Working with Non-Paying Tenants

 
 

Working with Non-Paying Tenants

If you have a rental, your tenants did one of three things starting in April: they paid as agreed, made a partial payment, or made no payment at all.  Let’s look at the three actions:

  1. They Pay As Agreed.
    1. That is great. I understand this pandemic has impacted a wide swath of our economy and close to 20% of workers have been laid off and are not employed, but that means 80% have the ability to meet their financial obligations.  If your lease is up for renewal, it may be appropriate to renew their lease but not increase their monthly rent.  Most tenants are not keep to move right now with the virus still in circulation and are choosing to stay put.
  2. They Agree to Partial Payment.
    1. A tenant will either notify you in advance that they are unable to pay the month’s rent or you will know when the rent due date comes and goes and they fail to pay as agreed. It is critical the tenant pays a portion of their rent even if they can’t pay the full amount.  Why?
      1. It shows good faith. Making a partial payment, even if only 25% of the monthly rent, reflects intent of the tenant to eventually make you whole one day. You have bills to pay and the tenant must realize they your relationship is not adversarial but symbiotic.
      2. It makes future payments easier. If a tenant makes no payments but claims they will catch up with the total payments down the road, by not making any payment, they are creating a debt hole that may be too deep to dig out of. You are setting your tenant up for a future eviction or they will simply walk from your rental prior to that fatal day.
      3. It may be funds you use for a future eviction. If you have to evict this tenant down the road, it will cost you $750 if not contested, and at least $1,500 if contested.  Let your tenant pay for that future cost by making partial payments now.
      4. It is critical to memorialize your agreement and have it agreed to in writing signed by all parties. Because here is the reality: your tenant may not be able or willing to repay you in the entirety of the amount owed. Hope for the best, but you should expect the worse and the tenant simply does not pay you back, and with a partial payment agreement in hand, you can still seek an eviction or a claims for financial damages.

  1. They Can’t or Won’t Pay Anything.
    1. If a tenant refuses to pay, you have every legal right to remove that tenant and get possession of your property back.  In “normal” times, we could file an unlawful detainer, the tenant would have 5 days to contest after proper service, and if they did contest, we would typically go to small claims court to petition for the removal of the tenant and regain possession, and that would take another 30 to 45 days.  That is no longer the situation.
      The tenant now has 30 days to contest an eviction.  The courts will not hear any eviction cases for 90 days after the eviction moratorium is lifted June 1, which means the earliest an eviction could be hear in small claims court is September 1st.
      But given the number of tenants certain to be delinquent by that time, it may take another 3 to 6 months to evict a non-paying tenant.  Why will it take so long?  In Los Angeles, Orange, Riverside and San Bernardino Counties, an average of 3,000 total tenants are evicted each month.  If 10% of all tenants are in arrears, that would mean 100,000 tenants would need to be evicted.  If the entire group demanded their day in court, it could take a full year to regain possession.  All you can say to this person is, “When we have opportunity we will regain possession and pursue all financial damages from you.  Your credit may be damaged and you may find it difficult to rent again with an eviction on your record. Are you willing to make partial payments or vacate the property immediately?”
    2. Vacate Early. Rather than have a protracted battle with your tenant, if you are in a long term lease, you may be able to convince the tenant simply to vacate your property and break the lease early without financial penalty.  You may be even willing to give them back their security deposit in total, experience a couple months of loss of rent, but spare yourself many months of loss of rent, the cost of an eviction and potentially additional damage to your rental.
    3. Cash for Keys. You may have to pay them to vacate property.  I know this may sound abhorrent.  They should be paying you rent you shouldn’t have to pay them to have your property back.  But you should.  If it takes 12 months to evict a tenant and your monthly rent is $2,500, that is a potential loss of $30,000 not including damage and legal costs.  It may be worth paying $5,000 to remove that tenant, pay a leasing fee of $1,000 and place a qualified tenant in your rental.  They only receive the funds once they vacate.

Whatever your situation, put everything in writing.  This is not the time to be obstinate, but to protect your investment property and try to keep the cash flow coming.  If you have a good tenant, hang on to them dearly.  If they are a tenant who has fallen on tough times but is willing to work with you, work with them.  If they are looking for a rental holiday and will not pay any portion of the rent even though they can, start preparing for a protracted fight or attempt to get them to vacate your rental, even if it means paying them.

If you don’t have the time or temperament for these negotiations, we are charging 50% of our typical management fee (our typical fee is $75 a month plus 2% of the collected rents) to assist you with non-paying tenants.