What to do if your tenant can’t pay the rent and falls into arrears - Total Landlord Insurance

January 23, 2023
Total Landlord Insurance
What to do if your tenant can’t pay the rent and falls into arrears - Total Landlord Insurance

Having a tenant fall behind with their rent payments and being left with no rental income is a landlord’s worst nightmare and it’s the most common reason for a tenant being evicted.

During the pandemic, many people’s finances were badly impacted, which led to temporary bans on evictions. Although many landlords managed to work with tenants who were struggling and come to an agreement over either temporarily reducing the rent or them moving out voluntarily, others found themselves with tenants who couldn’t pay and wouldn’t leave the property.

In 2019/20, just three per cent of private renters in England were in arrears (ONS data). However, according to research by the National Residential Landlords Association (NRLA), by the end of 2020, seven per cent of private tenants in England and Wales had built arrears due to the pandemic and 18% of those in arrears owed more than £1,000. A further survey of 1,391 NRLA member landlords found 60% had lost rental income due to the pandemic and 39% of those – that’s almost a quarter of all respondents - said their losses were continuing to increase.

Now that we’re in a cost of living crisis in the UK, many landlords are understandably getting more concerned about tenants falling behind with their rent, particularly as their own costs - such as mortgage interest rates, insurance and maintenance – are increasing. And with government proposals to scrap Section 21 evictions, as outlined in last year’s rental reform White Paper, and Scotland’s ruling that sheriff officers can’t enforce certain eviction orders until at least 1 April 2023 - which could be extended further – it’s vital that landlords know how to deal with rent arrears before they become a bigger problem.

How to prevent your tenant from falling into rent arrears

Sadly, you can never be 100% sure that your tenant won’t default on their rent – it’s just one of the risks you take on when you become a landlord. 

But if your tenant ends up falling into serious arrears and you have to evict them, it can be costly, both in terms of time and money. Research has shown that it now takes an average of 51 weeks and £3,000 to bring a tenancy to an end via legal proceedings. And that doesn’t take into account the loss of rental income and also any consequences of getting behind on your buy to let mortgage payments.

The good news is, there are steps you can take to greatly reduce the chance of it happening, especially if you aren’t using a qualified agent who will do all the checks for you. 

  1. Reference potential tenants thoroughly, including carrying out a credit check

There are three key things that will help you make a decision on whether a tenant is likely to keep paying the rent:

  • A reference from their previous landlord, confirming whether the rent was always paid on time and in full
  • Asking the tenant to provide their most recent three months’ bank statements, so you can see their regular income and expenditure and judge whether the rent will be affordable for them
  • A credit check, which will look at the tenant’s address and credit history and uncover whether they have any county court judgements (CCJs) against them. Note that you need the tenant’s permission in writing to carry out a credit check

Read our Ultimate guide to tenant referencing for more detailed  information. 

  1. Make it easy for tenants to pay

Provide the tenant with the necessary forms or information to set up a standing order and possibly even consider offering them a small discount or incentive for paying their rent into your account on time each month. 

  1. Ask for a guarantor, if appropriate

A guarantor is someone - usually a parent or guardian - who agrees to cover the financial obligations of the tenant if they’re not able to, giving you peace of mind that there’s a back-up. This is common practice with students, foreign nationals and first-time renters who may not have a previous landlord or credit history, and it allows you to accept potentially great tenants who may simply not be able to satisfy the financial aspect of the referencing process.  Importantly, make sure you reference the guarantor just as you would a tenant.

  1. Establish a good relationship with your tenant

If you treat your tenant well and maintain a good line of communication with them, they’re much more likely to be up front with you if they’re having any problems paying their rent. And the sooner you’re aware there’s a potential issue, the sooner you can do something about it. 

Paul Shamplina, Founder of Landlord Action and Chief Commercial Officer of HFIS, says: “In these financially challenging times, and with the likely possibility of a recession which will hurt businesses and cool the job market, it’s more important than ever to communicate with your tenants. Find out what their plans and desires are – do they want to stay, or do they plan to move on?  Keep checking in on your tenants to make sure they are coping and if necessary, work together with them to find a solution that works for you both.”

  1. Keep your property in good condition and respond to any issues quickly

It’s a legal obligation for landlords to maintain their property in good condition throughout the tenancy and carry out repairs within a ‘reasonable’ timeframe. But the quicker you respond to your tenants and the sooner you can get any issues resolved, the more appreciative they’ll be and there shouldn’t be any reason for them to want to withhold rent payments. 

Our guide on seasonal maintenance can help you keep on top of repairs.

