Home » Landlord guide: How to deal with rent arrears effectively

Landlord guide: How to deal with rent arrears effectively

worried tenant looking at laptop as they are in rent arrears

Dealing with rent arrears has to be one of the most difficult aspects of being a landlord, even if management is outsourced to a letting agent.

The essence of the agreement between a landlord and a tenant is that the landlord provides a well-maintained and legally compliant property to live in. In return, the tenant pays rent. Sometimes tenants don’t keep their end of the bargain for many reasons, and fall behind with their rent. If they don’t pay the full rent when due, they are in “rent arrears”.

Being a good landlord doesn’t mean you’re a charity, and need to provide the property free of charge. Landlords run a business, and need to be paid, the same as any other business that doesn’t receive government funding.

As with most things, prevention is very much better than cure, and early empathetic intervention from the landlord or agent can help the tenant and prevent arrears from escalating. It’s important to keep on tabs on rent payments, and manage any rent arrears actively, to try to avoid evicting tenants for non-payment of rent.

When tenants fall behind with their rent, not only is it difficult for the tenants, but it can make things very hard financially for the landlord, whose own financial commitments continue. Not only will they have any financing costs, but they will continue to need to pay the agents unless self-managing, and also all the maintenance and safety costs.

In this blog post, I not only go through practical steps that landlords should follow to manage a tenant who falls into rent arrears, but I also discuss the prevention of rent arrears, by explaining how to reduce the risk of rent arrears arising in the first place.

>> Listen: Good LandlordingHow to manage rent arrears show notes

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What does rent arrears mean?

Rent arrears arise when a tenant has not paid the rent when due under the tenancy agreement, and owe rent to the landlord. A tenant is in rent arrears from the first day they miss a rent payment.

Even if the tenant catches up with the payment of the rent, they will still have been in rent arrears.

How landlords can reduce the risk of rent arrears

Prevention of rent arrears is better than cure. Here are some practical ways that landlords can prevent rent arrears:

1. Thorough referencing of tenants before they sign up

It’s really important to carry out thorough referencing of applicants before they sign a tenancy agreement. This is not something to bypass, just because you like the look of the applicants and they seem OK.

OpenRent provide a good value comprehensive referencing service for £20 per person, which includes a credit score, fraud check and outstanding debt search. Their income (including benefits) should be at least 2.5x the rent. If the rent is a step up from their previous tenancy agreement, you could ask to see their last three months’ bank statements, to see how they manage their finances.

I’m very suspicious of people who offer to pay a large amount of rent upfront, particularly if they’re in a hurry to move in and want you to skip the referencing. Whilst there can be good reasons for this, landlords need to be sure the tenants will be able to pay the rent once the period covered by the upfront payment has ended.

Don’t forget that Google and social media can be great sources of information about prospective tenants.

>> Related Post: How to choose good tenants

2. Choose the rent payment date carefully

Once you’ve chosen your tenant, before you finalise the tenancy agreement, you should discuss the best date for the tenants to pay their rent. This will usually be straight after they receive their wages from their employer, when they are more likely to have money in their account. If they’re paid on the 25th of each month, but their rent is due on the 20th, they’re more likely to fall into rent arrears than if rent is due on the 27th.

There’s no standard date on which everyone is paid in England, and for those who are paid on a calendar month basis, it can range from 20th of the month to the last day of the month, or the last Friday. The 25th is a very common date in my experience.

For joint tenants, the best date might be just after both have been paid. If your tenants receive benefits, be aware that they are paid on a four-weekly or fortnightly basis, and won’t ever be in sync with calendar months.

It’s easy to pro-rate the first month’s rent. OpenRent offer this as a standard option for their RentNow package.

If you use an agent, ask them to discuss the best rent payment date with the tenants when they are arranging the tenancy agreement. This should be an active decision, and not merely the first date of the tenancy.

If tenants ask to change the rent payment date if they move jobs, the landlord should agree to this, assuming they can prove it. It’s easy to record a new rent payment date with an addendum to the tenancy agreement, or even a letter signed by both parties. 

Letting agents will usually charge the tenant £50 to change the payment date as that is the permitted charge under the Tenant Fees Act 2019. As a self-managing landlord, I don’t charge tenants to change the payment date of for their rent. 

3. Ask tenants to set up a standing order to pay the rent

Tenants are less likely to get into arrears if they set up a standing order, as the payment of rent isn’t reliant on them remembering to pay.

Self-managing landlords and agents should ask the tenants to set up a standing order for the rent when they check in the tenants, and to confirm when they’ve done it.

As I self-manage, I message new tenants my bank details, and include the payment information in my welcome pack. When I do the first “maintenance check” a couple of weeks into the new tenancy, I ask if they’ve set up the standing order, and provide them with my bank details again if they haven’t.

The rent payment should arrive in your bank account first thing on the allotted day. If it doesn’t appear until later in the day, it’s likely to mean the tenant hasn’t set up a standing order. The tenant will need to change the standing order when the rent increases, so do remind them of this when you review the rent.

