I am the Managing Director of iInsure365 and have been asked to do this article as I have a substantial amount of knowledge when it comes to dealing with tenants and Rent Guarantee Schemes. Having run my own letting agency since 1993. I only have a role now that oversees the business but I have an understanding of what the market is like.
COVID-19 has completely changed that Insurance Companies deal with Rent Guarantee.
It may be almost impossible to actually find a Company that is currently actually offering this product. You will find that most have withdrawn this temporarily whilst they try and establish what the market is going to do. This doesn’t help landlords at all especially in the current crisis.
What does Rent Guarantee actually insure and how does it work?
When you take out a Rent guarantee often landlords don’t understand what the terms and conditions of the scheme are. Whilst the rent may be covered the tenants pay the first month’s rent in any event when they move in and any rent guarantee scheme itself will want to ensure that the deposit is used as rent in future rather than any dilapidations but I will come on to this later. In real terms they are only guaranteeing four months of the contract if it is a six month term.
Will they require referencing? All rent guarantee schemes require some form of referencing. It is normally a personal reference, an existing landlord reference and a work reference. I have always found this to be a pointless exercise. The law changed some time ago so that nobody can give you a bad reference. Whilst it might tell you that they may be in arears or that they are employed by somebody it is never going to pay the rent in the future. It is only giving you an indication of their financial status but you would have had that information from your own agent or by asking the questions yourselves. I find this a complete waste of time and just don’t understand why companies bother.
You may find with a previous landlord that they give a reference you don’t like. However, it may be that they have fallen out with the tenant and there was nothing actually wrong with them but they came to a disagreement on something. It is an opinion rather than an actual reference.
Is there a criteria?
All of the providers even if they were able to give you a current scheme will have a criteria. This could be anywhere between 2.5 times the annual salary in respect of the rent. So for instance if the rent is £10,000 per year they have to earn a minimum of £25,000 in order to get through the Rent guarantee scheme. Some of them require higher even up to four times. This causes no end of problems for you as often peoples pay is not always consistent and in the furlough times could be completely different from what they are actually getting.
Is there going to be other criteria?
Yes, the Insurance Companies will always want a credit check. They will carry out a check on one of the standard companies to see whether the tenant has any defaults or bankruptcies etc but again it doesn’t always ring true with the tenant’s position and at the same time massively restricts your letting market. A tenant may have a really good credit history i.e. that they have never bothered with money in the past and have no outstanding debts but this doesn’t always give them the credit score that people think. Credit scores can be often misleading because the companies that they use like to see people borrowing money on credit cards and paying it off. If you have never had a credit card but always paid your bills on time it doesn’t always mean that you would give a good credit rating. It doesn’t reflect the current position.
Will the scheme pay for my legal expenses?
It depends on which rent guarantee you take out but sometimes they like to use their own legal companies to deal with all evictions if absolutely required and will cover your legal expenses up to a certain point. However your letting agent should be able to give you all the legal advice you need as we keep our landlords regularly updated on all the law. Did you know that the letting business has had 127 new laws over the last five years so you need to keep up to date?
Deposit – what will happen with this?
I touched on it earlier that the deposit will be taken at the beginning. However, under the Rent guarantee schemes and they are all the same they will require you to use the deposit towards the rent if there is anything outstanding when the tenant leaves.
What is the point of therefore taking a deposit?
The deposit should really be used for damages only and if you look at the schemes where deposits have to be put into they all confirm that this is what a deposit is for. Not for covering rent. Obviously if there is outstanding rent at the end of the tenancy then it would have to be paid from the deposit and therefore the rent insurance company would require this. It does not allow you therefore to make any claims for damages and you would be completely out of pocket and only receiving the rent.
Will there be exclusions?
There are a huge amount of exclusions when it comes to any of the rent guarantee schemes that were on the market and that may come back. One of the biggest is the legal paperwork. I have taken over 100s of other letting agents/landlords files over the years and have not on one occasion had anybody get the legal work correct. It is a total minefield and people don’t understand what you have to do by way of serving documents on the tenants. Did you know for instance there was a recent legal case which stated and has now confirmed by the Court of Appeal that you must serve a gas safety on a tenant but have it acknowledged by them? It means that they have to email you to confirm that they have received it and it must be done within 30 days i.e. 30 days from the gas safety being carried out or the date of the gas safety itself. It does not prohibit you from serving a Notice to Quit on the tenants as confirmed by the Court of Appeal but you must have carried out that particular procedure.