Two other key things to have in place at the start of every tenancy:

  1. Have a written tenancy agreement 

You should have a formal written tenancy agreement that clearly outlines the terms of the tenancy and rights and responsibilities of both parties, including how much rent is to be paid and when. If you are a self-managing landlord, mydeposits guide, What to include in your tenancy agreement, contains lots of useful advice.  Alternatively, you can use the Government’s free Model Tenancy Agreement or a tenancy agreement drafting service such as the one offered by Landlord Action.  If you are an agent and would like support with tenancy agreements or any other legal matter, contact the letting agent helpline, HF Assist.

  1. Make sure  you have complied with your legal obligations

If you end up having to evict your tenant and you haven’t complied with certain legal obligations – such as providing the tenant with a copy of the current gas safety certificate and prescribed information relating to the protection of their deposit - any Section 21 notice is likely to be invalid. Read our guide,  Legislation for landlords: everything you need to know, for more information on landlords’ legal obligations.

What to do if a tenant falls behind on their rent

Sometimes when tenants default on their rent it’s just an error or something that can be resolved fairly easily. They may have simply forgotten to transfer the money, or it could be a temporary cash flow problem, such as a client having delayed the payment of a large invoice.

On the other hand, it could be more serious. For example, they might be in longer-term financial difficulty or may even be deliberately withholding rent and wilfully not paying you.

The quicker you can find out what the problem is and whether it’s likely to become a bigger issue, the sooner you can decide on the right plan of action to make sure you minimise your losses – whether that’s helping the tenant get back on track or taking the decision to evict them. 

Paul Shamplina believes that if a tenant is simply going through a tough time, it’s worth trying to help them. Many of us experience temporary financial problems at some point in our lives and by being understanding, rather than rushing ahead with an eviction, you could end up with a loyal tenant for many years to come. 

At the other end of the spectrum, sadly there are cases where tenants think they can simply live rent free at the expense of their landlord. The advice from  eviction specialists, Landlord Action, is that landlords who suspect a ‘professional bad tenant’ should seek expert help straight away.

Seven key steps to take when a tenant stops paying rent

  1. Contact them straight away. The first step is a polite phone call to enquire if there is a problem, which should be followed up by an email as proof of communication.
  2. Give them a couple of days to make payment. If the tenant claims payment has been sent, double-check with your own bank or ask the tenant for proof. Give them a few days’ grace to rectify the situation.
  3. Agree a payment plan. If the tenant hasn’t been able to pay the full rent, for whatever reason, agree how much they’ll pay and by when, to make up what they owe. If you need help with this, you can contact the Property Redress Scheme’s Tenancy Mediation Service
  4. Consider reducing the rent. While you may not want to reduce the rent amount, your priority is to keep at least some rental income coming in so you can cover your outgoings. And if the tenant has been good so far and is looking after the property, it’s worth trying to keep hold of them. 
  5. Put it in writing. Write to the tenant confirming the payment plan you have agreed and what the next step will be if they fail to pay for a second time or secure read receipts if emailing. 
  6. Contact the guarantor. If there is a guarantor for the tenancy, contact them to explain the situation and advise them that they are now required to make the payment on the tenant’s behalf.
  7. Seek legal advice. If the tenant or their guarantor fails to pay what they owe, send a final letter stating that if payment is not made within seven days, eviction proceedings will commence. Landlords should speak to a legal specialist such as Landlord Action to work out the best course of action from here. 

How can mediation help with rent arrears?

When you’re trying to negotiate with a tenant who’s fallen into arrears, mediation can be a very helpful option. This is where you and your tenant liaise with a professional, independent third party to find a solution that works for both of you. If there’s any conflict, the mediator can help diffuse it and make sure the problem doesn’t escalate.

We’d suggest the best place to go is the government-authorised Property Redress Scheme, which offers a tenancy mediation service for landlords. There is a cost of £200 plus VAT – potentially more if the case is time-consuming – but it’s money well spent if it means you can avoid your tenant falling further into arrears or having to go to court.

“Our mediators bring common sense and expertise to resolve issues with rent arrears as quickly as possible. Once tenants realise we’re not just on the landlord’s side, they’re usually happy to work with us and we typically reach an agreement in 10 to 15 working days. While court cases can easily take up to a year and cost the landlord an average of £3,000 – not counting lost rent – we can reach agreements and often mend relationships between landlords and tenants in a matter of days.”

– Mike Morgan, Legal Division Manager, Hamilton Fraser.

Case study: How the PRS mediation service helped a landlord resolve an issue of six months’ rent arrears in just two days

We were contacted for help by Dave, a landlord whose tenant had accrued over six months’ rent arrears totalling more than £4,500. The tenant had stopped paying his rent when he lost his job and was avoiding Dave’s calls, which David couldn’t understand as they’d always had a good relationship.

