Rental defaults surge
THE BUY-TO-LET property market is becoming an increasingly risky business for investors on the back of an alarming increase in tenant defaults over recent months. To make matters worse, the legislation dealing with disputes between residential landlords and tenants – commonly known as the PIE Act (Prevention of Illegal Eviction from and Unlawful Occupation of Land Act 19 of 1998) tends to be biased in tenants’ favour.
Figures from credit bureau Tenant Profile Network (TPN) show that around one in every five tenants (19%) across all major South African cities didn’t pay any rent in first quarter 2009. That’s up from 5% in first quarter 2008.
TPN MD Michelle Dickens says there’s no doubt tenants, like homeowners, are becoming increasingly financially stressed, with many battling to meet monthly rental obligations. However, there’s also a marked increase in rental scams, where tenants take occupation of a property with the outright intention of never paying for their accommodation. Dickens says unscrupulous tenants have wised up to the fact that once they take occupation of a property, it’s a costly and time-consuming process to evict them.
Dickens sites one recent example of a young mother with two small children who, after initially viewing the property in the presence of an estate agent, went back to the agent a few days later requesting the keys to allegedly show the property to her husband. The women and her children promptly moved into the property and refused to move out, telling the agent to obtain a court order to evict her.
Worse still, when the agent “locked” the women out she approached the Magistrate’s Court and obtained an order allowing her back into the unit. She claimed to have had a verbal agreement for six months at zero rent. Dickens says the agent is now forced to take legal steps to get rid of her.
But whether tenants default because they know they can initially get away with it or for legitimate financial reasons, Dickens says it’s vital landlords act quickly to limit the damage. She advises landlords to avoid illegal action – such as locking out a tenant or disconnecting services. Though those actions may work, such steps could prompt the tenant to lay criminal charges against the landlord – with dire consequences.
Dickens says the correct procedure is to approach the tenant within a day or two of non-payment and agree to a date when the tenant will settle that month’s arrears. If payment doesn’t occur on the agreed date, the landlord must send a written letter of demand giving seven days’ notice to remedy payment (the period usually stipulated in standard lease agreements).
That letter, which should state the tenant is in breach of contract, should also note the landlord’s intention to report the payment default to credit bureaux should the account not be settled within the seven-day notice period.
Dickens says the last step is an important one, as tenants are generally more likely to pay up if they realise defaulting can affect their credit profiles. Dickens says landlords are entitled to blacklist the tenant 20 business days after a letter of demand for payment has been sent. TPN provides a standard letter of demand to rental agents and private landlords at a cost of R25/letter.
If the tenant fails to make payment within seven days, the landlord should send a written notice to cancel the lease agreement and demand the tenant vacate the property. Most lease agreements stipulate tenants must vacate the property immediately once the seven-day notice period has lapsed, although some provide for a longer notice period.
The lease agreement often also requires the lease cancellation notice to be sent via registered post – an important step to adhere to if the landlord is forced to go the legal route. If the tenant fails to vacate the property or disputes the cancellation of the lease agreement, the landlord has no choice but to employ a law firm to apply for an eviction order.
Anecdotal evidence suggests tenants withholding rentals deliberately wait for landlords to go the eviction route, as they know it effectively gives them a “stay-for-free card” for another few months.
The writer can attest to that. One tenant is four months in arrears and refuses to vacate the property unless he’s officially evicted by court order. In this case the letter of demand, notice to blacklist and notice of lease cancellation were simply ignored.
The legal costs of the eviction process, which we were told should take six to eight weeks if unopposed, is expected to be between R12 000 and R15 000. By the time the eviction order is likely to be granted, our tenant will be R27 000 in rental arrears. And we have no guarantee of recovery of any portion of the rent owed or our legal costs.
Jenny Smit, senior associate in the litigation department of law firm Werksmans, confirms the eviction process is a difficult and costly one. One of the major frustrations for landlords is that the PIE Act is biased strongly in favour of tenants. Smit says the original intent of the Act was to counter the social effects of people losing their homes within the historic context of SA’s housing shortage. The onus therefore falls on the landlord to justify the reasons why a tenant should be evicted. The Act also forces the court to consider extenuating circumstances.
For example, Smit says it becomes tricky to evict people who are disabled, elderly, have young children or women heading the household. Matters are further complicated by the fact the PIE Act has no regulations to enforce specific eviction procedures. In other words, every court has a different interpretation of the Act, says Smit.
The Act also doesn’t allow for an automatic recovery of costs. Smit notes landlords usually need to bring separate actions against defaulting tenants: an application to evict as well as an application to recover rental arrears and/or legal costs. “And it’s entirely the court’s discretion whether to grant an order to recover costs,” says Smit.
The court also has the discretion to decide when defaulting tenants should vacate the property once an eviction order is granted. In cases where the eviction is effective immediately, the sheriff of the court will physically lock the tenant out (usually within a few days of the court hearing) and will be entitled to attach goods on the premises if a summons to recover arrears or legal costs has been granted.
However, Smit says in a case where the tenant has school-going children, the court may decide to give the family 30 or 60 days to find alternative accommodation before the eviction is enforced.
Ultimately, the best defence against defaulting tenants is a stricter tenant acquisition policy. Dickens says it’s essential to conduct proper credit checks before signing a lease agreement. Asking for certified copies of ID documents, payslips and bank statements is also a given. In addition, often overlooked – but crucial – is to establish whether the tenant can actually afford the monthly rental, says Dickens. Banks generally require that homeowners’ monthly mortgage repayments don’t exceed 25% to 30% of household income: the same rule should apply to tenants.
Source: Courtesy of Joan Muller -Finweek 25 June 2009
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