties as Cannabis Farms. A credit reference helps you cross reference the details provided to you such as address history, date of birth, full name (including middle names).
Tenant History Report
This is a unique service offered by Landlord Referencing, this is designed to catch the worst offenders often called the "professional tenants".
Put rather simply - It is a database of Bad Tenants of which Landlords have added, they do so after they have become a victim of none payment of rent or damage, etc..
A close parallel is this service being a computer version of asking previous landlords how good the tenant was.
Its usefulness is added too due to credit reference agencies not recording missed rents on credit reports and often landlords failing to obtain a County Court Judgement (CCJ) against a none paying tenant.
Not all landlords report there bad tenants on this service, so it is not comprehensive but can prevent taking on one of the "worst offenders" of which an Landlord has gone out of his way add there details.
Previous Landlord Reference
Why not ask the previous landlord(s) how the tenant was in the property, questions we should be asking being:
- Did Mr X pay his rent on time?
- Did Mr X have any rental arrears at the end of his tenancy?
- Did Mr X cause any damage to the property?
- No complaints from the neighbours regarding Mr X?
- So you would take him on again if he asked?
Which is great! if the landlord is truthful or is the landlord at all.
The biggest risk in this step in referencing a tenant, is that if the landlord provides a favorable reference for a bad tenant to move them on to you, not all will, so definitely worth a call.
A false reference is not an issue though if we ask the previous-previous landlord, whom should give the Tenant a proper reference as they have nothing to gain or lose.
Tenants Lie! it is not unusual for tenants and friends to come up with a plan to pretend to be the other persons current landlord. It’s difficult to identify when this happens but if you suspect or want to be extra cautious - why not pay £3 for a land registry search on the previous-tenant address.
This can give you some usual information such as the landlords residential home or their current mortgage lender. A casual conversation to ask the landlord, that your thinking of getting a mortgage with X but you here they are slow; have you ever used them? or verify the property owners address with that given on the enquiry form.
It is often said by landlords any tenant is a letter away from redundancy but until then we should be ensuring there employment is valid and there income is enough to cover costs.
You should always ask a perspective tenant for the Human Resources telephone number at their employment so you can call yourself and verify that the perspective tenant is working. It is not unheard of for unemployed tenants trying to pass themselves off as in employment to secure a home for them and their family.
You should also ask the employer about the employment contract, one of the important considerations is if it is a permanent contact, temporary contact or 0 hours contract. We should remember a temporary contact tends to have an end date, which increases the perspective risk - giving extra consideration to deposit and guarantors. 0 hours contact perspective tenants can wake up one Monday to be informed they have no income that week - this can be a high risk proposal for a landlord.
You can also verify that it is real employment, whilst more rare it is not impossible to imagine friends coming together to pretend to be the employer. You can use Companies House to verify that the business exists and obtain some information, such as when the company was incorporated, its registered office or its directors – all questions that a HR representative should know if asked or what could trip up a fake employer.
With Self-Employed prospective tenants it can be more difficult, often you can check companies house to see if the company exists and there shareholding in the company – it can also give you an idea of the viability of the company with its accounts. This can become more difficult with sole traders – as there is no central database to verify.
The best way to verify income for self-employed is to ask them for a copy of their SA302 Tax Calculation, a perspective tenant can get this online. It is an overview of the current tax year and a tax calculation (known as SA302) for the last 3 years. This is a document from HM Revenue and Customs declaring the income for their liability for taxation.
There are ways to verify income for employed persons such as ask them for a copy of their P60 from their employer, or certificate of earnings from HMRC or the old fashion way of asking for the last three months bank statements.
Verifying Benefit Entitlement
The vast majority of landlords do not accept tenants without employment, those tenants claiming Housing Benefit (Universal Credit or Local Housing Allowance) often turned away.
If you are taking on a Claimant Tenant, you can ask them to obtain written confirmation from the benefits office that they are entitled to Local Housing Allowance two further important factors – that it is not reduced by the Housing Benefit Cap or any Over-payment Deductions.
You should also be aware how Local Housing Allowance works - it is based on entitlement, how many bedrooms does the household need. It is not as easy as counting occupants, as depending on sex and age children are often expected to share bedrooms. If a tenant is under 35 year old - they are only entitled to a "bedsit rate" not a "one bedroom rate".
