How to Deal with Bad Tenants?

Data: 2016.07.14

Probably every property manager has had at least one bad tenant, and knows the feeling. Having a difficult tenant or dealing with a bad one can put your property investment at risk, and complicate your approach to the tenants. Not all the tenants see your property as you do. A perfect tenant will take care of the leased premises and pay the rent on time, without any problems. Unfortunately, this is not always the case. In this blog I’ll cover the main reasons for a tenant being bad and suggest ways to deal with each of them.

1. Late rent payments.

A commercial property owner depends on the rent paid for all the space leased out. The tenant wants to do well so that he can pay the rent and other bills and make a profit, and the landlord wants the tenant to succeed, because if he does, the rent can be paid, the space is filled and the increased level of commercial traffic will benefit all the neighboring tenants. It’s a win-win. Moreover, in some markets retail tenants pay a percentage of their turnover as a rent fee or additional fee. But if the business starts to struggle and misses a rent payment, the relationship can quickly become complicated. At first, some property managers may be receptive to the tenant’s issues. The tenant may be allowed to pay late, or the real estate manager may forgive part of the rent. Property managers, however, have to protect their rights under the lease agreement. When the tenant falls behind on the lease obligations, and late bills begin to add up, further actions need to be taken. Sending out reminders or finance charge memos might help you to collect as much of the past-due amounts as possible. Having proper software might help property managers to track unpaid invoices and deal with the consequences. In order not to get such tenants in your building, property managers can check potential tenant credit ratings or get references from other landlords.

2. Property destruction.

This is another issue that arises in landlord-tenant relationships. Nobody wants to pay for broken or destroyed inventory. Tracking the property inventory list and signing it during the move-in process is necessary. In this case, an independent and competent third party can help property managers. If there is an issue of asset destruction, make sure you have proof that the damage was caused while the tenant occupied the property.

3. Security deposit.

Property managers usually request a security deposit in advance (normally between 3-6 months rent). It is held in a separate deposit account so that you can use the money to cover late rent payments or pay for other incidents related to lease terms, e.g. repairing responsibilities. A security deposit option provides you with control in the short term and security, especially if you have a tenant who for some reason cannot offer a guarantee. It also provides added protection on top of a guarantee if you require it. Your property management or accounting system should allow for monitoring deposit usage. If you use the deposit to cover some expenses, ask the tenant to top up the deposit.

4. Utilities.

There are different ways to deal with utility payments. Make sure that your rental agreement is clear and specific. It is much simpler if the price is fixed in the lease agreement. Then sometimes you just need to check if you gather enough money to cover utility costs. If your lease contract states that the utilities are in the tenant’s name, then the utility provider will deal with the tenant. That’s also OK. But when it comes to situations where the property manager needs to allocate utility costs to the tenants, it should be clearly detailed how specific amounts were calculated. Direct costs, such as water or electricity consumption, might be calculated based on meter readings, while common area maintenance costs (CAM) need to be distributed to all the tenants. Residents should be aware of what they are paying for; otherwise the property manager will get many questions and have dissatisfied tenants.

5. Maintenance and repair.

A struggling tenant who has failed to pay the bills on time may try to turn the tables by claiming his failure to pay rent is due to the property manager’s failure to fix some part of the occupied area. While such a claim generally will not exempt the tenant from liability to pay rent, it will complicate any action to evict and collect the amounts owed. The landlord can avoid this situation by promptly responding to tenant complaints and requests, and maintaining the premises. All maintenance work must be tracked, and you need a clear view of what’s happening in your properties.

Once you find a good tenant – try to keep him. If you have a difficult tenant – try to treat the problem. Sometimes you can find out that giving a tenant one chance turns into two chances, which will turn into three chances and so on. This is time-wasting, aggravates relationships, and results in lost rent income. In some extreme cases, eviction might be the only possible solution. I hope that will never happen to you. Nobody wants to go to court, but if it happens, it should be easier if you have documented every interaction you have had with your difficult tenants.

SOFT4, as a provider of a software solution for commercial property management, is constantly releasing blog articles about how to meet and cope with  trends, tendencies, and challenges, and giving suggestions as to how to react to the changing environment in order to stay competitive.

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