Rental de­faults surge

But get­ting rid of non-pay­ing ten­ants eas­ier said than done

Finweek English Edition - - Property - JOAN MULLER joanm@fin­

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.

PIE Act strongly bi­ased in favour of ten­ants. Jenny Smit

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