The coronavirus pandemic has seen a lot of negotiation between landlords and tenants over rent payments. While a recent survey from the National Residential Landlords Association (NRLA) suggested that most tenants have continued to pay their rent in full since March, it also showed that a significant percentage of people have arranged rent holidays or reductions to mitigate the financial impact of lockdown.
Many of these arrangements will now be starting to come to an end, and landlords should be looking to make sure that the transition runs smoothly.
Rent holidays and COVID-19
Back in March, when the coronavirus pandemic turned our everyday lives upside down, the government introduced all kinds of measures to try and protect people. While public health and safety was obviously the main issue, another major concern was making sure no-one became homeless during the pandemic. The mass closure of businesses saw many people temporarily unable to work, and despite generous grants (including the furlough scheme for employed workers), some found their incomes significantly reduced.
In this context, the government introduced an eviction ban, but it also asked landlords to try and find solutions for tenants who were experiencing financial difficulty. One suggested method was by offering rent holidays – where a tenant stops paying rent temporarily on the understanding that they will pay it back later.
The difference between rent holidays and rent reductions
Giving someone a rent holiday doesn’t mean you’re waiving or reducing the rent. It just means that they pay less rent (or no rent) for a set period, after which they go back to paying full rent plus extra payments to make up the shortfall. This repayment plan is a key part of a rent holiday – it’s essentially a sort of interest-free loan from the landlord.
Rent holidays are only really appropriate when a tenant is experiencing a temporary hit to their income but will subsequently start earning their full wage again. In other situations, a temporary or permanent rent reduction (where the shortfall is not paid back via a repayment plan later) may be a more viable option.
Why are rent holidays beginning to wind down?
The problem with rent holidays under normal circumstances is that the landlord still has to cover all their own outgoings, the biggest of which are usually their mortgage payments. However, during lockdown the government asked mortgage providers to allow landlords to take mortgage holidays on their buy-to-let mortgages, on the understanding that this would allow them to offer tenants a rent holiday. Of course, a mortgage holiday isn’t quite as good as a rent holiday since interest accrues, meaning that ultimately the landlord will end up paying more, but it was still a very helpful measure.
This, however, is coming to an end. Any landlords who still need to have until the end of October to apply for a three-month extension to their mortgage holiday, after which things will supposedly go back to normal.
The other main reason that rent holidays are beginning to wind down is that most people by now have come off furlough and gone back to work. That’s not to say we’re out of the woods yet – and there’s a possibility that more people will lose their jobs as government support schemes come to an end – but for the time being many people are back on their full wages again.
Preparing for the end of the rent holiday
If your tenant has a rent holiday that’s coming to an end, it’s important to be proactive about it. While the tenant might increase the payments of their own accord, they may not start to pay the increased amount without being asked. They may also have forgotten or misunderstood the terms of the rent holiday, so it’s a good idea to get in touch well before the rent payment is due. Re-confirm – in writing – the date that the rent holiday will end and the terms and amounts of the repayment plan. Hopefully, the tenant will have anticipated all this themselves, but if they haven’t then giving them plenty of time will allow them to budget accordingly or flag any problems early on.
Assuming the repayments begin without a hitch, you will need to be scrupulous about tracking how the back-rent is being paid off, to make sure you don’t keep on charging a supplement after the tenant has got square. Ideally, regular monthly payments are better than occasional lump sums, but if the tenant wants to make additional payments to clear the debt faster, they should be able to do this. You can’t charge interest on rent holiday repayments, so there’s nothing to be gained by spinning the repayment process out.
The UK’s economic woes may not be over yet. Since the start of the pandemic, several major chains have gone bust and others have announced sweeping redundancies. As the government’s employment protection grants come to an end, some of those who have been insulated from the full economic effects of COVID-19 may start to find themselves affected. All of which means that the repayment plan you negotiated back in March may no longer be viable for your tenant.
It’s important to remember that in many cases this will not be the tenant’s fault. Most will have agreed in good faith to repayments that they thought they could afford, but now cannot.
As landlord, it’s in your interests to try and negotiate the payments down to a level that the tenant can afford in the longer-term. Rent holidays can take a while to pay off, and by insisting on higher payments in the short-term you may increase the risk of the tenant having to resort to high-interest loans and credit cards – which could ultimately see them end up in more severe financial difficulty. You stand a much better chance of seeing the back rent repaid in full if your tenant is in a more secure financial position, even if it takes them a bit longer.
In some cases, lowering the repayments may still not be enough, and you may have to look at reducing the amount payable, or even reducing the ongoing rent. No landlord wants to take a hit like that, but recent research suggests that many are. The NRLA says that 55% of landlords who have negotiated a rent holiday or rent reduction due to COVID-19 plan to absorb the losses from their own savings. It’s not ideal, but it’s been a difficult year for everyone, and holding onto good tenants can be a valuable investment in itself.
The importance of communication
As above, the key is to start talking about the repayment plan nice and early. In uncertain times, both landlords and tenants may need to be flexible, and it’s much better to talk an issue through in plenty of time than to suddenly look at your bank account and discover that there’s an unexpected shortfall in the repayments.