Landlords - Rent Arrears - Be Prepared
The Fleur-de-lis is historically associated with everything to do with France and was widely used by the French Catholic Church, French royalty and in heraldry. A 13th century poem about a golden lily that signified purity created the symbol we all know today. More recently it was adopted by Lord Baden Powell in 1907 when he formed the Scouts in the UK, whose moto became “Be Prepared”, explaining “you are always in a state of readiness…”. It seems appropriate for us all to be prepared for quite a bit at the moment with all the uncertainty, not least of which for landlords and tenants in the PRS.
So, I thought it would be timely and critical for landlords, with rent arrears having been the topic of debate for some time in recent months, to pen a blog on the best way to get prepared, when there is the real likelihood that late payments are going to get far worse before they get better, with furlough ending next month, notices now extended until at least March 2021 and the very real prospect of CV19 returning with a vengeance this winter. Ultimately there is no short way to find out how many tenants are in arrears and by how much without a census, but various surveys have been done, that when extrapolated suggest about 20% of tenancies have suffered some form of arrears to the tune of about £450m so far.
The scary part however is some are forecasting arrears of £15bn before the pandemic ends. That will touch most landlords to one degree or another. So, whatever the numbers may be, they will certainly be a lot more than the normal 2%, it is always prudent to hope for the best and prepare for the worst, so as a landlord get prepared long before it happens so you are best equipped to deal with it. So here are my top tips in how to approach rent arrears if and when they happen.
Keep informed and educate yourself. I say that as I have had so many landlords contact me who have not as much time as they should have done, and the effort is the key thing. Of course consulting a professional advisor is always a good practice to make sure you have got your ducks in a row, but they will not be able to educate a landlord from scratch from A to Z without it getting expensive. There are plenty of regular digests available on regular newsletters and forums that are worth subscribing to, to keep up to date and share experiences.
Remember also to test, prod and poke the information you read just as you might with this blog. There is a lot opinion out there and a lot of fake news and misinformation. Let me give you a classic example. Back in April when the government launched its guidance for tenants and landlords at the start of the lockdown, it basically recommended that both should talk about any arrears, keep lines of communication open if a tenant is unable to make their regular payments, and at the same time to ease the pressure on landlords, it suggested landlords may want to consider a 3 month payment holiday from their mortgage lender.
Within hours, a well-known industry website published an article about how the government guidance had given its blessing to rent holiday for tenants. I remember at the time this jumping off the page and thinking I don’t recall reading that, so I went and checked the wording of the text on the gov.uk website. No mention of a rent holiday. The author had taken news of the suggested mortgage holiday and then concluded this must mean a rent holiday for tenants. Before I had time to comment all the forums that there were no rent holidays, and this was fake news, landlords and tenants up and down the land were having conversations about rent holidays.
At the same time I then even had a couple of landlords then email me the government advice URL telling me I had got it wrong, and it clearly it stated that tenants were eligible for a rent holiday. It didn’t of course, but the fake news had created a self-fulfilling prophesy with tenants using it as a reason and excuse for not paying the rent. Some landlords believed them or even offered a rent holiday, as they too had seen commentary that the government had approved one. As a result, many landlords were manoeuvred into a rent arrears cycle for no reason whatsoever and many have remained there ever since. So, check the source of any material you see quoted where you can, the internet makes it very easy to do these days. Edgar Allan Poe once said “believe half of what you see and nothing of what you hear” for that reason.
Next - keep a record of everything. This is sound advice and good practice for anything to do with the tenancy, whether rent arrears, maintenance or any other matters. Make sure you keep a record of everything that always happens and make sure these records are date stamped. Time passes quickly and not only will you forget when something happened, the tenant will as well, and the order of events can sometimes be critical to an outcome further down the line, whether when releasing a deposit, or perhaps even in Court and it could even be some years later.
You can do this any number of ways, but keep all documents, all emails, all text messages, all WhatsApp messages. Never dispose of anything even after a tenancy ends. Specifically, with the tenancy finances which obviously included rent and late payments, you should have everything recorded in a mini P&L in excel or an accounts App that provides the same function.