4. Track rent payments closely

An important part of running a business is to keep a close eye on cash flow. This is just as true for landlords as it is for other businesses.

I check my bank account on the date the rent is due from my tenants. If the date falls on the weekend or a bank holiday, I treat the rent as being “due” on the first working day after that, even though it’s technically late on that day.

If you use an agent, make clear you want them to tell you if the rent is not paid within (say) five working days of the due date.

Another way to track rent is to use online property management software which is linked to your bank account, like Alphaletz.

Rent due on post-it label on keyboard to symbolise rent arrears

What should landlords do if tenants fall behind with their rent?

1. How a landlord can help a tenant if they fall into rent arrears

Tenants fall behind with their rent for many reasons, and the first reaction of a good landlord should be to speak to the tenant to find out why and how long their financial difficulties are likely to last. It might be a temporary blip, in which case a payment plan might be appropriate. Conversely, it may be something serious. For instance, they’ve lost their job, had their hours cut or have been unable to work.

They may also not realise that they’re entitled to benefits such as Universal Credit. However, be aware that it can take at least 5 weeks for their tenant to receive their first payment after they submit their claim. It’s also possible for landlords to apply to have Universal Credit paid directly to them if their tenant has at least two months’ rent arrears. The Entitled To website has an excellent online benefits calculator which will show if your tenant is eligible for support. 

If your tenant needs advice on debt, suggest they contact the Citizen’s Advice debt helpline (0800 144 8848) or use their online chat for debt advice. Another excellent source of help for tenants is Shelter.

They may wish to end the tenancy agreement early, so as not to run up debt. Landlords should release tenants in this situation, as it helps the tenant at the same time ensuring the landlord is able to recover possession, and let the property to someone who can pay the rent.

It is also worth contacting the local council as they often offer support to avoid an eviction. An excellent example is Ashford Borough Council’s Lettings scheme.

2. What landlords need to know about Breathing Space

Breathing Space is a government scheme that provides people in debt with time to receive debt advice and try to find a way forward.

If a debt advisor tells you that your tenant has entered into a Breathing Space, you’re not allowed to take action to collect or enforce their rent arrears until the Breathing Space period ends. The standard Breathing Space period is 60 days and a mental health crisis Breathing Space lasts as long as their treatment for their crisis, plus 30 days.

>> Useful Resource: Debt Respite Scheme (Breathing Space) guidance for creditors

3. Management of rent arrears by a late payment process

If a tenant falls behind with their rent payments, the landlord or agent should follow a process to try to help the tenant make up the shortfall before it escalates. Although there is no obligation on a landlord to issue reminders or chase payments, it’s good practice to do so.

Here is a simple late payment process that escalates from a friendly reminder via text to legal action. The NRLA also have excellent arrears management letters.

It’s also important to keep records of any conversations you have with them about their arrears or a payment plan, and to confirm what was discussed and agreed by a follow-up email. Also, if the tenant falls into arrears, make sure you advise the guarantor, and send them copies of the letters you send the tenant. 

Here is an example of the type of late payment process that landlords can follow to manage rent arrears:

Text reminder number 1: end of following working day

If the tenant doesn’t pay the rent by the end of the first working day after it’s due, send a short but friendly reminder to say you’ve noticed that they didn’t pay the rent when it was due yesterday/on x date.

Ask them to let you know why they haven’t paid, and if they reply saying it was an oversight, ask them to set up a standing order. If they’re in financial trouble, point them to the support that’s available to them, and offer to speak to them.

Text reminder number 2: 3rd working day

f the tenant doesn’t pay the rent within 3 working days of the first reminder and doesn’t reply to explain their situation, send a slightly more formal but still friendly reminder, asking them to either pay the rent due or give you a call to discuss why they’ve not paid the rent and when you can expect them to pay.

Remind them that help is available if they’re in financial difficulty.

First reminder letter: one week after due date

After trying the informal route via text reminders and the tenant still hasn’t paid the rent in full rent or been in touch after one working week of the due date, now is the time to send a formal reminder letter.

Assuming the tenancy agreement entitles the landlord to charge interest (see below), the letter to the tenants should mention the amount of the arrears, and that interest will start accruing at the rate of 3% above base rate (assuming that’s what your tenancy agreement says).

The letter should ask the tenant to pay the overdue to the relevant bank account by x date, with x date being 14 days after the day the rent was due. Finally, remind them that help may be available if they’re in financial trouble.

Second reminder letter: 15 days after rent due

Now that 14 days have passed since the rent was due, it’s appropriate to send a second formal reminder letter which advises the tenant they’re now accruing a late payment fee on their debt.

In your letter, inform your tenant that you’re now entitled to charge a late payment fee of x% for each date that the rent remains unpaid. Insert the late payment fee that has accrued as of the letter, and include their total arrears to date. The letter should advise them of the late payment fee that is accruing for each additional day that the rent is late. See below for the formula for the late payment fee.

