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Getting Paid - pre tenancy procedures and managing rent arrears

Failures in the banking industry and challenges in the financial markets are now affecting the economy. The property market is changing. A slow down in property sales is matched by an increase in homes available to rent and a significant increase in demand from prospective tenants.
In this article we will examine the practical steps available to help identify high risk tenants and ways of managing defaulters. We look at the in house procedures landlords and agents can have in place now to ensure payment of rent, costs and fees and to reduce the risk of not getting paid. We will also consider effective actions to manage tenants out of arrears and the rent arrears pre action protocol.

Avoidance

These changing times herald potential for growth for landlords and agents, but with this comes increased risk. We are being warned of a recession and property managers need to consider how to ‘recession proof’ their property portfolio and their business.
Apart from always taking the whole rent in advance, there is no formula for ensuring every tenant will pay the due rent on time throughout the period of the tenancy. Buying an insurance product or rent guarantee is one route, debt collectors another, but it is also possible to substantially reduce the risk of rent arrears in the first place. Prevention is always better than cure; good systems and practice in the pre letting procedures are the key.

Vetting is more than referencing
An agent vetting a tenant for a landlord has a duty of care to ensure that satisfactory checks have been carried out. These would generally include:

  • Verifying the identity of the prospective tenant
  • Checking the legal right to enter into a tenancy agreement
  • Verifying the truth or accuracy of information relied upon
  • Taking up references
  • Checking credit worthiness
  • An assessment of affordability

Is this enough and does it always work for you? Practitioners have different methods for gathering information, but the test as to whether an agent has discharged the duty of care will depend upon the quality of the procedure adopted and the level of diligence applied to the process. Best practice in this area should reveal the bad payers and the high risk tenants.

Ten tips to ensure a good vetting procedure

1. Application form
It is vital to ask questions. The Housing Act 1996 makes information supplied by the tenant a part of the tenancy documentation. Most tenants do not realise that any false or misleading information given at this stage can give grounds to a landlord under section 17 of the Housing Act 1996 to apply for early possession of the property. Such information may also be relevant should evidence be required to support any action for fraud. However, the agent must have proof - asking the right questions in an application form is the best way to obtain this.

2. Viewing
For two reasons it is essential for a prospective tenant to view the property.
Firstly, it is clearly unwise to let to a tenant who has not actually seen the property, its location and amenities. Whilst a tenant may be committed to proceed following a recommendation from a friend or relative, they may find the property does not meet their expectation; this may lead to a troublesome let and potential for non payment of rent. It also makes pre tenancy ID more of a problem and any agreement to let in these circumstances, must be subject to verification of the tenants identity when they arrive.

Secondly, the viewings are a valuable part of the referencing process and this should be an intentional vetting point for the agent. A prudent agent will observe the prospective tenant at the viewings and during informal conversations ask questions about the tenant’s situation, which can later be verified on the completed application form. An agent’s skills and personal experiences are a huge asset in making a judgement about the suitability of a tenant. Frankly this is an area where quality staff training in people skills is essential.

3. Interviewing
Some agents conduct a more formal interview as part of the referencing process. A convenient time to do so is when checking the ID. Where possible ask the prospective tenant to complete the application form in the office and conduct the interview at the same time. The purpose of the interview, apart from forming a relationship, is to ‘get a feel’ as to whether this applicant will be a good match for the property and the landlord – every landlord has an expectation as to a preferred tenant. Imbalance here often leads to rent and management issues. There is a huge difference between the tenant ‘who can’t pay’ and the tenant ‘who won’t pay’ in terms of recovering rent arrears. Inappropriate attitudes are often revealed at this stage. It is important to focus questions around verifying the application. Avoid questions which may lead to claims of discrimination should the application be subsequently declined.

4. References
It is standard practice to take up references from employer, previous landlord, personal and others. Pre written references supplied by the tenants should never be accepted; it is too easy to produce these and they may be false and general. Always request names and postal addresses, in addition to email and telephone, for each referee. False and deliberately misleading references may provide grounds for early repossession of the property, if it can be demonstrated that the tenant was also ‘party’ to this misinformation or data. Specific questions are therefore essential. Write and always post or email a letter of request explaining that the applicant has applied to rent a home, specify the proposed period and the monthly rent. Avoid general questions which invite evasiveness. Be specific and ask:

  • Employer – Commencement and employment term. Salary and bonus. Hours worked. Place of work. Any outstanding disciplinary action.
  • Landlord – Commencement and term of tenancy. Has the applicant ever been late with rent, if so how many times. Any notices served. Has the landlord complained about any breaches of tenancy? Is there a deposit dispute?
  • Personal – Relationship, knowledge of rent arrears, job, specific questions about character and past addresses where appropriate.
  • Self employed – Accountant: copies of last audited accounts or copy of last IR Self Assessment, is tax paid, any claims from customers, any IR investigations pending? Some agents insist on references from supplier or trade creditors of the applicant.

