What to do if your contract-holder stops paying their rent
Tue 14 Feb 2023
If you’re a landlord over the long term, the reality is that you’ll probably have a contract-holder default on their rent at some point. They may simply have forgotten to make payment; it could be a bank error, or they might be in financial difficulty and having trouble making ends meet, or they could be deliberately withholding payment.
Generally speaking, contract-holders falling into serious arrears, where they’re more than two months behind with their rent, is relatively rare, although there’s no doubt that the pandemic had a negative impact. An NRLA survey of contract-holders in England and Wales found that by the end of 2020, 7% were in arrears with around 1.2% owing more than £1,000 – that’s more than double the 3% that were in arrears the previous year (ONS). A second survey by the NRLA, this time of member landlords in early 2021 – the majority of whom self-manage - found that 60% had lost some rental income because of the pandemic, with around a quarter saying their losses were increasing.
So, while the vast majority of contract-holders do pay their rent on time and in full, it’s important to be prepared in case your tenant does stop paying, for whatever reason – especially given the current cost-of-living crisis.
Avoiding contract-holders falling into arrears
If you use a professional agent to manage your rental, you’re less likely to run into trouble with a non-paying contract-holder, for three key reasons:
- They carry out comprehensive referencing checks that include:
- A credit check, which looks at the tenant’s address and credit history and will uncover whether they have any county court judgements (CCJs) against them
- A reference from their previous landlord to find out whether they always paid their rent on time and in full, and if the landlord would be happy to let to them again
- Asking for the contract-holder’s last 3 months’ bank statements that show their regular income and expenditure, so they can assess whether the rent amount is likely to be affordable
And because referencing is something letting agents do on a very regular basis, they tend to recognise potential issues very quickly. So, while self-managing landlords can also make these checks, they may not pick up the same warning signs.
- They check for the rent payment on the day it’s due and will contact the contract-holder right away if it hasn’t been received – whereas a self-managing landlord might not be able to act quite so quickly.
- They carry out periodical checks on the dwelling and contract-holder, which can bring potential problems and affordability issues to light at an early stage, before any rent payments are missed. Again, a self-managing landlord may not be as likely to recognise the signs – and indeed some landlords don’t make checks at all during tenancies.
So, having a good line of communication and making regular checks are key when it comes to preventing them falling into arrears. But if payment is late, action needs to be taken right away in order to resolve the issue and keep any losses to a minimum. At Moginie James, outstanding rent arrears across our managed properties come in at less than 3% whilst the industry average is above 4%.
3 steps to tackle rent arrears
If your dwelling is being fully managed, at Moginie James we will help with this process and if you have comprehensive landlord insurance, you may be covered for any costs to recoup the rent and evict the contract-holder – although this should always be a last resort.
- Communicate with the contract-holder. Contact them on the day that they fail to make payment to find out the reason. It’s important to establish if it’s a glitch, a temporary financial issue or if they’re deliberately withholding payment – in which case, they may not respond at all.
- Try to negotiate a solution. If it’s a relatively short-term financial problem and they’re otherwise a good contract-holder, it may be possible to agree a payment plan to make up what they owe, or a rent reduction for a period of time may help the contract-holder through a bad patch. In this economic climate, if it’s possible to help someone to stay in their home that has, up until now, been a good contract-holder, they are likely to remain an excellent long-term contract-holder.
- If necessary, move to evict the contract-holder. If they are simply unable to afford the rent ongoing, or they’ve stopped communicating and it’s clear they don’t intend to pay, then, as a last resort, it may be necessary to begin eviction proceedings.
So what can you do to protect yourself? The first thing is to use an agent to let and manage the dwelling. Not only will this reduce the change of a contract-holder falling into arrears in the first place, but your agent can handle the rent arrears and if required, the eviction process on your behalf. And, secondly, if you don’t already have rent guarantee insurance, it’s well worth taking out cover so that if your contract-holder defaults on their rent, you will continue to receive the full monthly payment for up to 12 months and the insurance should also cover the legal costs of evicting the contract-holder. To discuss this cover, we have a specialist Rent Guarantee service – landlords will still receive their monthly payments, typically up to a maximum amount for an agreed period.
If you have any questions about rent arrears or you currently self-manage and would like to discuss our property management service to take away the hassle of letting a home, one of our team will be happy to help.