There is now a question mark over whether it is lawful to reject tenants who are on welfare (housing benefit – HB, or Universal Credit – UC). Is it discrimination to do so, to advertise “No DSS”, and to turn away a tenant purely because a part or all of their rent is paid for by HB? It’s not yet clear.
Parliamentary guidance has said that straightforward advertising “No DSS” is not discrimination per se, but there is an argument going on – but so far no legal precedent has been set – that rejecting tenants could be “indirect” discrimination in some circumstances.
Single mother Rosie Keogh got compassionate compensation for sex discrimination from a lettings agency that refused to consider her as a tenant because she was on HB. This cleaner and former paralegal successfully challenged the blanket ban on benefit claimants by the agent, as indirectly discriminating against women, especially single women, and got an out-of-court settlement.
Why do landlords reject HB claimants?
Aside from the fact that most banks and building societies currently forbid landlords with their mortgages from renting to HB tenants, these tenants are perceived as representing a greater risk for landlords.
In fact statistically HB tenants do pose a greater risk of late or non-payment of rent, especially with the direct payment rules. These rules mean that the HB and the rental element of Universal Credit must be paid direct to the tenant, who in turn has to pass it on to the landlord.
Whilst with the majority of HB tenants this works just fine, in many other cases landlords have a problem with that. When times get hard or at financial pinch periods such as Christmas, there’s a great temptation for tenants to dip into money coming into the house that’s not really theirs.
The other negative with HB as far as most landlords is concerned is the often long delay in setting up initial payments, and any changes to payments that need to be made. As the local authority and DWP see any dealings about HB as the tenant’s own private affair, landlords can become very frustrated because they can’t deal with the authorities, but only through the tenant.
How HB can risk be mitigated?
If the tenant is a person who finds it difficult to manage their financial affairs, is in rent arrears or who is unlikely to pay for some other reason, such as illness or illiteracy and mental incapacity, an application can be made by the landlord to the Local Authority for direct landlord payments, designed to protect both parties.
In the case of arrears, the local authority has to be satisfied that there are in fact 8 weeks arrears; that it is not in the overriding interest of the tenant not to pay the landlord, for example, because of a repairs dispute; and that the landlord must be “fit and proper person” to receive direct payments.
So, expect delays, because approval is not quick, and rents will continue to be paid to the tenant during the application period.
If there are rent arrears it is now possible to ask for deductions from the tenant’s Universal Credit payments towards the arrears, and therefore the tenant will get a lower UC payment until the arrears are cleared.
The escrow solution
An escrow is a contractual arrangement in which a third party receives and disburses money or documents for the transacting parties, dependent on conditions agreed by both parties.
One of the advantages of not having direct landlord payments and using a third party intermediary such as a Credit Union (CU) is that the landlord is not vulnerable to “clawback” if it is later found that the payments should not have been made to the tenant.
This was a big problem when it was the norm for landlords to receive direct payments of benefits, but the problem does not occur where payments are made via a credit union, or a commercial solution like the Tasker Payment Service, or alternatively via a guarantor approach.
The Credit Union Payment System
So HB, and UC, are then paid to the Credit Union to ensure that the CU makes relevant payments, including the full contractual rent, before the tenant is able to access the their HB or UC.
Having a CU sit in between the tenant and landlord means that the landlord will not be subject to any clawback. The DWP would need to claim back any overpayment from the tenant, not the landlord. Should the tenant have had a defective claim for benefits, then that is not the fault of the landlord.
Credit Unions are co-operatives that are set up by and for their own members to benefit their local community. They mainly offer savings accounts and loans to their members, but some now offer current accounts from which rent payments can be made. This can be for any claimant benefiting from a direct payments arrangement who doesn’t feel confident in managing their finances on their own.
The added advantage of a CU for the tenant is that it encourages improved money management skills and facilitates potential loans for them as CU customers.
The Local Authority will transfer the funds directly into the tenant’s CU account every four weeks and the CU will arrange to make payments direct to the landlord.
The guarantor solution
This is an approach developed by one investor and letting agent in the North of England, Steve Perrons, which essentially involves signing up a relative of the tenant as a guarantor, and then arranging for the benefit payments to go to the guarantor, rather than the tenant.
The guarantor is then responsible for paying the benefit over to the landlord and ensuring that any shortfall is made up. According to Tessa Shepperson of LandlordLaw, Steve Perrons has used this method for many years and says it works very well.
Mr Perrons specialises in renting to HB tenants, mainly young couples, and he says that buying a property for letting to HB tenants is a sound investment which, in the area he operates in at least, can give the investor a decent return. Although the system he adopts may not be suitable for all HB tenants, the way he operates ensures that renting to HB tenants can, and does, work.
First of all he has a rigorous referencing and credit checking system, the heart and soul of which is his guarantor. Every HB tenant housed through his agency must have a guarantor. The guarantor must agree to take on the responsibility for the payment of the rent to the landlord, and this guarantor is normally a family member, generally a parent, who will be a property owner, will usually have a job and be financially solvent. The guarantor is credit checked and referenced as rigorously as the tenant.
Guarantors are then responsible for ensuring that the benefit is paid to the landlord and that any shortfall between the rent and the HB is made up. To enable them to do this, the tenant must agree to have the HB is paid to the guarantor, rather than direct to them. As with Credit Unions, this can be done when tenants agree – it gives the guarantors the security of knowing that tenants will not spend the HB on things other than rent, putting them at risk under their guarantee.
Clearly, the availability of a guarantor is not a realistic option for all HB tenants, and this model works best with tenants who are young, single parents or couples with families. The CU option is not available in every location, be when it is offered, clearly it is a viable solution.