5. Telephone
Make a call to the referees (to a land line) and consider taking the reference on the phone. Ask specific questions and, where a written reference has been given, call the referee to verify its origin. Use this conversation to verify information given by the tenant in the application form. Repeat answers back to ensure you have understood and make and save a contemporaneous file note, dated and timed.

6. ID
Insist on photo identification for all tenants. A passport or driving licence is acceptable; copy this and check it is still valid. Follow the same procedure for overseas tenants. For non EU applicants a Work Permit or other proof of residency is essential. These documents will prove not only the identity, but also confirm the applicant’s age and address. A driving licence also records details of driving and other convictions such as convictions for burglary and driving without insurance. However, it should be noted that insisting on a driving licence may be regarded as discrimination for a disabled tenant who may not have such documentation.

7. Change of identity
Where a tenant has had a name change, ask for proof such as a Deed Poll or marriage certificate, otherwise where the ID and history is in the previous name, use both names on the tenancy agreement – i.e. Rowena Edwards (previously known as Rowena Williams)

8. Proof of address and ownership
Copies of utility bills and land line phone bills are useful for proving the addresses match up and proving residency. A check of the Electoral Roll may help and a Land Registry search is possible where the applicant is a property owner. Where an applicant is selling a home ask for sight of correspondence from the solicitors confirming this fact.

9. Income
Where there is uncertainty about income or where it is difficult to verify the facts ask the applicant for sight of bank statements for a minimum of three months. Check the bank details match the banking information already supplied and examine the applicant’s cash flow and pay day (you might want to link the rent payment day to a couple of days after the salary goes in).

10. Credit check
Many referencing agencies offer a credit check and scoring. This is also an essential process and a good method for verification. A low score may (but not always) mean trouble. Bankruptcy will also show up with this check. However, this should not be relied upon exclusively.

Guarantors

Guarantors get a bad press! However, a guarantee given by a third party can be a very effective way of enforcing the terms of a tenancy agreement. It can be particularly helpful where the tenant is young or it is difficult to obtain satisfactory references. A greater use of guarantors should assist landlords and tenants at this critical time. A guarantor should always go through the same detailed referencing as the tenant and should be a home owner, employed or of verifiable independent means. However, there are some important rules and a lapse in procedures may render the guarantee unenforceable. Inadequate procedures (not bad guarantors) are at the route of most enforcement problems.

The guarantor must have sight of the tenancy agreement in advance. The guarantee must be signed at or before the commencement of the tenancy and it must be specific as to the potential liability. An open ended guarantee is generally unenforceable. For instance, if it relates to a fixed term tenancy it will be impossible to recover rent arrears outside of the fixed term, unless the guarantee has been extended by agreement or otherwise renewed. Where there is more than one tenant (i.e. a student let) the guarantor may want to limit the guarantee to one of the occupiers and thus avoid the potential of a large claim for all the tenants. This should be done by way of a specified percentage or a capped limit. There may be more than one guarantor and frankly definitive guarantees are more likely to be upheld in court than open ended and unreasonable demands.

It is preferable to incorporate the guarantee as part of the tenancy agreement and it should be signed in the presence of the agent (or suitable witness) to ensure it has actually been signed by the correct party. Once the agreement has commenced it is essential to notify the guarantor as soon as rent arrears start to occur – the guarantee may not be enforced at that stage, but the guarantor is under notice and may be able to influence the outcome at an early stage. Problems in enforcing guarantees can be avoided by sticking to fixed term tenancies and insisting that a guarantor sign a new fixed term guarantee each renewal.

Deposits

Most agents have a formula for calculating the amount of a deposit or bond. This should always be more than the equivalent of a month’s rent as it detaches this bond from a rental figure and separates, in the tenant’s thinking, that “I paid two months rent in advance”.
The amount of the deposit will, of course, reflect the local market, but in deciding the amount, do a risk assessment on the tenant. Where a higher risk is perceived, take a higher sum!
Where a guarantor is of independent means why not ask for a cash guarantee and hold a sum of money upon terms and subject to the law relating to deposits.

