This article was first published in the second quarter 2016 edition of Personal Finance magazine.
What should you do when a tenant stops paying rent? Instruct an attorney to start eviction proceedings? Obtain a debt judgment? Or reach an agreement with the tenant that allows him or her to pay off what you are owed?
Where non-payment is the result of a genuine, once-off misfortune, landlords are often sympathetic and may accept late payment.
However, any relaxation of the terms of the lease must be agreed to writing, Marlon Shevelew, the director of Cape Town-based Marlon Shevelew & Associates Inc., which specialises in rental law, says. In this regard, he says the lease should have a “relaxation or indulgence” clause, to the effect that any relaxation of the terms of the lease does not set a precedent. Without such a clause, it could be argued that any concession made to the tenant has altered or replaced the original terms of the lease.
Whenever you agree to relax the terms of the lease, you should draw the tenant’s attention to the “relaxation or indulgence” clause, Shevelew says.
But what should you do if the tenant simply stops paying rent, and it becomes clear that he or she has no intention of paying?
Elize le Roux, a partner at Gauteng specialist property law firm SSLR Inc., says it’s in your best interests to cancel the lease and evict the tenant, because your priority should be to replace a non-paying occupant with a paying tenant as soon as possible. Taking the tenant to court to obtain a debt judgment is of no use if the tenant cannot afford to pay (perhaps because he or she has lost his or her job, or already owes other creditors money) or there is little to gain from having his or her possessions sold in execution. For these reasons, Le Roux advises against entering into an agreement that allows the tenant to pay off the outstanding rent, even if the agreement is in the form of an acknowledgement of debt (see below).
She says there is nothing to prevent a landlord from issuing a summons for the unpaid rent after the tenant has been evicted.
Michelle Dickens, the managing director of TPN, a credit bureau that specialises in residential renting, agrees that a debt judgment may not translate into collecting the amount owed, because many tenants do not have assets worth attaching and selling in execution. In her experience, she says, although an eviction may at first seem to be the more expensive option, it is better to be certain that the loss of rent will be limited to a few months.
Shevelew says you should consider agreeing to write down (reduce), or even write off, the arrear rent in exchange for the tenant agreeing, in writing, to move out by a certain date. Once you issue a summons for unpaid rent, you run the risk of the tenant becoming vindictive and, for example, deliberately damaging the property, or squatting.
Your sense of justice or fairness might be offended by the idea of writing down, or writing off, the arrear rent in exchange for the tenant moving out, but you should look at the situation from a purely commercial perspective, Shevelew says. If the tenant decides to squat, you face the expense of obtaining an eviction order, and the tenant could go on living in your property rent-free for six months or longer. On the other hand, if the tenant agrees to vacate the property in, say, two months, in exchange for the arrear rent being written down, he says you not only save yourself thousands of rands in legal fees, but you can also put a new, paying tenant in the property much sooner.
Le Roux says you need to safeguard your interests and negotiate from a position of strength, so you should first issue a summons or initiate eviction proceedings before contemplating entering into such an agreement. You can always drop legal proceedings if the tenant adheres to the agreement. If the tenant does not, you will not have lost valuable time before issuing summons or applying for an eviction order.
Shevelew recommends you contact the tenant as soon as rent has not been paid by the due date (or within the grace period, if the lease provides for one) to find out why payment was not made. Establishing the reasons for the non-payment, as well as the tenant’s attitude towards the breach of the lease, will guide you on how best to address the problem, he says.
Prevention is better than cure
Tenants who habitually don’t pay, or pay late, usually have a track record of being unreliable or irresponsible in other areas of their finances. It is therefore essential that prospective tenants are vetted thoroughly, Shevelew says.
The Rental Housing Act (RHA) prohibits unfair discrimination on grounds such as race, gender and marital status, but nothing prohibits you from assessing whether a prospective tenant is a financial risk. In this regard, Le Roux says it is in your interests to use the services of a credit bureau that specialises in vetting tenants, because the records held by these organisations will shed more light on a prospective tenant’s financial background than those held by normal credit bureaus. For example, TPN’s records will show whether any eviction orders have been granted against a tenant, as well as the tenant’s monthly payment record – in other words, whether he or she paid on time or late, or paid only some of the rent, or did not pay at all. In terms of the National Credit Act, written consent is required to gain access to a person’s credit records.
Le Roux says you should be wary of accepting a reference from a prospective tenant’s current landlord, because there is always the risk of a problem tenant receiving a glowing reference so that he or she will obtain accommodation elsewhere. It is better to ask for references from previous landlords.
Greg Harris, the chief executive of Chas Everitt Property Rentals, suggests that, once you have a tenant in place, you carry out another check of your tenant’s financial status before you renew the lease. A tenant may have taken on more debt, or be paying more interest because of an interest rate hike, since he or she first moved in.