When it comes to the various different schemes that you have to put a deposit in I often find that landlords or letting agents haven’t served the terms and conditions on the tenants and again this would negate any paperwork which means that the rent guarantee scheme won’t pay out. There are other exclusions for instance the tenant must be a minimum of 18 years old. The tenant must not go into the property before the written tenancy agreement. Comply with the Housing Act regarding the deposit. Comply with the mortgage conditions on the property. It is a complete minefield on what are required by the insurance companies and what their exclusions are.
You will also find that a lot of these schemes can’t be put into place until 90 days has expired i.e that the tenant has gone into three months of arrears. They would normally take over the chasing of the rent within this time period in order to try and solve the issue. For instance the tenant may be getting universal credit but there is always a housing element to this amount and what will happen is that you can ask for this housing element to be paid to you direct if the tenant is more than eight weeks in arrears.
What happens if I come to renew the contract but the rent guarantee scheme has been withdrawn?
This is a huge problem and has happened to one of my landlords recently. He takes out his own landlord insurance cover even though we do not believe that it is required by I will come on to this later. They withdrew the particular product from the market and only offered him a much lesser rent guarantee scheme. This meant that the tenant would have to have certain completed documents by the renewal and the tenant refused to do so. He was put in a position whereby he either gave the tenants Notice to Quit or leave them where they are without the rental agreement and warranty that he wanted. However, because he comes under my lettings agency he was covered in any event by our guarantor scheme which I will come on to.
What if I have a noise complaint or an issue with damage internally that the tenant has made when they leave?
Your rental guarantee will not cover any damages internally. You may find if the tenant has gone into arrears that they have taken the deposit to cover the arrears and you would be left out of pocket.
Is there an alternative?
Absolutely there is an alternative. Some twenty years ago I looked at the market in my own area and decided that rent guarantee wasn’t the way to go. If you had damages in a property then the deposit didn’t always cover it and often the rent guarantee scheme company would want to take this to cover the rent arrears.
We get guarantors who are home owners for every property.
I ensure that every single person that takes our property has a guarantor who is a home owner. This ensures that you have somebody that will guarantee the rent throughout the term of the contract as well as somebody that you can call if there is a problem such as noise etc. There is no waiting for 90 days for the arrears to accrue as you can speak to the guarantee and the tenant almost immediately. It ensures that the tenant knows that if they don’t pay their rent that not only will you be communicating with them but their guarantor will be as well.
I have had very few problems over the years with being able to chase tenants for their rents. This is down to a huge amount of systems in place but at the same time we have guarantors that we can speak to who normally solve the problem. They are often the mums and dads of the tenant and some of them even pay the rent themselves so they don’t have issues.
Does this restrict your letting market?
Yes, I don’t disagree it does restrict the market however it is not as bad as trying to get a tenant through a rent guarantee scheme. This restricts the situation even more.
Does it cover if there are any damages?
It does cover you for every damage that the tenant may carry out during the term in the event that it was more than the deposit. We had a recent case where the tenants caused a substantial amount of damages which was in excess of £6,000 more than the deposit. A court case was entered into with the tenants and the guarantors and the judge laid it out very clearly to the tenants that they had no defence and neither did the guarantors to the claim. He made it very clear to the guarantors that when you sign such a guarantee you sign a blank cheque book and it is your responsibility to ensure that there are no problems. We also got all of our costs at the court and the amount ended up being £20,000. We insist that guarantors are home owners and we were subsequently paid within 7 days of the judgement. It shows that the system works.
What happens if you have a noise complaint?
Not only can you talk to the tenants but you can now speak to the guarantors as well and they can speak to the tenants as well. It gives you an extra layer of comfort.
What happens on renewal?
Our guarantee is laid out in such a way that we do not have to request a guarantor to renew the guarantee. They are guaranteeing the tenant until such time as they leave the property and against any damages as well.
Do you have problems with guarantors with students?
We have had absolutely no problems with guarantors when it comes to students. We find that most students now understand that they have to have some sort of guarantor. If you try to reference a student it would be a waste of time. What are you exactly referencing? They are 18 or 19 year olds who have no form of income and their credit rating is almost zero you are just wasting your money.
I have run my scheme as I have said for almost in excess of 20 years and have never had any problems. We let properties on a regular basis and it is just about informing tenants before they even view the property what the requirements are. This helps them to understand why you require it. Somebody might have the best job in the amount but look at the amount of redundancies there currently are. There is no guarantee they will have that job in six months’ time. Rent guarantee schemes are very limited on what they are able to provide to landlords and taking a guarantor gives you much more ability to deal with additional problems.
I hope you found this article useful.