As a landlord, you expect to receive rent on time and in full but how do you handle a tenant in arrears?
There are a few things you should know about your rights as a landlord when it comes to rent default including the process around sending a non-payment termination notice and how to get the best outcome if you’re required to attend a tribunal.
It’s not the first thing you think about when buying an investment property but learning how best to deal with a tenant in arrears is an important lesson to learn.
How to deal with a tenant in arrears.
If your tenant has missed rent, it may seem pretty straightforward that you have every recourse to terminate the lease and evict the tenants.
The fact is, the law tends to favour the tenants in a rental default situation.
Successfully retrieving your missed rental income as a landlord comes down to following the due process and few golden tips along the way.
What if my tenants have missed a payment?
If your tenant is a day or two late with rent, legal experts agree that it’s always best to resolve the issue outside of court if you can.
Think about the character of your tenant: if they’ve never missed rent in the past and they’ve kept the property in really good condition, it may be that they’re just in short-term financial hardship at the moment.
It could be anything from losing their job or having to pay for medical bills for a loved one.
The first thing you should do is discuss the situation with them, temporarily freeze rent and work out a way for them to pay the debt over a period of time.
Your real estate agent or property manager should be helping you throughout this process.
In some cases, this is enough for your tenant to get back on track.
However, in most cases, once a tenant starts falling behind in rent, especially when it starts to become substantial, the likelihood of them paying, is slim to none.
How much time should I give my tenant?
You also have to be cautious in so far as allowing rent default to extend past the 30 day mark.
The reason that your tenant’s security bond only covers up to 4 weeks worth of rent or up to $700 depending on what state you live in.
To reduce your loss once you decide to take further action, you should do so no later than the one month mark.
Anything past 30 days and you may have to take further legal action which can often cost you more than the rent you stand to recoup.
How do I escalate the process?
If you feel you’ve give your tenant ample time to pay their rent, your first reference for further action should always be the lease agreement.
It will always provide terms and procedures for a tenant in arrears including (usually) a provision that gives a landlord the right to move to evict a tenant if they’re in arrears for more than 14 days.
Be careful though!
You can’t just simply physically remove the tenants or start changing the locks.
There’s a proper legal procedure you have to follow in order for you to get the best outcome.
Send them a breach notice.
The 14-day provision is only applicable from the first day that your tenants receive a non-payment termination notice.
The notice essentially communicates to the tenant that they breached the term of the lease, which could be anything from property damage to, of course, not paying rent.
It’s very important that the notice is served and it’s served properly because it can work against you should the matter proceed to a civil tribunal.
The 14-day written notice is key to recouping your rent and evicting the tenants.
Tribunals have been known to completely reject a landlord’s claim of a tenant in arrears in court simply because the notice wasn’t served correctly.
This leaves you having to send out another breach notice and potentially wait another 14 days, all the while missing out on rental income from a new tenant.
What should be in the termination notice?
Your real estate agent may have their own breach notice template that you can work off but there’s no specific form you need to complete.
Essentially, a non-payment termination must be signed by either yourself as the landlord or your acting real estate agent and detail:
- The reason for terminating the lease agreement.
- The property address.
- The date the tenants will be required to vacate the property.
- A statement which states that if the rent is paid, the lease agreement will be upheld (it’s really important that you include this).
You can issue the notice in person, by fax or by mail, bearing in mind that you’ll have to add extra 4 days to the 14-day written notice requirement, bringing the total number of days to 18.
You’re also permitted to hand the notice to somebody aged 16 or over at the tenant’s residential or business address.
If the tenants aren’t home, you can also put the notice in their letterbox in an envelope addressed to the tenants.
These various methods of delivery can help minimise the chance of your tenant purposely avoiding any contact with you.
Bear in mind that you aren’t permitted to issue notices via email, text message, over the phone or by simply slipping the notice under the door.
Hint: Keep a copy of each notice including a written record of when it was sent and how it was delivered to the tenants.
In addition, make copies of all conversations (including email conversations) you’ve had with your tenant up until the point the breach notice was sent.
A witness may be needed if you intend to issue the notice in person.
It all comes back to having a paper trail if you need to go to tribunal for a tenants in arrears.
Do I have to go to tribunal?
If the 14-days has lapsed, you can then proceed to lodge an application with the civil and administrative tribunal for your relevant state, listed below:
- NSW Civil and Administrative Tribunal.
- Queensland Civil and Administrative Tribunal.
- Victorian Civil and Administrative Tribunal.
- South Australian Civil and Administrative Tribunal.
- Northern Territory Civil and Administrative Tribunal.