As a final paragraph, advise them that if you don’t receive payment or hear from them within 7 days of this letter, you will need to consider legal action, and issue a letter before claim and/or commence proceedings to recover possession of your property, but that you would also consider a reasonable payment plan to clear the arrears.

Letter before claim: one week after second reminder letter

A landlord must send a letter before claim before commencing legal action, which is a final warning before you start debt collection in the County Court to obtain a County Court Judgement (CCJ) being listed against their name and/or before you commence possession proceedings under sections 8 or 21.

The letter before claim should include the following:

  • full details of the debt and the interest rate and the amount of interest that has accrued
  • the methods of payment
  • a reply form
  • warnings that legal action may result in a CCJ in their name, which will impact their credit rating, and make it difficult for them to obtain credit or finance for at least six years, and that continued non-payment may lead to eviction. 

Do stress in the letter that you will consider a reasonable payment plan and/or mediation, and provide them with the details of the Citizen’s Advice debt helpline (0800 144 8848).

Letter agreeing payment plan with tenant

If your tenant proposes a reasonable payment plan, which you decide to accept, write to them to record your agreement.

The letter should state that you reserve the right to take legal action if they miss any payments, which may include eviction and/or a CCJ for outstanding debt, and encourage them to contact you if they have further problems.

Eviction under Section 21 or Section 8

Eviction should be the last resort for landlords if their tenant is in arrears. Whilst it’s relatively easy at present to use Section 21 to terminate a tenancy that is outside of a fixed term period and the landlord or agent have complied with the relevant compliance obligations, this will change if and when the Renters Reform Bill becomes law and landlords are restricted to using the new Section 8.

If it’s during a fixed term period or if the landlord or agent haven’t complied with their obligations, the landlord will need to use one or more of the relevant grounds for possession under Section 8:

  • Mandatory Ground 8. Serious rent arrears where the rent is payable monthly and at least two months’ rent remains unpaid. It must be both when the Section 8 notice is served, and at the time of the hearing for a possession order. Rent must be “lawfully due from the tenant”. Notice period: 2 weeks.
  • Discretionary Ground 10 – “some rent lawfully due from the tenant” is and remains unpaid. Notice period: 2 weeks.
  • Discretionary Ground 11 – the tenant has “persistently delayed paying rent which has become lawfully due”. There doesn’t have to be rent arrears at the time the possession proceedings start. Notice period: 2 weeks.

>> Related Post: How to gain possession using Section 21 (“no fault” eviction)

>> Related Post: How to gain possession using Section 8 (statutory grounds for possession)

Applying for a CCJ (small claims court)

If you succeed in obtaining an order for possession under section 8, you will get a money judgement for the rent arrears due as of the date of the hearing.

However, if you use the accelerated procedure, you won’t get a money judgement and will need to apply separately for a CCJ. You may also apply for a CCJ if your tenant moves out without clearing their arrears.

>> Useful Resource: Making a court claim for money (GOV.uk)

tenant looking worried because of rent arrears

Can a landlord charge a tenant interest for late payment of rent?

Yes. Under the Tenant Fees Act 2019, landlords can start charging interest after rent has been outstanding for 14 days, provided this is specifically set out in the tenancy agreement.

The maximum interest that a landlord can charge tenants for the late payment of rent is 3% above the Bank of England’s annual percentage rate for each day that the payment is outstanding. At present (15 March 2024), this is 8.25%, as the Bank Rate is 5.25%.

Once the rent has been owing for 14 days, the landlord can backdate the interest payment to the day the rent fell due until the tenant clears the outstanding amount in full.

Any term in a tenancy agreement that charges the tenant more than this is null and void, and it would be a prohibited payment under the Tenant Fees Act 2019.

How to calculate late payment fee / interest for tenants in rent arrears

There are online calculators for the late payment fee, but you can calculate it yourself using this formula:

  • Interest rate (A%) = base rate x 3%
  • Daily late payment fee (£B) = amount of arrears x A%) / 365
  • Total late payment fee (£C)= number of days in arrears x amount of arrears.
  • Total rent arrears (£D) = £C + amount of arrears

Clearly it’s more complicated to calculate if more than one month’s rent is due, but this shows you the principles.

Final thoughts

Managing rent arrears is one of the hardest aspects of being a landlord.

The answer is not to ignore rent arrears, and hope it all sorts itself out by itself. The approach of a good landlord is to try to prevent rent arrears in the first place by choosing tenants who can afford the rent and have passed credit checks, and then agreeing a rent payment date that is just after they’ve been paid.

However, if tenants do fall behind with their rent, don’t shy away from sending reminders. Far better to nip it in the bud, and make sure the tenant knows what help is available, than leave it until the rent arrears become so high that the landlord needs to recover possession of the property.

renter looking worried with caption How to handle rent arrears

1 thought on “Landlord guide: How to deal with rent arrears effectively”

  1. Very interesting indeed . Unfortunately we as landlords have no choice but to go to court , as the tenants they are now 10 months behind . The court is on 19/3/2024

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