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UK Investment Property

How to manage rent arrears in the UK property market

It should come as no surprise to anyone that over the last two weeks, most of the inquiries we have received from landlords concern rent. More specifically, arrears.

It depends why they went into arrears. If they were furloughed, they may well not be back in work yet or only going back part time from next week. They may also be at one of the many companies at risk of redundancy.

They still owe it and it works so no harm to speak to the agent to see why they got the break in rent anyway, as that may give a better idea of whether they are likely to be able to pay it yet. That they’ve already paid back half suggests they’re aware it’s still due and will pay it back when they can, so be careful not to start putting pressure on needlessly as it won’t help the relationship. They sound like a decent tenant and they probably view you as a reasonable landlord.

Our responses to each of these inquiries largely reflect the following:

  1. Get yourself sorted
    It has been made abundantly clear to APIA members that in times like this, cash-flow is king. Take a good look at your cash position right now. What are the incomings? What are your outgoings? Do you qualify for any government assistance packages? Has your employer given you any indication around the security of your job? Are you aware of any clients who may not be able to pay your bill in the short to mid-term?

Stress-test your portfolio right now. Look at how your cash position will change if one or more of your tenants default. What would that look like if some or all of your tenants get a slight reduction or deferral? How much pain can you withstand? Can you deleverage by selling some properties at the end of L4. What would that look like? Have you spoken to your bank or got some good financial planning in place to weather the storm?

Until you know exactly what your capacity is, you are not in a position to help anyone else.

  1. Check-in with your tenants
    If you haven’t already, you should. In the age of social media that conveniently diminishes facts while celebrating manufactured outrage, it is easy to buy into the landlord vs tenant rhetoric. And you would be shortsighted to do so if not downright wrong. Long-time investors will be the first to remind you of the symbiotic relationship that exists between a landlord and a tenant. Like it or not, you and your tenants are going to be weathering this storm together.

Get the relationship on the right track by reaching out today to check on their wellbeing. Consider this: There is this acquaintance you met some months ago at an APIA mixer, you exchanged numbers but neither of you ever followed up. You know nothing about this person apart from you shared a drink with him. If in the midst of all of this L4 madness, you suddenly get a text saying ‘Hey, I paid for your drink that time we met and you’ve never paid me back. I like $10 please.’ How would you feel about that? If say this person actually checked-in with you early in the lockdown and later on sent you that text to ask for money anyway, how differently would you feel about that? A how-are-you message would not only mean a lot for your tenant to receive, but it could also translate to longterm loyalty after COVID-19.

If you are thinking to yourself, Gees APIA, I didn’t come here to be lectured about how to be a decent human being 🙄, then we only have one word for you – karma.

  1. Front-foot tough conversations
    We can’t say this enough: Pre-mortem. Pre-mortem. Pre-mortem.

The reality is that some of you reading this will be suffering financially to the same if not a greater extent than your tenants. On top of that, all landlords right now have to wear a greater risk of tenants defaulting because of COVID-19. Have a think about what you and your tenants can do now to prime each other to expect to cope with your respective challenges.

For example, many tenants are not aware that a mortgage holiday will end up costing landlords more in interest longterm. When Jacinda said rent freeze some tenants heard you don’t have to pay rent. You could also be labouring under certain misapprehensions about your tenants. Maybe they have lost their jobs. Maybe they are on half-pay. You just don’t know. Work out a way now to broach these subjects to them respectfully and invite them to be open and honest with you about their situation is the first step to ensure that arrears do not snowball into something unmanageable.

  1. Learn the new rule of renting
    Information about how the COVID-19 Response (Urgent Management Measures) Legislation Act 2020 changes the rules of renting have been widely circulated. NZPIF has also produced this excellent resource to help you manage your rental property during COVID-19. Some common misinformation we would like to address here:

14-day notices for rent arrear are still legal. Whether it is appropriate should be determined on a case by case basis;
Even though you cannot apply for termination unless the tenant is 60 days in arrears, it doesn’t mean your tenant can abstain from paying for 60 days;
There is no legal obligation for you to reduce rent or offer a deferral programme (though it may be appropriate/prudent to do so);
You are entitled to ask your tenant for proof of reduced/lost income or financial hardship before offering a reduction/deferral;
Should you offer a temporary rent reduction, the reinstatement of the original rent amount at the end of the reduction period does not constitute a rent increase;
Though the Act uses language that is reminiscent of the 218-1 Residential Tenancies Amendment Bill (especially in terms of termination and anti-social behaviour), it is not a way for the government to backdoor 218-1 in during a global crisis. The Act is only in place while an epidemic notice is in force for COVID-19 under section 5 of the Epidemic Preparedness Act 2006. To the cynics out there – settle down.
That said, we are entirely uncomfortable with Dr Wood’s directive that tenants do not have to inform landlords if they test positive for COVID-19. We will be escalating this to the NZPIF to support its advocacy efforts.

  1. In appropriate cases, consider a temporary rent reduction, rent holiday or rent deferral
    We don’t know how COVID-19 is going to unfold and what havoc it is going to wreck on the economy when all is said and done. What we do know, at the time of this piece, is that many of us are still working from home and on most- if not full-pay.

That said, some are not quite so lucky and have fallen on hard times through no fault of their own. This could be you, or even your tenants. Be helpful. Refer tenants who are struggling to the various relief packages that are available and let them know about the accommodation supplement as well as arrears assistance offered by WINZ.

In appropriate circumstances, consider working with your tenants towards a plan for temporary rent reduction/rent holiday/rent deferral. We had previously advised, during L2, to document the arrangement by way of a variation to the tenancy agreement. That is no longer appropriate during L4 seeing that it would be impossible to have both the tenant and landlord signing the variation. Instead, we recommend the following:
That you have an open and honest discussion with your tenant about your respective positions. That you make clear that you are not seeking to profiteer from the situation but rather want to work out a fair and equitable arrangement to suit both parties.
That you keep the arrangement short (such as two weeks or one month) to give yourself and your tenant the flexibility to review your positions throughout this unprecedented crisis.
That you document the communication in a way that allows the Tenancy Tribunal to easily unpack and understand in case there is ever a dispute. APIA members are invited to download and use our temporary rent reduction summary statement and temporary rent deferral summary statement. Make sure you insist on seeing a written reply from your tenant confirming the arrangement before it takes effect.

  1. Be kind and keep your eyes wide open
    Kristine King made a good point at this week’s Hangout session L4 implications for landlords and tenants: tenants are not going out and tapping into their discretionary money. They can’t. None of us can. So whey they come to you to say that they are struggling to pay rent, chances are, they are really struggling. Sure, there will always be a small number of people who are trying it on and taking advantage of the situation. But we think they are the exception rather than the norm. As long as you are thoughtful, savvy and keep your eyes wide open, we think you will have enough in you to make the right judgment call. Earlier on during this crisis, we received a rather tasteless media inquiry (once again trying to make mincemeat out of landlords’ reputation). In response, we said, amongst other things, that we are confident in the humanity and business acumen of our members to act appropriately. We were, and we still are.

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