If you want to make the renewal of the lease subject to the tenant being financially sound, you must include a clause to this effect in the lease.
Wording of your lease
Shevelew says the lease should be clear about when the rent is due, to prevent disputes over whether or not the rental was paid on time. In particular, does the due date mean the day on which the tenant pays the rent or the day on which the payment reflects in the landlord’s bank account? If you depend on the rental income to meet your monthly mortgage bond repayments, does the due date allow enough time for the money to be in your account before the bank’s debit order goes off the account?
Contrary to popular belief, Shevelew says there is nothing in law that states that a tenant is entitled to a seven-day grace period within which to pay the rent. You are free to decide whether or not to include a grace period in the lease.
Shevelew advises that the lease should include a “joint and several liability” clause. If you lease the premises to more than one tenant, or if someone stands surety for a tenant or tenants, this clause will enable you to take legal action against the party who is most likely to satisfy your claim – in other words, who is in the best position to pay. If, for example, two tenants owe you money and you sue one of them and recover all the damages, the other will be absolved of his or her debt towards you. The tenant who had to settle the entire debt will not be happy, but he or she will have to claim from the tenant who paid nothing.
The lease should contain a breach (or forfeiture) clause that specifies the conditions that entitle you to cancel the lease, Shevelew says. Without a breach clause, you may have to prove that a certain action, or failure to act, on the part of the tenant was, in fact, a breach of the lease, and you may have to go to court to do so. A breach should include failure to pay rent by the due date, continual late payment, and the withholding of rent.
Cancelling the lease
In terms of the Consumer Protection Act, a landlord can cancel a fixed-term lease if a tenant has failed to rectify a material breach after being given at least 20 business days’ notice to remedy the breach Shevelew says. If the breach is not rectified by day 21, you can send the tenant written notification of cancellation and instruct the tenant to vacate the property by a certain date.
It is important to remember that, once a lease has been cancelled, a tenant ceases to be a tenant and becomes an unlawful occupier if he or she remains in the property after the deadline given for vacating the property. In these circumstances, the ex-tenant becomes a squatter, and you will have to obtain an eviction order to get him or her out.
Shevelew says it is a misconception that it is possible to revive a lease after it has been cancelled. The only way the same person can lawfully occupy the property after the lease has been cancelled is by entering into a new lease.
He says it is also a misconception that you may not take legal action for unpaid rent until the 20-business-day notice period has ended. If the tenant has not paid by the due date, you can send a letter of demand that gives the tenant seven calendar days in which to pay. If the rent is not in your bank account by the end of day seven, on day eight you can issue a summons for unpaid rent, interest and legal fees. The 20-day notice period prevents you from cancelling the lease until day 21, but it does not prevent you from taking steps to claim what is owed to you.
After giving 20 business days’ notice, you can also load an adverse (default) listing against a tenant’s credit profile.
Dickens says that, if you send a seven-day letter of demand and payment has not been received by day eight, the only legal recourse is to issue a summons. If you then want to cancel the lease, you will need to send a second letter stating your intention to cancel after 20 business days from the date on which the letter of demand was sent.
She says a tenant who is willing to pay will do so regardless of whether he or she is sent a seven-day demand letter or a 20-business-day lease-cancellation letter. On the other hand, a tenant who either cannot afford to pay, or does not intend to pay, will respond to neither. TPN believes it is better to send the 20-day letter, because, invariably, the lease will have to be cancelled and legal action taken to evict the tenant.
Summons for unpaid rental
An application to serve A summons for unpaid rental would usually claim the following:
* Payment of the outstanding amount;
* Interest on the amount at the rate specified in the lease, or if the rate is not specified, at the prescribed rate (10.5 percent in July 2016);
* The costs of bringing the claim; and
* If the tenant does not vacate the premises after the lease has been cancelled, damages for staying on.
When bringing the application, you can apply for an order to attach the tenant’s goods.
If the action to recover the arrear rent succeeds, the sheriff will serve the summons on the tenant, who has 10 business days to notify the court if he or she wishes to defend the matter. If the tenant does not respond to the notice within 10 days, or decides not to defend the matter, your attorney can apply for a default judgment (judgment is made based on the tenant’s failure to respond to the summons within the deadline).
A tenant can seek to rescind a default judgment. In order to do so, Shevelew says, the tenant would have to satisfy the court that:
* He or she did not wilfully neglect to defend the action; and
* He or she has a bona fide defence.
The application for rescission of judgment must be launched within 20 days of the tenant obtaining knowledge of the judgment against him or her.
If the tenant notifies the court within 10 days that he or she intends to defend the claim, you may apply for a summary judgment (judgment made without a trial) if you truly believe that the tenant does not have a bona fide defence and is defending the action solely for the purpose of delay, Shevelew says. In response to an application for a summary judgment, the tenant must satisfy the court that he or she has a defence.