Similarly, whilst you will of course speak to your tenants about many things during a tenancy, always follow up any conversations with a WhatsApp message or email to document the conversation as a record it happened at all. These unilateral messages are admissible in Court, as if a tenant disagreed with any of the content then they would challenge the message you sent them. If you get a prompt reply even better, which is why WhatsApp works really well, as it builds a constant conversation.
So far example, if you bumped into them at the shops and swapped hellos, you would no doubt ask if everything was ok at the property. A message later saying, “Nice to see you earlier today, glad to hear everything is ok at the property”, demonstrated that you asked, if at some point in the future, your interest in them and the property should ever be challenged. Relationships can sour, life changing events happen, like job losses, illness especially at the moment, so just because you get on now doesn’t mean you will in the future. People and attitudes can change.
It is good practice to also receipt rents with your tenants in writing especially if they pay separately, confirming how much has been received on what date, and what if anything is outstanding. Make sure there is some prompt regularity with these communications, ie the day the rent is paid or the day after, but the same time every month as it demonstrates you as the landlord are organised and have a process. I will come to verbal communication shortly, but formal correspondence is required for late rent payments at certain trigger points in addition to any other discussions you may be having with the tenant over any matters.
After 7 days, a formal letter of demand needs to be sent to the tenant. After 14 days, a second demand to both the tenant and the guarantor if there is one. After 21 days, a letter to both informing them of your plan to take legal action. Not only are these letters and their timing critical should you ever need to serve notice under Section 8 of the Housing Act, many landlord insurance policies become invalidated if you do not follow their processes after a late rent payment. Make sure you read the policy documents before you take a policy out to see what is expected of you.
So, with the admin sorted, comes the most important part. Communication and relationship. No conflict ever has been or ever will be satisfactorily concluded with an aggressive, belligerent approach – there are always casualties. In recent months, I have seen many of the comments posted on landlord forums about the subject of rent arrears and how to handle them, and what I had always expected to be a very small minority of “bully” landlords, proved to be a little bit larger than that. Still a small minority though I am pleased to say.
Many of them, take an almost brutal approach, saying they call their tenants and pretty much tell them to move out if they don’t pay the rent. Others threaten CCJs or notice or to change the locks. Not only is such behaviour illegal, it is guaranteed to lead to more conflict and loss for both parties. Tenants that get treated in this way will inevitably at the very minimum cease making any effort at all to look after the property, and some may actually look to take revenge and deliberately cause damage or allow problems like leaks for example to develop into much bigger problems. In extreme cases, properties are vandalised, chattels destroyed or removed. It is also an approach that stands a good chance of no more rent as well. No one wins.
Likewise, whilst there is a process to handle rent arrears correctly, and it is critical that it is followed, it alone is not going to get you the result you want unless you get lucky. The relationship harnessed inside the correct process will get you that.
Whilst there has to be a firm approach to dealing with rent arrears, this doesn’t mean a need to be combative in any way. Firm can just mean applying pressure through lots of communication, but this doesn’t start just at the point that rent arrears begin. The relationship with the tenant must start pretty much from the point you accept their application to move and develop from there, so choosing your tenants with this in mind is crucial. It is simple things, such as a message or call every month to check everything is ok, making an extra effort to help them out when a problem develops, offering to assist them if they need any help, dealing with maintenance promptly, evens sending them birthday and Christmas cards. A bit of empathy can go a long way.
The aim whether because of this advice, or just naturally, is to demonstrate to your tenants that you are a diligent, friendly, even caring landlord. As a result, and I have heard this 100s of times over the years speaking to tenants, not only will they avoid any deliberate rent arrears as we have seen during the pandemic where some have taken advantage, they will actually feel really guilty if they genuinely fall behind on the rent and make extra effort to address any shortfall. On top of which they will look after the property, it becomes almost self-managing, your tenant almost manages their own rent arrears as a result of how you have historically treated them. Conversely, if you manage a poor relationship with your tenants, are slow with maintenance and don’t invest any interest in them as people, tenants can often feel less inclined to keep up to date with payments.
