How can insurance help landlords protect their property from bad tenants?
By Alan Boswell Group
When it comes to protecting the legal interests of landlord and tenant, the laws governing property rental are pretty-well balanced, thanks to the Housing Act 1988.
Property letting comes with lots of hard work and a few risks, but for most landlords, their relationship with tenants is a co-operative one. Landlords have well-defined responsibilities to their tenants, and in return, tenants pay the rent, treat the property well, and conduct their lives in a way that doesn’t bring the landlord’s property or business into disrepute. It’s in the interests of both landlord and tenant to adhere to all terms of a tenancy agreement.
Landlord and tenant can be joint victims of property damage incurred through extreme weather, subsidence, fire, or crime. That’s where buildings insurance comes in. But what happens when the tenant is the problem? How does a landlord protect their property and rental income?
Read more: How to identify and manage troublesome tenants
The right to rent
Checking a prospective tenant’s immigration status and right to rent is a legal requirement. It’s a criminal offence to rent out your property without checking the right to rent of all adults, whether they’re named on the tenancy agreement or not.
With the tenant present, check the tenant’s original documents to make sure they have the right to live in the UK and that any temporary permit is still valid. Check that photos on the documents are of the tenant and that the information presented is the same on all documents. Make complete copies of the documents and keep them for the duration of the tenancy and one year after, making a note of the date on which you copied them.
Tenant referencing
The first step towards protecting yourself from troublesome tenants is to only have good tenants living in your property. Tenant referencing, which provides an overview of a prospective tenant’s suitability to rent, is standard practice in the property rental business. Tenant referencing is carried out with the prospective tenant’s permission.
Firstly, the person’s identification is verified. Are they who they say they are? Have you been given any false information? Details of residential and employment history are gathered with references from present and past landlords and employers.
The most recent landlord will be asked if the property was well looked after by the tenant, and if it was left in good condition at the end of the tenancy. They’ll be asked how much rent the tenant paid and if it was paid on time. The most recent employer might be asked about the tenant’s reliability and general character.
A credit check will bring to light any debt, county court judgements (CJJ) or bankruptcies, and will often include an affordability calculation based on a rent vs income ratio – typically a ratio of 2.5. For example, if the annual rent is £7200, a total household net income of £18,000 (£7200 x 2.5) would be adequate.
It’s important to include all over-18s on a residential tenancy agreement as only named individuals can be referenced or held liable for the payment of rent. If you need to take legal action for unpaid rent, you’ll have a better chance of success if all adults are liable. If you make a claim on your rent guarantee insurance, your policy might only be valid if every adult tenant has been checked.
Corporate referencing includes verification of business activities and any previous company names, and a check of profit & loss documents.
If a tenant fails to meet the requirements of a reference check, you and the tenant may choose to use a guarantor. For the same level of landlord protection, a guarantor must be subject to the same referencing as the tenant.
Tenant referencing is a requirement for full cover on legal expenses insurance and rent guarantee insurance.
Rent guarantee insurance
Rent guarantee insurance is triggered by an eviction for non-payment of rent over two consecutive months. This policy covers unpaid rent until you have vacant possession and legal expenses, which might include eviction notices, repair and renovation disputes, defence of an official investigation, and disputes about terms of tenancy.
To qualify for rent guarantee insurance you must have evidence that your tenants have been referenced, and an exclusion period applies before you can make a claim. You’ll need a separate policy for each tenancy agreement, and you can’t take out rent guarantee insurance after your tenant has defaulted.
Malicious damage
Most landlord insurance policies will cover malicious damage as part of your buildings or contents cover, if it’s caused by burglars breaking in or vandalising your property. But some policies won’t cover you for damage caused by tenants (or their guests). If this is the case and damage by tenants isn’t included, you should be able to add it to your policy as an optional extra. On the other hand, some policies will pay for malicious damage caused by anyone with a legal right to be on or in your property (like tenants and their visitors).
Your policy documents should clearly set out what’s covered, along with any other specific terms. This includes any claim criteria – for example, some insurers will only proceed with your claim if tenants passed their initial reference checks.
How do you evict a tenant?
If your tenant has defaulted on rent payments or has broken any other terms of a shorthold tenancy agreement, you can start the eviction process by issuing the tenant with a Section 8 notice, which allows the tenant up to two months to vacate.
If the tenant doesn’t leave your property within the two months, you can apply to the court for a possession order and go through the legal process of evicting a tenant.
Reducing the risk
Here are a few tips for reducing the risks associated with property letting.
Do your background checks and comprehensively complete tenant reference checks.
Have a good tenancy agreement in place and take the time to prepare a clear contract.
Start with a six-month tenancy which allows you to test the water.
Don’t accept cash payments and make sure there’s a paper trail.
Before your tenant moves in, make inventory list for the rental property and take photographs.
Have the right landlord insurance in place. To find out more, visit our landlord advice hub.
Use an authorised tenancy deposit protection scheme.
Communicate regularly with tenants and look for ways to resolve issues. If you are available and willing to co-operate, often you can resolve issues without needing to take things further.
Contact Alan Boswell Group
To talk to us about landlord insurance or tenant referencing, please don’t hesitate to call our team of experts on 01603 967955.