At this time of year, soon after the Christmas spending spree, inevitably rent payments begin to suffer. If you are having problems with rent arrears, this article should help.
As in most areas of life, prevention is better than cure. To reduce the risk of being owed money, it is sensible to take precautions before entering into tenancies and other contracts.
This article applies primarily to English law. Although tenancy laws are similar in other jurisdictions, there may be significant differences. Always seek professional advice before making or not making important decisions.
Always Check Out Your Tenants
A little time spent investigating who you intend doing business with can detect warning signs which indicate whether the customer is likely to be a bad payer. It is very important to investigate the financial background of a company or individual.
It is possible to build up a reasonable picture of a potential customer by a few basic checks that do not cost much. Credit information can sometimes be ambiguous and so care must be taken as to what it could mean.
You Need a Good Agreement
All businesses, other than those engaged in the most straightforward of transactions, should have a document which sets out the standard terms on which it does business. The importance of having an understandable contract or agreement should not be forgotten when it comes to credit control.
The terms should be unambiguous because if there is uncertainty over the terms of the contract, it will usually be interpreted against the person seeking to rely on the unclear clause.
Letting agreements and leases are vital in this regard: downloading a free lease or letting agreement from a web site is one thing. Dealing with the consequent problems when your tenant, who has been occupying your property for some years and has security of tenure, turns sour – that’s another story.
Don’t skimp on your agreements and this is particularly important with commercial lettings. Off the shelf agreements have their uses, but for a serious long-term commercial letting you need a comprehensive lease drawn up by a competent commercial lawyer to fully protect your interests.
Late Payment of Commercial Debts (Interest) Act 1998
Many terms and conditions of business have clauses which charge interest on late payment. Under the Late Payment of Commercial Debts (Interest) Act 1998 as amended by the EU Directive which was implemented on 7 August 2002, all businesses may charge interest and fixed compensation for late payment. Even if the terms of business do not refer to the legislation, its provisions are implied into the contract. However, it is better to have a clause in your terms of business.
The provisions of the legislation only apply where the customer is acting in the course of business, so would not apply against a consumer. The Late Payment legislation permits interest to be charged at the rate of 8% above the base rate on accounts after 30 days from the date of the invoice or when the good were delivered or services provided.
If different payment terms have been agreed, then interest can be charged when payment becomes due under the contract. The level of compensation which may be charged for late payment in addition to interest depends on the amount of the debt:
• For debts below £1,000: £40 in compensation
• For debts from £1,000 to £10,000: £70 in compensation
• For debts over £10,000: £100 in compensation
These fixed charges were introduced to help compensate creditors for the costs of chasing late payment.
Key Points and Debt Collection
- Have clear unambiguous agreements and terms of business – don’t skimp on these
- Have a system for debt collection, don’t delay, make an impact, follow a time table.
- Be persistent and patient – it can time time to collect debt, but if you persevere you’ll get it in the end.
Have a System for Chasing debts
Every landlord should have a system for chasing late payments. If your procedure for filtering out potentially bad payers is effective, then it will not usually go beyond reminders. When it becomes clear that the tenant is delaying payment or is not going to pay, then a certain degree of skill will be required to recover the debt.
It involves absorbing all the information you have about the debtor and placing yourself in a position of control. The key factor to success here is to use a method that makes an impact.
Although when chasing commercial debts, the circumstances of one outstanding debt are unlikely to be identical to another, it is possible after years of experience to identify the reasons and excuses for non payment.
Recovering from Individuals
Effective debt recovery is about being alert to warning signs which you are aware of from previous experience. This may mean you are perceived as dealing with a tenant without an open mind, but your aim as a debt collector is to recover money which will maintain your cash flow.
Recovering a debt from an individual involves different skills and techniques than those used for chasing money from a business. It may be argued that it is more difficult to recover debts from an individual who is hard up or without a fixed address. On the other hand, it may be easier to recover debts from some individuals because it is personal to the debtor and so you are more likely to provoke a response.
Tracing Tenant Debtors
Tenants in rent arrears often abscond not leaving you with a forwarding address. This should not be a major calamity if your tenant has filed a comprehensive Tenancy Application Form with you at the start of the tenancy. This will give you all the information you need including next of kin to enable you to trace your debtor tenant.
Tracing Agents will trace debtors for a reasonable fee – usually around £0 to £90.
Having achieved a response, you have an opportunity to negotiate a repayment plan. Small but regular installments are probably the best you can expect. Even if you go to court and obtain judgment, the debtor can ask the court to order payment by low weekly installments.
Sometimes, a debtor’s statement of their financial circumstances shows excessive expenditure on certain items. In such cases, the creditor may wonder whether the debtor is trying to disguise the true extent of their financial position.
Section 21 & Section 8
When a tenant in residence gets into arrears it’s often preferable to gain possession of the property first (section 21 route) as opposed to using the section 8 route. You can then go for the arrears, which may then also include dilapidations expenses, through the normal Small Claims process.
The section 21 route gives automatic possession, providing your paperwork is in order, whereas a section 8 route can mean all sorts of difficulties and usually deferred possession orders.
Commercial Tenancy Arrears
In the case of commercial tenants in arrears you should carefully weight the pros and cons of small claims, using bailiffs or outright forfeiture. All these will depend on the circumstances, particularly the length of the lease and the prospects for the tenant’s business.
Doing it Yourself or Using a Solicitor?
Once you have tried all the various telephone and written techniques to recover the money, then court action is an option unless you decide that the debt is not worth pursuing. Recovering a debt through the county court process can be frustrating, but to improve your chances of succeeding it is important to have a good understanding of the legal procedures. There are strong economic arguments for landlords and companies handling small claims in-house.
However, with the small claims limit currently at £5,000, a debt just under this level can represent a considerable sum to a small landlord or business. Therefore, it might be worth instructing solicitors to avoid mistakes even though only limited fixed costs can be recovered in the small claims procedure.
There are some situations in small claims where you can recover your legal fees under CPR Part 27.14.2(g). This is where the other party has acted unreasonably. Unreasonable conduct is not defined but there many cases which give guidance as to what is unreasonable conduct.
The court will not often grant legal costs for unreasonable conduct but it is worth bearing in mind as it may make it worthwhile instructing solicitors to pursue a debt.
Article by: Anthony Reeves, legal consultant©LandlordZONE® – legal content applies primarily to England and is not a definitive statement of the law, always seek professional advice.