Le Roux says it is rare for courts to grant summary judgments, because they believe that a defendant should be allowed his or her day in court, so even relatively minor reasons will be accepted as grounds for a defence.
During the term of the lease, you should take care that you do not provide a tenant with grounds for defending a summons or defeating the action, Shevelew says. Common defences are that you did not deliver the premises in the condition agreed to in the lease, or failed to carry out repairs for which you were responsible in terms of the lease.
What about the small claims court?
Shevelew says the small claims court is a viable option if the arrear rental does not exceed R15 000, which is the maximum amount you can claim in this court. However, small claims courts cannot grant attachment orders or enforce judgments.
In an article on the small claims court in the third-quarter 2014 edition of Personal Finance magazine, it was pointed out that an order of a small claims court merely entitles a plaintiff to enforce the judgment if the defendant fails to pay within 10 days of the order. Cases must be transferred to the magistrate’s courts for this final stage of the proceedings.
Using the deposit
You might think that using a tenant’s deposit is the easy solution to recovering a shortfall in rent. In fact, Shevelew says it is risky, because, once the deposit has been used up, there will be no money available to cover the cost of repairs if there is damage to the property.
Using the deposit to cover arrear rent is a viable option only if you have established, once the tenant has vacated the premises at the end of the lease, that the deposit will be sufficient to cover both the outstanding rent and any damage to the property.
Another reason you should think twice about this option is that it is easier to obtain judgment for arrear rent than it is for damage to the property, Shevelew says. When you sue for arrear rent, the amount owing can be established simply by referring to the lease, and you might be able to obtain a default judgment. But establishing a damages claim is more difficult, and the claim is open to dispute on various grounds, such as whether the tenant was responsible for the damage, who was liable for carrying out the repairs, and whether the expenditure claimed was actually used for repairs. With a damages claim, it is almost certain that the matter will go to trial, he says.
Allowing rent to be paid off
If you decide that the tenant can pay off arrear rent, Shevelew says, the tenant should be made to sign an acknowledgement of debt (AoD), which is an agreement that allows the tenant to pay off the arrears without detracting from his or her liability for rent that is currently due.
He says a “promise to pay”, a “settlement agreement” or an “undertaking to pay” is not an AoD. The General Law Amendment Act stipulates the clauses and details that an AoD must contain, and if these are absent, the validity of the document will be compromised. This means that, if the tenant breaches the AoD, you will not able to obtain a judgment order and a warrant of execution. Therefore, you should approach an attorney to ensure that an AoD is properly drawn up.
Shevelew says you should also know the following about AoDs:
* If the tenant breaches the AoD, a court will not issue a judgment order without first issuing a summons on the tenant;
* A court will not issue a judgment order unless you can produce a letter, signed by the tenant before the AoD was entered into, confirming that he or she was in a position to pay the amounts agreed to in the AoD; and
* A court will not issue a judgment order unless you can produce the original AoD.
Problems with ‘self-help’ remedies
Taking the law into your own hands by, for example, locking a non-paying tenant out of the property, or cutting off the electricity or water supply, is an offence in terms of the RHA. For such an offence, the penalty is a fine, or up to two years’ imprisonment, or both, Shevelew says.
Le Roux adds that such unlawful actions will prejudice your chances of obtaining an eviction order.
The RHA obliges a landlord to allow a tenant undisturbed use and enjoyment of the premises for the duration of the lease. If you breach this duty, the tenant has the right to apply to court or a Rental Housing Tribunal for a spoliation order, which requires occupation of the property to be restored to the tenant immediately, Shevelew says.
That the tenant has caused damage to the property or owes rent does not provide you with grounds for a defence, he says. Furthermore, the tenant is not required to pay rent for the period during which he or she was unlawfully deprived of the use and enjoyment of the property.
If the tenant brings the spoliation application through a magistrate’s court or the High Court, the landlord will be liable for the tenant’s legal costs, which the court will award on the higher, attorney-own client tariff and not the lower, court tariff, Shevelew says.
Prescription of arrear rental
In terms of the Prescription Act, a creditor has three years from the date on which a debt became due, or from which the debt came to his or her attention, to bring a civil claim for payment of the debt. If you do not take legal action within those three years, the debt is automatically extinguished.
In the case of arrear rental, the three-year period runs month-to-month, which means that the prescription extinguishes one month of your claim, month on month, after the first amount became due, Shevelew says.
For the purposes of the Prescription Act, sending a letter of demand does not constitute taking legal action; you must at least have approached a court to issue a summons, he says.
When does prescription start? From the date on which the lease is cancelled, or the date on which the occupier finally vacates the property? The Supreme Court of Appeal ruled (Monyetla Property Holdings v IMM Graduate School of Marketing, 2015) that, in the case of leased premises, the prescription period starts on the date on which the lease is cancelled, irrespective of whether the tenant remains in occupation of the property.