Managing rent arrears

Should the worst happen and a rent account fall into arrears, swift, decisive action coupled with fair and non harassing contact is vital. Common triggers for arrears are a change in relationship, a death or illness, redundancy or sudden drop in income or perhaps a claim that the property is in disrepair. It is often possible to manage an otherwise good tenant out of arrears, and it is possible to mitigate losses where a recovery of arrears is less likely. Depending on the circumstances, a creative and proactive approach should be adopted along these lines:

1.    Check the bank account every working day and track payments.

2.    Phone or text (if you have the tenant’s permission to text) within three days of late payment.

3.    Send an arrears letter no later than 7 days after the rent is due.

4.    Contact tenant and discuss the reasons. Offer advice on available help; Housing Benefit and debt advice services as appropriate. If it’s a response to disrepair, address this issue without delay and keep written records.

5.    Send a second arrears letter at 14 days, now draw attention to any interest charges and costs chargeable under the tenancy agreement. Inform the tenant that any guarantor may be notified and make contact with the guarantor. Where it is known that the tenant is in receipt of Housing Benefit, keep the local authority informed about the arrears.

6.    Attempt further discussions and seek to establish if it is a case of ‘can’t pay’ or ‘won’t pay’. Suggest a part payment now on the basis that any payment, no matter how small, will help. Initiate discussion on debt management. Offer to waive interest and other charges if a payment plan is in place. Avoid threats at this stage, but be clear that the landlord will expect a payment plan if the next stages are to be avoided. Record the payment plan and get the tenant to sign it.

7.    When non payment is running into a second month consider serving a section 21 notice to mark the end of the tenancy within two months or the end of the fixed term. Explain to the tenant this notice may not be enforced if the rent is paid or a payment plan is followed. Keep dialogues running if possible and a visit at this point could be useful.

8.    When the arrears reach two months, serve a section 8 notice; pleading any history of persistent arrears in the notice. Where Housing Benefit is being paid, send a copy of the notice to the local authority with a formal request that all future benefit now be paid to the landlord or agent. Send rental statements to any guarantor.

9.    In the absence of a satisfactory payment plan, legal action should immediately follow. The landlord must decide whether to take possession proceedings under the section 8 notice claiming the arrears, or go for what may be the quicker route and take accelerated  possession proceeding under section 21.

10.    Update any guarantor that a claim is coming and the amount. Start to gather information about the tenant’s current situation i.e. workplace, in readiness for enforcing any recovery judgements.

Protocol

It is entirely the tenant’s legal obligation to ensure the rent is paid on time and the landlord is under no obligation to demand or chase rent. However, undue financial hardship for a tenant and costs for a landlord can be alleviated if a problem can be indentified at an early date and specialist advice and guidance given. In social housing, landlords must show to the Court that any legal action has been preceded by a protocol laid down by the Ministry of Justice. Although these procedures are not legally binding on agents and private landlords, they should be read and understood as they form a basis of best practice in managing rent arrears and assist when dealing with vulnerable adults. Adherence to these methods can only help a landlord in a disputed possession case.

The landlord and fees

Unless a rent guarantee has been given, agents are not liable to their landlords for rent arrears. However, a badly managed rent account is the major cause of breakdowns in agent/client relationships. An aggrieved landlord who has lost a lot of money will often come after the agent and will be looking for negligence in the management of the rent account. It is essential, therefore, in these more challenging times, where most people and businesses are ‘feeling the pinch’, that agents demonstrate best practice throughout. No one wishes to lose a tenant, and possession proceedings frankly point to failure somewhere earlier in the system.
Finally, the point that is not lost to anyone in the industry is that agent’s fees are contingent on the rent being paid. No one can afford to write off fees and be spending endless hours managing rent accounts that are running out of control.

Communication

Effective communication is important in arrears collection and a conversation early on is a good way to establish the reasons for why rent is not paid.
Early threats and taking up a position will silence the tenant (or invite aggression) and vital information will be held back. Remember the first calls are fact-finding missions. Set out expectations and confirm in writing as soon as possible.
Written letters and emails will be part of the arrears processes. Avoid letters with threats, especially if there is no intention of taking the next step. Stick to time limits and follow up on the agreed time limits.