Check the proposed occupants against The LHA Bedroom Calculator.
The payment for Local Housing Allowance also changes on Local Boundaries, you can type in your postcode on VOA Website to find out how much tenants can be paid.
Current regulations means that benefits are paid directly to the tenant, there is an exception of when the tenant is more than eight weeks in arrears that you can write to benefits to be paid direct.
A Guarantor is always welcome, if the tenant can put one forward.
Those higher risk tenants, perhaps with unstable employment or lack of tenant history - it is more wise to request a Working and Home Owning Guarantor.
The Guarantor having a home in which you can secure any defaults by the perspective tenant can give you extra confidence compared to one with no assets to secure debts against.
As above remember to verify how tall the Guarantor can stand up, an unemployed guarantor gives you no confidence for an attachment of earnings awarded by the court. A Guarantor that does not own a home gives you no confidence of securing debt on their asset. That being said - if you’re going to let to the tenant anyway a guarantor is better than none at all.
A guarantor with a Credit Reference showing CCJ, Default or Bankruptcy should give a landlord little confidence of recourse.
As we later explain; a Guarantor can give you leverage with the tenant - as not only is the Tenant giving the potential of them a default it can give the Guarantor (on none payment) a mark on their credit history as CCJ. This gives the guarantor warrant to encourage the tenant to pay (if unwilling) or financially support the tenant if they are having cash-flow issues.
Proof of Identity
Often overlooked by the novice landlord in referencing a tenant, is proof of identity.
This can be obtained by asking a tenant to see there Photo Driving License or Passport – it is considered best practice to obtain a copy of this Identity for your files be that a photocopy or a photo via your phone. You should also use this to cross reference the spelling of the applicants name, address and date of birth with that was provided on the enquiry form.
You can also obtain proof of residence, such as a utility bill from the tenant to verify there last residence.
It is rare, unlikely but a bad tenant at a later date could appeal to the court that the tenancy was obtained by fraud, someone pretending to be them. Having such documents in your file can help mitigate this risk - as unlikely as it may be.
The photo ID can also help at a later date with debt collection, ensuring the debt collectors have the identity of the tenant of which you wish to reclaim loss.
On the outset of a tenancy, a landlord should establish what back-stop or insurance they have in the event of a default.
- A Guarantor for the Tenant
- A Security Deposit
- Rent in Advance
- Rent Guarantee Insurance
- Housing Benefit Claimants (Local Housing Allowance)
A Guarantor for the Tenant
As noted in the tenant reference section above, having a Guarantor can be insurance of ensuring tenant pays on time.
In the event of a major rent default, a home-owning guarantor can give the Landlord the security of "eventual" payment by securing the debt on there home. When the guarantor comes to refinance or sale of the property – there conveyancer must ensure your charge on the property is repaid.
You may also be able to get a court order for an attachment of earnings, ensuring that the employer reduces the tenant’s debt out of there payslip. This is useful in the event the Tenant is none working or has lost their employment.
Prior to a major default – the risk of a CCJ, debt secured on their home or attachment of earnings. Can often encourage a guarantor to make sure the Tenant prioritizes rent payments over other outgoings or you may find the Guarantor paying out of their own pocket to avoid such action.
Unfortunately; court actions against a guarantor is discretionary being a decision the judge. Ensuring the landlord co-signs the tenancy agreement and a Guarantor agreement - with a copy of there ID. Can help go along way in proving intent of a Guarantor!
A Security Deposit
You can put forward a claim to the Deposit Schemes for part or all of the secured deposit to repay lost rent.
The point to remember here; is that there is only one deposit. If rent areas is above what is secured in the scheme or if there is also damage to the property – you can still be out of pocket.
It is therefore important to ensure you secure a significant deposit amount, a higher deposit secured gives you higher security. Unfortunately in a competitive market other landlords may be offering rented properties at a lower deposit amount or you may price a tenant out.
It is therefore often a judgement call - the trend seems to be a deposit covering just one months of rent. If the tenant has credit history issues or no previous lettings experience, it could be wise to increase the deposit. On the other hand, if the tenant is able to obtain a home owning guarantor - then there is extra security therefore a deposit could be lowered.
