Landlords demand larger deposits

Deposits as a percentage of monthly rentals are increasing, but landlords and rental agents could experience difficulty in finding quality tenants who can afford a deposit of more than one month’s rent.

Michelle Dickens, managing director of Tenant Profile Network (TPN), says according to its data, deposits as a percentage of rent have increased from 107% in 2010 to 113% this year.

She says there is definitely an increasing trend where landlords are asking for more than one month’s rent, however it varies from area to area and according to price bracket.

The current trend is for estate agents to ask for one month’s deposit and an electricity deposit over and above that, she notes.

It is mainly fuelled by two factors. A lot of tenants are using their deposit to pay for the last month’s rent so that they can use the last month’s rent to pay for a deposit on their next rental contract and can’t afford to have two deposits down at the same time.

“It is a big problem in the industry at the moment. In fact, it has been a problem for about the last 18 months to two years,” she says.

The second issue is electricity price escalation. Whereas the electricity bill on a two-bedroom property would in the past have been around R300 a month, the same property’s electricity expense is now roughly R700 to R800 a month, she says.

Financial strain

However, the financial strain many consumers are experiencing means that landlords can’t necessarily increase deposits to a level that they would be comfortable with.

SA Guarantee Specialists’ research found that a lot of estate agents have tried to secure one-and-a-half or two month’s rent as deposit, but because of the financial strain it puts on the tenants, they are not always successful, according to founder Danie Hanekom.

He says estate agents found that the moment an increased security deposit is imposed, the probability of the tenant defaulting in month three increases.

Another reason for landlords demanding more than one month’s rent is that when a tenant does cause damage, the average damage amounts to two and a half month’s rent, he notes.

Rental guarantees

But while landlords may struggle to secure a substantial deposit or could see their tenant default early on in the lease term, the penetration of rental guarantee products in the local market is still very low, says Deon Botha, chief information officer at Equillore.

Botha says the low penetration can be ascribed to the relative newness of these products in the market, the conservative nature of the typical property owner who doesn’t like change or trying out new options and the limited marketing activities by the respective product owners. High costs of management services relative to yields in residential property investment also play a role.

Furthermore, several start-up companies that have tried to enter this market without understanding or managing the risks properly have crashed, leaving owners out of pocket, unprotected and generally nervous about big promises, he says.

However, there is a lot of interest in these products and awareness is growing.

Botha says the market is also becoming more regulated and new legislation is making it increasingly difficult for owners to manage their own properties.

Examples includes the Consumer Protection Act which allows tenants the right to cancel contracts with only 20 days’ notice and the National Credit Act which requires registration as a debt collector (subject to limitations) before one is able to recover outstanding rent, he says.

“In addition, risks associated with the Prevention of Illegal Eviction Act (PIE) compounded by excessive legal fees, protracted delays in courts and often unpredicted outcomes are well known,” Botha says.

In terms of the rental guarantee products, there are three broad categories, he says.

The first is a full-service rental collection solution that guarantees the rent in the bank when it is due, including any costs incurred for evictions and related expenses.

This option is popular with owners who are happy to manage their own maintenance and repairs, and find their own tenants, he says.

“This allows them to remove most of the credit and legal risk from the equation while avoiding the high costs (10% to 12.5%) associated with full-service property management solutions,” he says.

The second type of product offers an optional add-on to a full management service, typically another 2.5% of the rent on top of the existing 12.5% management fee, required to be paid annually in advance, he says.

Unlike the first product type, the cover is separate from the management service, and typically requires an application process to an administrator or broker before losses are paid out.

“Due to the high costs associated with this solution this option is not very popular,” he says.
The third category is classic insurance products, he says.

These offer after-the-fact cover once the risk has already materialised.

The legal implications

Samantha Thornhill, candidate attorney at Oosthuizen & Co Meyer de Waal Attorneys, says when a tenant fails to pay rent as stipulated in the lease agreement, the landlord has the right to inform the tenant, in writing, of the breach and request the tenant to remedy the breach.

In this case it would be to pay the outstanding rent within a specific number of days as specified in the breach clause or notice period. Seven, ten or 14 days is a pretty standard notice period, she says, but the parties are free to stipulate the number of days they find most suitable.

Should the tenant fail to pay the outstanding rent within the specified time, the landlord will be entitled to a certain right(s) in terms of the lease agreement. These rights usually include the right to cancel the lease agreement with immediate effect.

The landlord may cancel the lease agreement by informing the tenant, in writing, that he or she is cancelling the lease agreement, based on the tenant's breach of contract. The landlord may then cancel the lease and request the tenant to vacate the premises with immediate effect, but may also specify a period within which the tenant should vacate the premises, if not immediately, she says.

If the tenant continues to occupy the premises after cancellation of the lease, the landlord will most probably have to bring eviction proceedings against the tenant.

A more cost effective starting point would however be to refer such a dispute to or lodge a complaint with the Rental Housing Tribunal as they deliver a free service to landlords and tenants, she says.


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