The number of tenants in arrears with their rent has been rising for two straight quarters and is now at its highest level since the end of 2021.
In some provinces, up to a quarter of tenants are behind on their rental payments.
Evicting a tenant who stops paying rent is a lengthy and complicated process, so landlords need to take control of such situations as quickly as possible.
As much as legislation protects tenants in many cases, landlords have the right to be paid rent in full and on time.
The PayProp Rental Index reveals that 18.4 percent of tenants were in arrears with their rental payment in the second quarter of this year, an increase from the 18 percent recorded in Q1 2023. This is the highest level seen since the end of 2021 and, although still well below the peak recorded during the pandemic, marks two straight quarters of higher arrears.
The trend of increasing arrears can be seen across most of the country, with only the Northern Cape and Free State experiencing a decline in the number of tenant arrears in Q2. Most other provinces saw small increases, while in the North West this figure shot up from 22.8 percent to 25 percent, the report reveals.
While historically high interest rates and inflation are hampering tenants’ ability to pay, PayProp notes that it is encouraging that recently inflation has started coming down, dropping to 5.4 percent in June. The South African Reserve Bank also chose to hold interest rates steady last month, raising hopes that they may now stop climbing.
“However, the long-term effects of high interest rates on tenants’ finances may not yet have filtered through completely, so arrears could get worse before they get better.”
Decisive and swift action is key when recovering arrears. The longer a tenant stays in arrears, the less likely they are to ever pay what they owe.
How landlords can protect themselves
Rental demand continues to rise in the current high interest rate environment as consumers struggle to navigate the prevailing cost-of-living crisis, and prospective home buyers delay purchases. Data from Absa also shows that property buyer and seller sentiment both declined in Q4 2022 and Q1 2023, with ‘buy rather than rent’ sentiment dropping to its 61 percent – its lowest level on record – in Q1.
But despite the rising demand, Ynnis Willson, head of Jawitz Properties’ rentals division, says landlords face various challenges. Higher interest rates increase bond repayments, the increase in property rates and taxes, and other cost escalations mean expenses exceed the rental income, which impacts yield.
In this environment, she cautions landlords against implementing above-inflation rental escalations to cover the shortfall.
“With strong rental supply, particularly from developers that are struggling to sell units in new developments and can afford to undercut rental prices, landlords need to weigh the opportunity cost associated with having no tenant versus the cost of covering a shortfall.”
In addition, landlords must consider the value that retaining a long-term reliable tenant offers in the current economic climate.
“Pushing for above-inflation rental escalations could force existing tenants to consider downscaling. There are also costs and risks associated with securing and vetting prospective new tenants, and there is no guarantee that landlords will secure a tenant at the higher rental rate in the current market.”
Given the current economic climate, understanding tenant risk has never been more important amid the cost-of-living crisis. Landlords must perform thorough vetting and credit checks, and gain access to all the information they need to make an informed decision, she says, adding that an experienced rental agent can add immense value in this market by performing these tasks on behalf of landlords. They also have the experience to pick up on trends that raise red flags, like how often a tenant moves.
A rental agent also provides benefits to tenants by ensuring there is a proper lease agreement in place that protects their rights.
“Conducting impartial and thorough entry and exit inspections also protects the best interests of both the tenant and landlord,” Willson notes.
Even with these checks though, budgets are pinched for most South Africans, so landlords who rely on rental income must be prepared for, and know what to do if there is a late payment. Whether a late payment is by accident or a result of financial difficulty, Adrian Goslett, regional director and chief executive of RE/MAX of Southern Africa, says landlords should never allow it to go unnoticed. If you do, it could set false expectations.
“Chat with your tenant immediately to find out what has caused the delay. If payment is not made after bringing it to the tenant’s attention, draft a formal letter to notify them that they are in breach of contract.”
As emotionally challenging as it can be to address these situations, it is important to remember that your home loan provider will penalise you if you default or pay late, so there is no reason why you should not remind tenants of their legal obligations to you.
“A rental agreement is a legally binding business contract. If you are tolerant and play easy-go-lucky, your tenant might think that there will be no consequences if they pay late again, and this could become financially devastating to you as the bond holder.”
To protect themselves, landlords must allow enough room between the tenant’s rental payment date and the date on which their bond repayments are deducted so that they can make a plan if needed.
“In case a tenant misses or is late on a payment, be sure to have the full bond repayment amount available in an accessible savings account.
“Remember that the formal eviction process can be lengthy. The longer you take to act on a late or missed payment, the longer it will be before you can legally evict a tenant who continues to miss payments.”
A landlord’s responsibilities
The Rental Housing Act states that a landlord must provide their tenant with a lease. This does not need to be written unless the tenant specifically requests it.
The Seeff Property Group explains that the lease must include:
- The rental amount payable by the tenant
- A description of the property
- Names of the parties involved.
“Ensure that the lease agreement is watertight because tenants have many protections. The CPA (Consumer Protection Act), for example, allows the tenant the right to terminate for no reason whatsoever, subject to agreed penalties, which must be specified in the lease agreement.”
The Act stipulates further responsibilities of landlords:
- The property must be fit for habitation
- You must invest your tenant's deposit in an interest-bearing account for the tenant’s benefit
- You cannot deduct anything off the deposit without following due process
- You must refund the deposit within a prescribed time-frame.
A landlord’s rights
A landlord has the right to terminate the lease on its expiration date or, with notice, in the event of breach or insolvency. If a tenant fails to meet the obligations outlined in the lease agreement, this would be a breach.
Seeff says the landlord should notify the tenant in writing to fix their violation within a specific time. if the tenant fails to settle their breach within the time provided, the landlord can either:
- keep the lease agreement in place and sue for specific performance and claim for damages, or
- cancel the lease agreement and sue for damages and/or eviction of the tenant if they are still staying on the property.
The Act also stipulates that the landlord has the right to:
- Prompt and regular payment of a rental or any charges that may be payable in terms of a lease
- Recover unpaid rental or any other amount that is due and payable after obtaining a ruling by the Tribunal or an order of a court of law
- Terminate the lease in respect of rental housing property on the grounds that do not constitute an unfair practice and are specified in the lease
- Claim compensation for damage to the rental housing property or any other improvements on the land on which the dwelling is situated.
On termination of a lease, the landlord also has the right to:
- receive the rental housing property in a good state of repair, save for fair wear and tear
- repossess rental housing property having first obtained an order of the court.
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