written by Liad Hadar – Director
Part 3 of 3: The Lag Effect
Liad Hadar, Director at Hadar Incorporated
The first two articles in this series dealt with how to identify a good tenant and best practices of managing the landlord-tenant dynamic. In following this advice, you should have all the tools at your disposal to develop and maintain a positive relationship with your tenants.
That said, life happens and if the pandemic has proven anything it’s that very little is set in stone. Good tenants can still experience curveballs and no amount of transparent or good communication can get the rent paid when tenants find themselves in financial hardship.
The question then is, How do we preserve our newfound relationship and enforce rental payments simultaneously?
Do you extend your patience and understanding of the tenant’s cashflow (or other) challenges? Do you allow for arrears to build up and pray the situation turns around? Which approach will best lead to the recovery of rental and the survival of the relationship?
Given the plethora of factors unique to each tenant and situation, there is no textbook answer to the above questions. One thing that I can tell you is that burying your head in the sand is not an option. Indecision is a decision and not dealing with the matter in an upfront and respectful manner will only lead to greater exasperation.
The key to solving this challenge lies in the following question: Will the action I’m considering (as a landlord) place me in a worse position should it not yield my desired result?
Here’s my advice on how to protect your best interests as a landlord, regardless of what unfolds.
The Real World
In terms of most lease agreements, rental is due on or before the first day of the month. The tenant is de facto in breach of its lease agreement if the rental does not reflect in the landlord’s chosen account by the first calendar day of the month.
Of course, being a day (or even three) late, although a breach of the lease agreement, is generally not a practical issue for most landlords. But what if the third day of the month becomes the sixth, seventh or eighth day? Worse, what if it evolves to a full month of non-payment? No longer so easy to accept.
Polite But Firm
There is a fine line between a good and compassionate relationship with the tenant and showing too much leniency to the point of prejudicing the landlord. A Letter of Demand from the landlord or managing agent may seem like an act of war to certain tenants. It isn’t.
Stripped of all negative emotional connotations, sending a Letter of Demand is simply best practice. It ensures that the tenant is reminded of its contractual obligations and subsequent breach, which needs to be remedied.
A landlord must continue to adhere to the recommended communication techniques discussed in my previous articles. Use the opportunity to politely but firmly explain that payments of rental and associated charges are expected to reflect in the landlord’s chosen bank account by the first calendar day of the month. Hence the Letter of Demand as a not-so-gentle reminder.
The tenant must be made to feel that this does not spell the end of the relationship. In fact, it is a good indication of a professional landlord complying with the terms of the lease.
This does not mean that the landlord cannot indulge the tenant, continuing to communicate openly and compassionately. It just means that you will protect your rights and not prejudice yourself whilst doing so.
Most lease agreements make provision for a seven-calendar day demand in the event of non-payment by the tenant. This period can be longer or shorter depending on the specific terms of the lease.
The breach notice simply affords the tenant an opportunity to remedy its breach within the prescribed time periods. Failure to do so would allow the landlord to then take legal action against the tenant and cancel the tenant’s lease, if applicable.
The practical reason for sending a Letter of Demand, on the very first day after rental is due, is that the situation often unfolds as follows:
The tenant fails to make payment by the first calendar day of the month.
As the landlord, you contact the tenant who apologizes profusely and undertakes to make payment in a “day or two”.
A couple of days later, the tenant’s payment is still not reflecting. You follow up again. Yet another undertaking or an excuse is received. The tenant promises that the payment is “imminent”.
The weekend passes and it is now the seventh calendar day of the month, and the payment is still not reflecting. You’re forced into considering your options. Do you continue to indulge the tenant, or do you take steps to protect your interests?
A further, reluctant, indulgence is granted to the tenant but with more frequent and frantic follow ups by you for the outstanding payment. Time is lost and frustration is mounting.
By the fifteenth day of the month, not a cent has been received.
The landlord’s hand is now forced, and a Letter of Demand is dispatched to the tenant.
From date of receipt of the letter, the tenant has seven calendar days to make payment to avoid the ramifications of not doing so. The tenant makes payment, albeit on the seventh and last day, ensuring that it remedies its breach timeously. It is now the twenty second calendar day of the month.
Next month’s rental is almost due. Although relieved that the rental for the month has been paid, you now (understandably) have concerns whether the cycle will simply repeat itself in a few days’ time when rental is due again. It likely will.
The above is a “best case” scenario. If the tenant does not remedy its breach timeously, the landlord now must make another decision. Does it cancel the lease, instruct a lawyer to issue a Summons against the tenant? If so, more time passes before the tenant either pays or faces the consequences of legal action against it.
Time is of the Essence
If the above feels familiar to you, which I dare to presume it does, consider that acting now saves you drastic time later.
The best way to illustrate the negative effect of not acting is as follows:
From my experience, landlords often create unnecessary lag time. Whether this is out of fear of antagonising a situation, poor administrative or communication skills, the results of the lag effect are to the landlord’s great disadvantage.
In acting with the advice shared above i.e. sending a Letter of Demand on the second calendar day of the month along with a polite but firm communication around the importance of adhering to payment terms and conditions, you will be saving yourself a lot of time and expense. There is a positive knock-on effect as the overall timeline for all subsequent action (including legal action) will be substantially shortened.
In setting the tone early on in the month, you facilitate a greater chance of prompt payment this month as well as the following and ensure that your tenant takes you and your payment policies seriously.
Time is money and this is one of the purest examples of being proactive in managing and protecting a property asset’s value!
*Note: public holidays must be excluded from all calculations of time periods. For purposes of these examples, it was assumed that there were no public holidays for the applicable period. Any public holiday further extends the timeline as those days are not counted when calculating the seven days for the letters to expire.
Until Next Time
In closing, I take this opportunity to thank Asset Magazine for featuring me in this publication. I truly enjoyed sharing views on our wonderful, challenging yet exciting property industry.
I am a staunch believer in the industry at large and in our beautiful South Africa. I look forward to sharing more thoughts from my personal experience as a dedicated property lawyer working with landlords ranging from the largest REITs in the country to individual property owners. I’m passionate about assisting the full spectrum of these property owners to protect and grow their property asset values.
Feel free to contact me to exchange ideas or to obtain input on your specific needs or questions.