Tenants not paying?

When one starts talking about rental property, everybody seems to know somebody who's had trouble with tenants defaulting on their rental payments. "The long and the short of it is that you need to act swiftly and decisively in order to mitigate the risk around the potential loss of income as effectively as possible," says Bruce Swain, CEO of Leapfrog Property Group.

So what's the owner of rental property to do when tenants can no longer pay the monthly rental?

The first thing to do is to act the moment payment is late, rather than wait until payment is a month overdue. "The first step is simply to get in touch with the tenant to enquire about the situation. If the tenant is known for paying on time but is simply having once-off financial difficulty, you may want to allow payment to happen at a later date," Swain suggests. He adds that it is useful to bear in mind that the cost of recruiting a new tenant can be more costly than simply making an allowance for one with a proven track record for paying on time and maintaining the property well.

Having said that, Swain warns that one needs to be very strict about sticking to the deadline of such discretionary allowances to ensure tenants don't take advantage of your generosity.

"The reality is that the chances of recovering the money is very typically very slim and actually ends up costing the property owner significantly in legal fees," Swain explains.

The important thing is to follow the right steps to ensure you have a legally enforceable eviction order, should it come to that. "You don't want a technicality to prevent an eviction order from being carried out, and note that it is illegal to lock tenants out of the property or have services disconnected so best not to risk getting yourself into trouble," Swain highlights.

Here are the steps to follow for the best results.

Immediate action

As soon as payment into the account stipulated on the rental agreement on the day of the month agreed upon is late, a written notification - a breach of contract letter - needs to be issued to the tenant. The letter should stipulate by when the situation needs to be remedied - typically seven working days - and what further steps will be taken should payment not be received within this timeframe. "It's a good idea to have this letter sent by a registered debt collector as the formality indicates the seriousness of the intent to collect the money," Swainn points out.

On the seventh day

If, despite the breach of contract letter, payment is not received after seven working days, a note of cancellation of the lease agreement needs to be sent. This document should include a demand to vacate the property immediately.

Swain shares that this is often the point at which the tenant realises the severity of the situation and puts plans in place to remedy it.

Last resort

While the hope is always for the warning to suffice, it does of course action that eviction may be the only course of action.

"Legal action should always be the last rest as the eviction process is most costly and complex, the latter mostly because the law states that tenants cannot be evicted if it would result in them being homeless, which is a technicality that makes the ruling difficult to enforce," Swain explains.

Every case will have its own merits but it is usually better to forfeit rental arrears than get embroiled in expensive, and often expansive, legal action. "The best way to deal with any situation related to tenants and late payments is to do so quickly, transparently and according to the very letter of the law," Swain concludes.