- Tasmania (no dedicated tribunal but you can find more information at Courts and Tribunals Tasmania).
- State Administrative Tribunal in Western Australia.
- ACT Civil and Administrative Tribunal.
Your real estate agent can organise all of this for you and act on your behalf!
How long does turnaround take?
Once the application is lodged, you’ll receive a notice of conciliation and hearing and it usually takes 2-4 weeks for the matter to be heard.
The turnaround time is actually a lot quicker than a typical legal case.
The reason is that the tribunal recognises that during this process, you’re continuing to lose money on rent.
Depending on the nature of your tenants, your property may well continue to be damaged until the matter is heard.
Where is the matter heard?
Your state’s civil court will have tribunals all over the metro area so the case will be heard at a tribunal that’s convenient for both you and your tenant.
How much does it cost?
The cost of going to Tribunal is around $47. On top of that, the cost will be payable by whoever loses the hearing.
How does it work?
Essentially, it will be you (or your real estate agent), your tenant and a Tribunal member discussing the matter in a closed environment.
It’s at this point your proof of the breach notice and any other correspondence you’ve had with your tenant will come into play.
By showing clearly that you gave the tenant ample time, you discussed payment solutions and you followed the proper 14-day written notice process, you’ll have a much better chance of winning the tenant in arrears case.
Again, tribunal hearings tend to favour the tenant: you’re missing out on rent money but they could potentially be booting a family out on the street.
All of this will come to forefront if the tenant explains how they and their family were in financial hardship recently, for example.
If they agree to pay back the rent owing over time, that’s a great win and the matter can be resolved just like that.
If you and your tenant can’t come to an agreement and your tenant has had a history of missing rent in the past, the tribunal member may issue a termination order.
This basically means a date is set for the tenants to vacate the premises.
What happens next?
Once the termination order and warrant of possession order are granted, you are within your rights to change the locks.
If they’re not home, you’re actually legally required to put their possessions in storage but how long varies from state to state.
What happens if they don’t leave?
By having the warrant of possession, an officer of the court or a Sheriff can help you evict the tenant, by force if necessary.
You are permitted to attend the eviction to oversee any damage the tenant may cause to the property when they’re evicted.
Do a formal final property inspection and take plenty of photos and video of the property.
All of this evidence can used to recover any reparations needed if the bond isn’t enough to cover these costs.
Remember: locking out tenants without a tribunal order is illegal. You could be fined up to $22,000 in some state and may even need to compensate the tenants.
Do I have access to my bond?
Since the tenants have broken the terms of the lease, you have every right to claim the bond but you’ll be required to go through the proper channels and submit an application with the relevant bond board authority for your state.
This is actually the independent custodian of the bond you receive from your tenant as the start of the lease agreement. Normally, your agent will make a claim on the bond.
Once you submit the form and it’s accepted by the relevant authority, you should receive the bond back within 2-3 working days.
What if the bond isn’t enough to cover my losses
Unfortunately, hiring a solicitor and taking your tenants to court to claim more than the value of the bond ends up costing you more than what you’re trying to get back.
It’s the reason why getting landlord insurance is important.
Reduce the risks of a tenant in arrears.
Screen potential tenants
When it comes to a tenant in arrears, prevention is better than a cure.
Screen potential tenants thoroughly with not only a rental history check but even an employment and criminal history check.
Do as much due diligence as necessary and take your time to ensure you have the right tenant in your property.
You can’t always rely on your real estate agent to do everything in your best interests: it’s your investment property after all.
Question their decisions and ask whether they’re doing a good enough job in managing your property.
You may want to screen the tenants yourself or change to a new real estate agent.
This is especially true if you can’t get to your property on a daily or weekly basis: you’re relying heavily on the judgement of the agent.
When screening tenants, a good agent is not afraid to advise you that the tenants they’ve interviewed are not reliable and that they have to keep looking.
In the long run, it’s worth making the right tenant decision.
Consider landlord insurance
Landlord insurance will not only protect you against you a tenant in arrears but theft and damage as well.
Bear in mind that an insurance claim can’t be processed until the tenant has vacated the premises.
Contact your insurer as soon as this has occurred, and have copies of breach notices, inspection reports and photos and videos ready to support your claim.
Want more tips on managing an investment property?
Our mortgage brokers are investment loan specialists but many of them are successful property investors in their own right.
We’ve heard success stories and we’ve horror stories when it comes to having a tenant in arrears.
Although we can’t give tax and legal advice, we have plenty of free information that you can use when deciding on your next investment.
Check out our Investment Property Centre for more guides and tools that can help you make an informed decision when buying and managing your investment property.
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