Many, if not most of the belligerent landlords will scoff at this theory, but I know for a fact it works. Admittedly, you have to be something of a good person to start with, someone who likes people anyway. If your starting point is Victor Meldrew, then I accept adopting this approach will be virtually impossible, but I Iike to think there are few people like that. Always remember that serving a Section 8 notice should always be the last resort, that like the offensive approach can take on average nearly 6 months to regain possession, and often leads to no further rent and high dilapidations, and a resulting void period after all that as you need to get decoration, repairs and cleaning done. In today's covid19 world, it could take 12 months to gain possession, maybe longer.
So, whilst you may be prepared with the 7, 14, 21-day letters, they are not the first course of action. First is a phone call, if you don’t get one first, the day after rent was due, to politely ask if everything is ok as you had noticed the rent didn’t arrive. Imagine you are calling a friend to ask the same thing. That is how unthreatening the call should be. The conversation will flow depending on the content, and whilst it may not be obvious, always keep Covid19 at the forefront of your mind. Are they well, are they still employed, and if the answer to either is no, provided you believe them, you do have a responsibility to be sympathetic to their plight?
The aim of any discussions over rent arrears has to be agreeing what rent can be paid when, a payment plan to get the tenant back on track. I know of some landlords that actually gave their tenants a discount during the pandemic and one that they don’t have to pay back, that’s your choice. Whilst it may sound like throwing money away, it is quite clever in a way. It avoids arrears in the first place, and all the hassle that goes with it, and then buys the landlord a huge amount of equity with the tenants. Rent increases for example, won’t be a problem when this pandemic is over.
However, if after all that you are faced with little option but to seek possession, you have options, albeit as I have said, none of them offer regaining possession quickly. Firstly, if out of the fixed term, you can serve a section 21, a no-fault eviction as they are called. You don’t need to say why you are serving it, albeit with rent arrears in place, the tenant will obviously know. You have to provide 2 months’ notice from the Rent Due Date (6 months currently), but unlike a Section 8, you can serve it when you want to. If they refuse to move out after that, you need to apply to the Courts for a possession order as soon as the notice expires which will give you the power to send bailiffs to the property and physically retake possession. A Section 21 expiring does not give you the authority to do that, which many Landlords do not realise. You have to check the tenant has moved out before you claim possession, you cannot just barge in.
If you are unable or unwilling to serve a S21 notice, then it has to be Section 8. You first have to wait until the tenant is 2 months in arrears, but this can be on the 2nd rent due date, so effectively 1 month and 1 day, you don’t have to wait until the 2nd month elapses in full. You then serve a Section 8 notice which gives the tenant 14 days to pay the rent, after which you can then apply for possession order through the Courts as before, however notices have now changed due to the pandemic to 4 weeks for arrears over 6 months, and 6 months for arrears less than 6 months old. Rent Arrears is one of the mandatory grounds for eviction, so the Courts have to provide a Court Order provided you can prove your case and there are no extenuating circumstances, which could be young children or mental health for example. All changes to notices have basically meant that no tenant will have to move out of a property for at least 6 months to let the worst of this pandemic pass.
At the moment we are waiting to see the impact that Coronavirus will have on Court Orders now the Courts are reopen. Bear in mind, even if the Court rules in your favour and you have followed the right process, they may not still grant you possession, and with the current backlog of 26,000 cases, it is unlikey many landlords will see the inside of a Courtroom until the middle of next year. Victory or a Court Order does not necessarily mean you get the tenant out and get your property back. It could mean a payment plan, or partial payment of arrears whilst they continue to remain at the property. This is a highly likely outcome over the next 6-9 months. No Court is going to evict a tenant in winter during the 2nd wave of a deadly pandemic simply over some arrears, especially if they are less than 12 months which is seen as the threshold to be considered in a different light. You are not going to be able to get rid of or replace your tenant for quite some time. Getting the relationship piece right has never been more important to making sure your exposure is reduced.
What is key, is that you serve the correct S21 or S8 notice. Countless possession orders are not granted as Landlords or their agents serve the wrong notices with the incorrect wording, or at the wrong time. You then have to start all over again. Beware.
So, in summary. Be decisive, act swiftly, document everything, but above all follow the right process and make sure the relationship you have with your tenants is as strong as it can be. You made need to rely on it one day to save you both a lot of stress, cash and upheaval.