Research carried out by specialists in savings and lending, Shawbrook Bank have revealed the extent to which payment holidays and rent reductions have impacted rental income over the lockdown period. The report detailed that almost half of all UK landlords, or 46% reduced the amount of rent their tenants were required to pay over the pandemic. Shawbrook claims that the extent of these cuts into landlord’s income is set an average of £6,500, placing the total loss to the sector at a colossal £7.9 billion.
With the average levels of arrears being faced by a tenant at the start of 2021 averaging £2,376, according to a report from Paragon Bank, alongside almost half of UK landlords gaining their rental income from a single property, the need for these rent repayment initiatives becomes less about a selfless act of reducing a tenant’s rental obligation, but more a story of ensuring rental income was maintained. Despite this, the study from Shawbrook Bank showed that although 17% of landlords that owned multiple rental properties stated they lost income due to rent reductions, a mere 12% of landlords that owned a single rental property revealed that they had also faced a fall in rental income as a result of providing their tenants with reduced rent or a payment holiday. However of the landlords that let out a number of rental opportunities over half, or 59% stated that they negotiated rent reductions with the occupants of more than one of their rental properties.
Shawbrook further revealed that around 28% of landlords provided their tenant’s with a full rent payment holiday, whilst around 50% of private landlords lost £7,500 across payment holidays in 2020. The payment holidays offered to tenants typically lasted three months with the landlord proactively providing these to tenants in 55% of instances.
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How Can Landlords Prevent Rent Arrears?
Naturally rent arrears is not a good situation for either the landlord nor the tenant, and it is essential that both parties try to work to a solution that offers the landlord some amount of rental income, whilst allowing the occupants to comfortably get back on their feet and address their situation. Although many claim the tenant referencing process and its numerous financial assessments to be the best measure a landlord can take against arrears here are a few additional steps a cautious property owner could take.
Taking Rent in Advance
With the introduction of the tenant fees act in 2019, landlords were prohibited from passing on excessive charges or any administrative costs onto the occupants of their rental property. The government legislation aimed to make the private rental sector an increasingly accessible space for all, especially those that may be struggling financially, alongside those struggling to take their initial steps into the rental market thanks to sky high upfront costs to renting. It is not hard to see why these financial barriers would present themselves as such a deterrent to the rental lifestyle, with multiple deposits; referencing and other set up costs all coming before the keys to the front door. With this being said, not only did the implementation of the tenant fees act make many of these upfront costs that should not be incurred by aspiring renters a thing of the past, but also placed a limit on the amount a landlord is able to charge prospective renters before they move into the property. With this in mind a threshold was placed on the amount the owner of a rental property is able to ask their aspiring tenants pay for their holding and tenancy deposit.
The act meant that when requesting their future tenants pay a holding deposit to take the rental opportunity off the market and begin curating the terms of the tenancy agreement, the landlord must take no more than the equivalent costs of a single weeks rent for this deposit. However, although a similarly minded financial limit is in place for the tenancy deposit, sometimes called the security deposit, the threshold is considerably higher. This is largely because the amount a landlord is able to ask their applicants to pay for a tenancy deposit is derived from the amount each resident is required to pay in rent each year for the accommodation. In the circumstance that the owner of the rental property only requests that the occupants are charged up to £50,000 each year in rent, then the maximum amount the tenants are liable top pay for their tenancy deposit is five weeks worth’s of rent. However, if the amount the tenants must pay in rent each year is more than this amount, then the landlord is able to ask the occupants of their rental property to pay the equivalent of six weeks rent for the security deposit. Naturally, either of these alternatives present themselves as a high upfront cost for those looking to rent heir next home and whilst any amount taken through the deposit will offer the landlord some security through being able to recuperate any missing rental payments, this is not only a small amount of arrears to be able to regain, but this could deter tenants with an increasingly secure income away from the opportunity.
We understand if this may seem somewhat off topic, however, you may have noticed that the Tenant Fees Act did not place any regulations on the amount of rent a landlord can ask their tenants to pay before they move into the rental property. This means that an increasing number of landlords are bypassing these policies established to protect renters from high upfront costs altogether, seeing landlords asking for advanced rental payments more frequently. This practice has typically been reserved for renters that did not manage to pass all aspects of the referencing process, most commonly the “affordability checks”, comprising an assessment of the tenant’s employment statues, income and credit history to ensure they are able to maintain consistent rental payments to the landlord. As can be expected if a landlord is in doubt regarding a tenant’s ability to pay their rent, they may ask for a portion of this to be paid before the renter moves into the property. Whilst as mentioned there is no legal limit on the amount a landlord is able to ask their tenants to pay in advance, there is of course a point where too many potential tenants are priced out of the opportunity. Until recently, landlords would frequently request that there tenants pay a single months’ worth of rent in advance; however with recent time leaving a huge number of households facing arrears, landlords are looking to secure their income and requesting as much as six months’ rent in advance. However this move by private landlords has not gone unnoticed, with the National Residential Landlords Association have appealed to landlords to “look for alternatives to asking for high levels of rent upfront.” With the association going on to say that, “it is usually simpler to obtain a guarantor or suitable insurance product to provide assurance to tenants and landlords that rents will be covered.”
It is also worth mentioning that the tenant fees act, whilst the regulation does not place a limit on the amount a landlords can request their tenant’s pay in rent before moving in, it does prevent landlords for taking rent in advance and disguising other costs into this initial payment. With this in mind a tenant can’t be charged for any referencing checks under the pretence the money they are providing to the landlords is for an advanced rental payment. Any sums of advanced rent payments must be clearly detailed in writing between each party of the tenancy agreement; stating the period that the advanced rental payment covers, when the tenant can expect to make their next payment to the landlord and a periodic breakdown of the advanced payment to ensure clarity. It also goes without saying that the advanced rental payment should fall in line with the same rates the tenant would expect to pay within the tenancy period.
Should You Get Rent Default Insurance?
As can be expected in the current financial fallout from the COVID pandemic, alongside the nation’s emergence from lockdown measures, landlords are becoming increasingly sceptical of the security of their rental income. To this end rental property owners are able to take out appropriate insurance policies that will protect their rental income in the event their tenants fail to pay. Commonly referred to as rent guarantee insurance, or tenant default insurance, such policies do exactly what they say on the tin, providing landlords with a crucial financial lifeline in the event that their tenants begin to accumulate rent arrears.
This method of ensuring a consistent rental income doesn’t come without its caveats, with the providers of such insurance policies often demanding that the landlords thoroughly assess their tenant’s through the referencing process, with those deemed to be at risk of missing rental payments further into the tenancy period affecting the landlord’s ability to take out rent guarantee insurance. Although it is worth noting that the specifics of each tenant default insurance policy will naturally have some discrepancy within the terms, in most cases the rent guarantee insurance will protect the landlord up to an established amount, or for a set period of months, after which the landlord will unfortunately not be able to claim for additional missing rental income. Whilst the period over which these policies will offer financial protection to the landlord is typically around one year, some providers will also go as far as covering the legal costs of the rental property owner when trying to recuperate the missing amounts. It is also essential for landlords to keep in mind the instances under which their insurance provider will not cover their income in the absence of rental payments. Whilst again, the individual terms of each policy will vary, it is common for rent guarantee insurance to not cover any extended period where the rental opportunity remains vacant, or if the occupants of the rental property are full time students or hold a poor credit history.
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