Rent in Advance
It goes without saying requiring rent in advance is standard practice, a tenant should pay upfront for the month they are living in the property compared to the alternative.
Housing Benefit Claimants (Local Housing Allowance)
The government has put in place some insurance or rather a back stop, in the event a Claimant Tenant fails to pay their rent.
If a tenant is more than 8 weeks in arrears, you can write to your local benefits office notifying them of such and ask for payments to be made direct to yourself.
The benefits department will look at the request, they may want to verify you are the landlord/owner and check to ensure the tenant is in arrears before making the four weekly LHA payments direct to yourself moving forward.
This does not change; that the tenant is still in arrears but that future payments will at least be paid direct to you. Except – the tenant could still get those benefits suspended or reach a benefit cap and so forth.
A landlord - should be aware that getting paid direct put some onus on you to notify the benefits department of any "Change in Circumstances". Even if that means someone vacating the property, that could reduce the household(s) total Local Housing Entitlement.
If there is an over-payment in Housing Benefit, a council may try and get that payment from yourself. A "rich landlord" rather than an unemployed claimant. If you have notified the council of change of circumstances or was not aware of the tenants changes - this can be mitigated - unfortunately councils often ignore this so you may need an LHA expert in representation.
In addition – we have the new Universal Credit coming out which may change some of these aspects.
Rent Guarantee Insurance
Landlords are able to purchase insurance against the risk of the tenant failing to pay their rent.
To be able to obtain such insurance the Tenant may need to meet certain criteria – such as credit file checks and verification of income. The insurance company usually nominates a Credit Reference company that you must use.
The policy will usually provide protection in the event that you suffer unexpected rent arrears issues with the tenant in your property. The policy usually has a cap per month of rental income covered and a cap of the maximum you can claim in total.
The insurance is therefore designed as a temporary measure, with the onus on you to start possession proceedings if required. Some insurance companies set out a procedure you should follow and others offer free legal advice to help you get there quicker.
In some instances a Letting Agent may offer Rent Guarantee as part of the package, remember to check the terms and conditions.
Rent by Standing Order
At the time of signing the tenancy, you want to establish with the tenant a regular recurring payment.
The simplest way to do so is to use a Standing Order Template, you require the tenants bank details (sort code, account number, branch) and their signature. To established a fix sum rent payment into your account every week or month.
A standing order helps remove the risk of the tenant forgetting to pay regularly or having to collect the rent in cash by hand.
This does not solve the issue of preventing rent arrears, as if there is insufficient funds in the bank account the standing order will bounce and in a bad tenant can cancel the standing order at any time.
The Letters & Procedure
Landlords should always remember to never take it personally and have some form of detachment.
Yes – late payments can mess up your cash-flow and none payment does mean you’re at a loss – that does not change the tenants’ rights.
They have a right to reside there and the Courts will enforce the tenants’ rights to be in arrears.
All a good landlord can do – is to be on top of it. Giving the tenants early reminders and nice letters once an issue arises – it should always be the intention of the letter to receive payment, not to complain or be adversarial.
If after none payment, no contact or no arrangement being made in the initial correspondence – you can use the consequences of inaction.
Those being you can serve a Section 21 notice ending their tenancy giving two months’ notice, if their initial tenancy term has expired. The other being the Section 8 notice when the tenant is 2 months or more in arrears.
Until you get to a point in which you can take action, you want to make it easy as possible for the tenant to call and arrange payments. Even after a point in which you perhaps send your section 8 – if the arrears can be solved its often cheaper than court proceedings, re-decorating the home and finding a new tenant.
1. Recurring Payment Notification Reminders
Landlords who have a Barclaycard will know about the regular text message reminder their payment will be taken shortly.
You should implement the same procedure to help your tenants manage their cash-flow.
A reminder text message that a significant amount of money is about to leave their account can help them budget or warn them of an impending default.
This can be as simple as a Calendar reminder on your phone, with a SMS template ready to send to your tenant. Early communication can also give the tenant opportunity to notify you of issues in cashflow.
2. A Nice Missed Payment Letter
This is sent the following day of none payment – this is how early we have to be to prevent rent arrears spiraling.
Everyone can miss a payment, being forgetful is part of all of us all.
It is important to keep a good relationship with your tenant but equally important to keep on top of rent arrears.
