Beware! The 'upfront rental' trap

Real case: The tenant pays for a year’s rent upfront in crisp, cold hard cash. The landlord is impressed and happily receives the upfront payments, sometimes for 12 months and other times for 6 months in advance. Until one day when payments come to a screeching halt because the tenant gets shot in the hand.

At this point, the landlord has been primed to trust the tenant as upfront payments have a powerful positive impact on the relationship of trust between tenant and landlord.  

Because of the psychological sway that a history of large upfront payments has, the landlord allows the tenant some leeway. But 6 months of non-payment later the lease had to be cancelled and to this day, not a cent of outstanding rental has been received!

The moral? A willingness to pay upfront may allude to the fact that money comes and goes for that tenant and while they can feast now, famine may very well follow.

Utilities, utilities!

Another big issue we see is that landlords do not agree upfront on how the payment of utilities will be handled. While you may have agreed that the tenant will pay the rental up front, if the utilities are not included in that rental amount, you must ensure that the tenant is aware that they will be required to make a monthly utility payment and that this is clearly set out in the lease agreement.

Frequently, a tenant will pay up front and assume that their whole obligation to the landlord has been met and that no further payments are required for the remainder of the lease, only to receive a utility bill which they then duly ignore under the impression that it is not for their account. This leads to the tenant falling into arrears almost immediately and the next issue arising …

The tenant’s right of cancellation

Regardless of whether the tenant has paid up front or not, the tenant is entitled to cancel their fixed-term lease in terms of section 14 of the Consumer Protection Act by giving 20 business days’ notice and being liable for a cancellation penalty.

A significant problem arises when that penalty is paid and the landlord is required to refund the tenant the balance of the rental for the remainder of the contract period. 

A new car… a remodel of your kitchen… that extension you’ve been contemplating - the upfront rental money can be spent almost as quickly as it was received.

But what happens if your tenant cancels early!? Suddenly you are responsible for repaying the tenant for the remainder of the lease agreement which is a very difficult financial position to find yourself in.

Solution

The simplest way to handle the situation is making use of an estate agent as the intermediary. An arrangement can be made for the upfront rental to be paid into the agency’s trust account where it will accrue interest for your benefit and you can be paid out monthly.

Alternatively, you can place the money in a separate account yourself with a monthly withdrawal set up to periodically release the rental amount to you.

Taking safeguards to ensure that upfront rental is not spent may seem slightly conservative but wise none the less! It’s the only way to avoid the 'upfront rental trap' which can end in a serious financial headache for landlords. 

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