Landlords around the country were shocked when the federal government announced they could not evict tenants who had lost their job or income thanks to COVID-19 for not paying their rent.
While the Queensland government has since announced a raft of measures addressing the issue, including a three-month land tax rebate, landlords in other states have been left wondering what, if any, recourse they have.
Tenants can’t just stop paying their rent without a good reason. They need to be able to prove they are suffering hardship.
There is also a raft of provisions landlords can access to assist them if their tenants are genuinely doing it tough and can’t pay rent.
Managing tenants in hardship
If your tenant can’t pay the rent, the first step is to see if they could manage a rent reduction, rather than not paying the rent altogether.
“Suggesting a figure lower than the current rent could be a good compromise so at least there’s some money coming in,” said Lloyd Edge, founder of buyer’s agency Aus Property Professionals. “Also request bank statements and other documentation to prove loss of income. This will help you understand if the tenant has savings that could go towards paying rent.”
AJ Chand, chief executive of property management app Instarent, agrees it’s important for landlords to get proof of hardship if tenants ask for rent relief. “Panicked times can lead to tenants making false claims of hardship, so do your due diligence to see if the circumstances are real and justify a rent relief,” he said.
It’s important to note that tenants in Queensland have no obligation to supply financial information under the latest rules announced on Thursday by Minister for Housing and Public Works Mick De Brenni.
“Tenants are not required to pass on personal financial data to their property owner or to an agent, but they may be required to give it to the Residential Tenancies Authority,” he said.
A good property manager will be able to facilitate these discussions on behalf of the landlord. Also be aware that asking a tenant to apply for early release of their superannuation to pay for their rent may be a breach of the Corporations Act.
Deferring your mortgage payments
If your tenant really can’t pay their rent, you could consider deferring your mortgage payments for a period of six months, with a three-month review period. But remember the interest will be capitalised. So first try to arrive at a suitable outcome with the tenant.
“You could consider asking for a partial deferral of your mortgage repayments if the tenant is only paying a portion of the rent,” Edge suggests. “Another option is to move from principal and interest to interest only.”
“To approve any mortgage holiday, the bank will want proof the tenant has lost their job, source of income or business,” he adds.
Your lender will want to see tenancy agreements and communication logs from your tenant notifying you they can’t pay. “This will help make your case and give the bank information on which to make a decision,” said Chand.
The cost of pressing pause on an investment property’s mortgage will differ depending on how the investment is structured.
“Whether the property is positively or negatively geared, whether you rely on rental income as your main source of funds and the property’s gearing levels all play a part,” said Mark Trowell, chief executive of online property management platform Yabonza.
Also remember other costs such as strata levies, council and water rates, insurances, maintenance and emergency repairs continue even if you do get a mortgage holiday.
The role of landlord’s insurance
Landlord’s insurance may play a role if your tenant can’t pay rent. But each policy is different so check yours to understand what’s covered.
“Some rental protection policies may not provide cover for lost income in this new climate where tenants can no longer be evicted. Many policies also do not provide cover for the coronavirus and many insurers aren’t issuing new policies during the crisis,” Edge said.
Under normal circumstances, however, nonpayment of rent is usually covered by landlord’s insurance for a certain period until a resolution with the tenant such as termination of the lease is achieved.
“Insurance claims can be made before eviction as long as eviction is pending,” said Chand. “This will be difficult for insurance companies and governments to navigate given the pandemic and its economic impacts.”
It’s worth noting rental guarantees may apply for some newer apartment complexes. “Check to see if you have signed up to this if your tenant can’t pay,” said Trowell.
Credit score implications
The jury is out as to whether your credit score will be affected if you press pause on mortgage repayments. The best idea is to ask your lender before you decide to take this step.
“Check and keep a record of your credit score now if you’re asking for your payments to be varied. Then see if it has changed in six months’ time,” said Chand.
Balancing tenants’ and landlords’ rights
There’s no easy answer as to whether a landlord with no rent or a renter with no job is in the worst position.
“It depends if the renter with no job is a landlord themselves, because some will be,” said Edge. “If you are landlord it can be helpful if you have equity in the property. But it will be hard to access that equity if the property is not tenanted. To release equity the landlord will need to show the bank rental income is going into the property.”
On the surface, it may look like landlords and tenants are on a relatively equal footing. A landlord whose tenant isn’t paying rent can ask for a reprieve from the mortgage repayments on their investment property for up to six months. A tenant with no job can ask to have a rent reduction or even pay no rent and not be evicted during the crisis.
Landlords are probably going to be out of pocket by the greatest amount, as any deferred mortgage payments will still be capitalised and it will be hard for landlords to claw back lost rent. In contrast, tenants won’t be asked to pay back the rent at a later date.
That being said, landlords may be better placed to handle a crisis, with higher average household incomes than non-landlords.
It’s still early days, however, and the real estate industry is trying to work through the detail of the situation. Whatever happens, the best idea is for landlords and tenants to maintain an honest and open dialogue so both sides end up in the best possible position.