The Property Redress Scheme tenancy mediation service managed to get hold of the tenant, who agreed to take part in mediation. He explained that, although he’d now found a new job, he’d been ignoring Dave’s calls because he owed so much rent that he was afraid he’d be evicted and lose his home.

We were able to agree a payment plan, where the tenant committed to paying his normal monthly rent, plus some extra each month, which would clear the arrears in just over a year. Dave and his tenant also agreed to review this every six months, with a view to increasing the monthly payment to clear the debt more quickly as the tenant got back on his feet.

Our mediation service, which cost Dave just £200 plus VAT, helped Dave and his tenant reach a solution that they were both happy with in only two days and with two phone discussions. Dave was going to recoup his lost rent and the tenant was able to stay in his home - plus their relationship was salvaged. 

Can you deduct unpaid rent from the tenant’s deposit?

Yes, you can use deposit funds to cover unpaid rent. If you do, that means the deposit no longer exists and therefore doesn’t need to be protected. 

Suzy Hershman, Head of Dispute Resolution at mydeposits, comments:

"A tenant’s deposit is there to protect the landlord from any responsibility that the tenant does not uphold during the tenancy. First things first, it must be properly protected and if the tenant then falls into rent arrears there will be at least one month’s rent covered. However, beware the trap of using the deposit during the tenancy as this will leave you nothing to use for damage when the tenancy ends." 

Importantly, the deposit clause in the tenancy agreement should state the circumstances and reasons why you might make deductions – so make sure rent arrears are included. This gives you a clear starting point when explaining to your tenant why you’re claiming from their deposit.

You must also make sure the deposit has been correctly protected in a government-approved scheme and that you have provided the tenant with the required prescribed information.

What help with rent arrears is available for tenants?

If your tenant is struggling to pay their rent, there are a number of schemes and incentives they might be eligible for, including:  

  • Cost of Living Payment. If your tenant claims certain benefits or tax credits, they may be eligible for an extra £900 to help with the cost of living. Those who are eligible will receive this payment automatically.
  • Discretionary Housing Payments. This is financial support for people who receive Housing Benefit or the housing element of Universal Credit, which can cover rent shortfalls, removal costs for moving home and rent deposits. There are two separate schemes: one for England and Wales and another for Scotland.
  • Council Tax reduction of up to 100%. Each local authority has different eligibility criteria, but it’s straightforward to apply online. And if your tenant is living alone, make sure they’re already taking advantage of the standard 25%discount. 
  • Universal Credit. If your tenants are out of work or in low-paid employment – including self-employed or part-time – they may be eligible for a UC payment to help with living costs. Tenants can apply online via the GOV.UK website

Further help and advice is also available from Money Helper.

So, make sure your tenant knows this help is available and advise them to speak to the local council housing department, Citizens Advice or the housing charity, Shelter, to make sure they’re getting all the financial support they’re entitled to. 

Should you evict a tenant who is in arrears?

We’d suggest that going down the legal eviction route should always be a last resort. Mediation should be your first port of call if you’re having trouble reaching an agreement with your tenant yourself. But at the same time, buy to let is a business and you can’t afford to allow someone to keep living in your property rent free.

If your tenant is in two to three months’ rent arrears, and it appears they either can’t afford or simply won’t make their rent payments going forward, then you may have to make the difficult decision to serve an eviction notice.

Once your tenant owes at least two months’ rent, you can serve a Section 8 notice, giving them two weeks to leave the property. And it’s worth pointing out that most tenants do leave by the required date once they’ve received formal notice. 

However, if they fail to leave, you can then apply to the court for a possession order. A judge could then either make the possession order based on the information they already have, or they might decide that a hearing is needed, which could take some time, depending on how busy the courts are. 

If the tenant really digs their heels in and refuses to leave, even after a possession order has been granted, you need to apply to the court again for a warrant for possession and a bailiff must then serve a notice of eviction on the tenant, giving them at least 14 days’ notice.

While some eviction cases are completed in a few months, it’s more likely in the current climate to take anything from six months to a year and cost several thousand pounds, not counting the rental income you’re losing every month that a non-paying tenant stays in your property.

Paul Shamplina, Chief Commercial Officer of HFIS and Founder of Landlord Action, says,

“Many landlords don’t fully appreciate that evicting a tenant in arrears is a legal process that requires them to do things in a specific order, making sure they serve the right notice at the right time. If they get any part of it wrong, the court can simply throw out their case and they have to start over again from scratch – while their tenant can live rent-free for longer in their property. So if you are in the position of having to evict, make sure that you seek professional help from legal eviction specialists, such as Landlord Action.”

For more information, visit Landlord Action’s website – or you can request a callback from the advice team, who will be happy to have an initial chat free of charge.  

You may also be interested in our article, Trouble with tenants? 7 tips to protect you and your rental property.

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