Buy-to-let investors: brace for a potential spike in arrears
With residential rental defaults set to escalate as a result of the government’s anti-coronavirus measures, tenants and landlords alike need to understand their legal options
Buy-to-let investors should brace themselves for a potential spike in arrears, as the government’s coronavirus-induced national lockdown could affect residential tenants’ ability to pay rent.
That’s bad news for the rental housing market as a whole. It will place further pressure on buy-to-let returns, which have already been eroded by softer rental growth on the back of an oversupply of flats and townhouses in suburbs across SA.
Depending on which source you use, SA’s residential tenant delinquency rate — or rate of high-risk tenants, as they are also called — already stood at 18%-26% in the fourth quarter of 2019. In other words, one in every four to five families renting a flat or townhouse is not paying rent, or is making only partial payment.
The latest data from PayProp SA, the country’s largest processor of residential letting transactions, put 25.6% of all residential tenants in the fourth quarter as "high-risk", which implies a strong likelihood of default. Limpopo had the highest percentage of high-risk tenants, at 32.9%, while North West had the lowest, at 18.5%.
Michelle Dickens, MD of credit bureau TPN, which tracks tenant payment behaviour, says there is no doubt that rental arrears will escalate on the back of the government’s 21-day shutdown of nonessential businesses.
"We are getting calls on a daily basis from worried tenants who have seen their income dry up and can no longer afford to pay rent," she says. "Small business owners, as well as those in the hospitality and restaurant industry who have been forced to take unpaid leave during the lockdown, are most affected."
The last time TPN recorded a sizeable uptick in tenant defaults was in 2009, in the aftermath of the global financial crisis and subsequent recession. Back then, TPN’s measure of delinquency hit a record 29%.
Says Dickens: "We are now at 18%, but we could get back to 2009 levels soon, especially if SA’s unemployment rate continues to climb."
She notes that increasing rental defaults will have a longer-term effect on landlords’ returns. "Already, most landlords this year have had to be satisfied with rental increases of no more than 2%-2.5% on lease renewals. So rentals may well dip over the next six months, depending on the severity of the Covid-19 impact on household finances," says Dickens.
A looming spike in rental delinquencies on the back of the coronavirus outbreak and the government’s three-week trading ban on nonessential businesses raises important questions about the legal rights and obligations of tenants and landlords alike.
The bottom line, it seems, is that residential tenants cannot use Covid-19 as an excuse not to pay rent. Retail and commercial tenants, however, may have a legal claim to a rental rebate or holiday for the duration of the lockdown.
The difference between residential and commercial tenants is that the latter — specifically those that are deemed nonessential — are prohibited by the Disaster Management Act from occupying their premises during the lockdown. And, typically, commercial leases include a force majeure clause (when one or both parties cannot fulfil their contractual obligations due to unforeseen events), which may entitle such tenants to withhold rent if they are prevented from running their businesses from the leased premises.
PayProp SA CEO and lawyer Jan Davel says there has been no material change in the contractual rights and obligations of residential landlords or their tenants — despite the negative impact the lockdown may have on the residential rental market.
"There is no new law, regulation or court ruling that excuses a tenant from honouring the terms of a valid lease agreement," he says.
However, Davel says this doesn’t mean the terms of a residential lease agreement cannot be renegotiated. He says tenants whose financial position has been impaired by the lockdown (or any other event) have the right to ask their landlords for a rental discount, deferment or deposit utilisation.
"But it will be up to individual tenants and landlords to negotiate and agree on any such concessions, which must still fall within the scope of all applicable laws and regulations," says Davel.
He notes that renegotiated lease arrangements (such as payment holidays) should be put in writing and annexed to the original lease.
Though landlords’ rights remain largely unchanged, the enforcement of these has been suspended temporarily — particularly when it comes to evicting delinquent tenants.
Davel refers to new regulations, published in terms of the Disaster Management Act last week, which prevent landlords from instituting eviction orders during the lockdown.
"Letters of demand can still be sent via e-mail to tenants, but no legal action can be instituted during the lockdown, as evictions are not deemed urgent and essential matters," he says.
Eviction processes may resume as usual once the lockdown ends.
However, Davel says challenges could arise should the 21-day lockdown be extended, as this could prejudice landlords in particular. And, he says, it remains to be seen how the courts will deal with eviction orders after the lockdown.
But Andrew Schaefer, MD of national property management company Trafalgar, says landlords may already be prejudiced by the lockdown. This applies particularly to property owners who signed leases with new tenants from April 1, as they stand to lose half a month’s rental income.
Tenants who hadn’t taken occupation by March 26 are not allowed to move out of their current homes before the lockdown ends. Consequently, says Schaefer, they are not required to pay rent to the new landlord until they are able to take occupation.
"And landlords will not be able to let the property to someone else during lockdown, even if it is empty," he adds.
Schaefer advises landlords and rental agents to offer a one-month lease extension to tenants who were supposed to have moved out by April 1. "In this instance, tenants will be liable for the additional month’s rent," he says.
Though landlords need to use their own discretion as to how they will assist financially stressed tenants, Schaefer suggests that tenants in good standing be asked to offer their deposits in lieu of rent, and to sign a waiver to this effect.
He advises that "this should be in writing and should include a provision that the deposit is to be reinstated, perhaps in instalments by a certain date, and that the landlord will be able to take legal action if the tenant reneges on this arrangement".
Alternatively, Schaefer says there is no reason why landlords shouldn’t consider giving tenants a payment holiday during the lockdown (or for longer), especially if their own banks have given them similar deferments on bond instalments.
In addition, landlords in some areas may qualify for a rates payment holiday, if other local councils decide to follow the lead of Stellenbosch municipality.
Stellenbosch is offering residential and commercial property owners affected by the Covid-19 lockdown a three-month rates payment holiday. Businesses and households need to apply for the concession.
Other municipalities have yet to announce similar concessions. However, the City of Joburg is extending rebates under its expanded social package for an additional six months. The package offers rebates on water, electricity, refuse removal and property rates to about 30,000 households living on a monthly income of less than R6,086.37.
Gerhard Kotze, MD of the RealNet estate agency group, has urged local authorities to consider rates relief for property owners, as well as a delay in the utility tariff increases that would have taken effect in July. The latter will provide financial relief to homeowners as well as those who rent.
Kotze says: "This would be in line with the government’s pledge to help South Africans through the economic after-effects of the lockdown, and would also protect the rates base of municipalities."
*TPN, in association with law firm Fullard Mayer Morrison Inc, is offering free advice on its website to help the property industry navigate the impact of the lockdown