Every commercial property management department should have a ‘rent collection policy’. That policy should reflect the market conditions, the landlord’s instructions, and the terms of the lease document. You will get arrears in rent collections at any time and for all types of reasons; the larger the property portfolio under management, the greater arrears event and the need for a ‘policy’.
The advantage of establishing the ‘rent collection policy’ is that it helps greatly as the size of the property portfolio grows and the diversity of the tenant database occurs. Rental arrears can get quickly out of control and be overlooked by the property manager. It pays to have a focus on rent collections every day before you do anything else of a property management nature.
Create Your Rent Collection Policy
Here are some ideas to help you establish this policy into your real estate and property management business:
- Current market conditions – If the property market is under pressure perhaps due to higher levels of vacancy or business instability then it is better to manage through the arrears issue than create another vacancy in a property that could remain vacant for a long time. Some rent from a tenant is better than none.
- Landlord factors – Every landlord will have pressures and commitments when it comes to paying the property mortgage and the outgoings. At certain times of the month, the landlord will require property funds to be remitted to their bank account. It is normal to remit funds twice per month, having due regard to the date that the landlord must pay their mortgage.
- Rental types – Understand how gross and net rents work for every lease in every managed property. Normally you will be retaining outgoings recovery money from the tenant payments and remitting to the landlord just the net rent, so you can pay for building outgoings. To handle this situation effectively it is very wise to set a building budget that applies to outgoings recoveries. The landlord can agree with the budget prior to the start of the financial year.
- Lease terms and conditions – Every lease will be different when it comes to recovery of rental money and the issuing of default notices under a lease. On that basis every lease should be read and the critical dates and responses should be set from the particular lease. When a rental arrears situation occurs, the first thing to do is read the lease.
- Arrears response strategy – When the non-payment of rental occurs it will be because a date has passed and rent has not been remitted by the tenant. You must watch the rental payment records daily so you can see these problems happening immediately and as they occur. That then allows you to call the tenant and find out what is happening. From that point onward you take notes of what the tenant tells you and what actions you have taken.
- Laws relating to rental recovery – Every tenant and every lease will be impacted by local property laws regards rental recovery. Study the laws as they apply in your area, as formal notices issued to the tenant for the recovery of rent must comply with property law. The laws will also need to be assessed in balance with the lease terms and conditions. Read the lease as part of that process.
- 3 stages of Response – To give time to the tenant to remedy the lease and rental breach, split your responses and actions up into stages such as a direct telephone call, a follow up letter, and a formal notice of default (that refers to the tenant lease and the breach). Every stage must comply with common property law and the lease.
- Seek landlord instructions – Call the landlord immediately you know you have a tenant in rental breach. Seek instructions from the landlord as to the strategies they want implemented. Keep them up to date with the situation as you proceed.
- Aged debts – Some arrears may be managed over time through a payments plan agreed with the tenant and the landlord. That is where an aged debt process can be managed and rental payments delayed and split over a longer period of time.
- Maintain a professional image – Keep your arrears collection and response systems professional and direct with both the landlord and the tenant. A good system will help you project a ‘professional business image’ in property management.
So there are different ways to handle rental arrears. Make the right choices and develop your rent collection policy for your commercial property management portfolio.