You want to create a Template; we can again borrow an example from large companies. A simple and short letter "OPS! Your rent payment was not paid on time. Please make payment to YYYY, if you have already made a payment please ignore this letter".
You can also use the same with a Text Message.
The early reminder – is very important as it’s a slippery slope missed payments or late payments, which come with their own problem of a disagreements about payment history.
The reminders should be none-adversarial with the intent to get a payment, not so much the consequences, penalties and so forth.
3. Early visit to the Property
If after a week of no payment, lets visit the property and check a few things.
A tenant can often shrug off a text message, a letter or even a phone call. There is something more personal about knocking on the door and talking with the tenant about the missed payment.
Often awkward – but talking face to face you can discuss the issues and perhaps arrange a payment plan.
It can also give you early indication if the tenant has abandoned the property or has started packing up to leave.
The intention of the visit is to seek a resolution, if they are out of employment ensuring they are going to council to claim support, if it’s a cash-flow issue the importance of a home over one’s head over the sky TV bill.
It’s often best with cash-flow issues to arrange a payment plan – to get on top of the arrears from day one even if only a partial payment. You off-course want full payment but movement towards that goal is better than asking for full payment of monies that are not there.
4. A Nice – there are consequences letter.
If after two weeks of no payment of rent or contact resulting in a payment plan being established.
It is time for the nice consequences letter.
This is where you outline you have mortgage payments to make, that you are unable to subsidise their housing payments and may have to take action unless payment of rent is made or a payment plan is established.
You can include; a Section 21 notice outlining that this gives you the right to end the tenancy. I won’t go into the requirements before serving a section 21 in this article.
5. The Red Notice Letter
If we reach a point of 2 or 3 weeks, without payment of rent or a payment plan being established.
It’s time to turn on the Red Ink – you’re looking for a letter with a Red Border and Large Red "NOTICE" letters.
To add to the perceived importance of the letter (and for file); you can visit the post office and request for the letter to be Signed on Delivery or Recorded Post.
The aim is to keep it simple with short paragraphs that the tenant is in arrears, they need to make immediate payment and what action is available to you.
The consequences being that that under Ground 10 of Section 7 of the Housing Act that you can currently ask the court for possession of the property. (Unfortunately such Ground is discretionary of the court, so not recommended) as the tenant is in arrears.
Taking action in court may result in the eviction of the tenant and you will be requesting a Monetary Order which may result in a County Court Judgement (CCJ) for the arrears and court costs.
6. The “I’m Taking Action in X Days Letter”
There is often a date in which the Section 21 letter's two-month notice becomes active OR when a section 8 notice can be legally served.
This is the “FINAL WARNING” letter on 14 days unless a payment is received I will be filing court documents in order to obtain possession, obtain a CCJ and ask for costs or in 14 days unless a payment is received I will serve a Section 8 Notice.
Even at this late stage – when you are well in your rights to start proceedings. You still want the tenant to resolve the issues, you do not want to file court papers – with delays, costs and then having to redecorate before finding another tenant. It’s much easier if they resolve the issue – we should give them a chance to do so.
We should also express the consequences of going to court for the tenant; the homelessness, the CCJ and the debt collectors.
Taking action against arrears
As well as keeping up the pressure with all the letters and giving the tenant all the opportunities to make payment – you have to take early action against rental arrears.
Cost of Living, Loss of Employment or Similar Matters are never nice – it may not be the tenant's fault but a Landlord should not suffer the consequences of a 3rd party’s misfortune.
It’s much easier to evict a “Won’t Pay” Tenant over a “Can’t Pay” Tenant – but our legal system requires notice periods and procedural action. It is therefore necessary to start the ball rolling as early as possible.
Landlords prefer a Section 21 notice – but these can only be enforced if the fixed term has come to an end. Its a “no fault” possession notice its just bringing the tenancy to an end. There is no need to prove rental arrears or other matters, just that it was correctly served, you’ve been a good landlord and deposit was secured, etc.. etc..
The Section 8 notice is a “fault-based possession” the onus is therefore on you to prove the tenant is in significant arrears – it is down to the discretion of the judge but if you can prove that the tenant is more than 8 weeks in arrears a possession order should not be unreasonably withheld.
Your first few possession hearings – it is often wise to ask for expert legal advice and attendance in court.