13 December 2016

One of the primary concerns of any rental property owner is non-paying or otherwise defaulting tenants. You can have the perfect tenancy agreement with ironclad provisions for protection in case of default but enforcement is a different story. It can take years to enforce, if at all, especially considering lengthy court proceedings and protections afforded by rent control laws in Cyprus, often exploited by defaulting tenants in bad faith. Below are some practical and effective practices for protection:

 

Due Diligence

 

The single most important thing is to do a background check on the company or person purporting to rent the property. Owners are often moved by the fact that someone is willing to pay their asking price, perhaps after long period of listing the property, that they blindly enter into tenancy agreements without any investigation as to the prospective tenant’s credibility. Ask questions about employment history, assets, business, prior rentals, reason for renting, reason for leaving prior living arrangement and then do an independent search on social media, ask for permission to speak with their banker or just google them. You would be surprised how much information is available out there which will give you a clear picture of someone’s background, character and credibility and thus a good indication as to whether they will be a good tenant.

 

Bank Guarantees

 

The best practice is to request for a bank guarantee. For a lay man this means that where a tenant is in default for rent payments, or otherwise, the bank guarantees to pay you the amount in default with no questions asked.  Bank guarantees are somewhat uniform between banks and are given for a specific amounts and for specified periods, customarily the initial tenancy period, but each one will operate according to its particular terms. Make sure it is automatically renewed upon expiry. Bank guarantees are burdensome for the tenant, as banks usually block the whole amount of the guarantee from the tenants account.  They also charge for the service and there is an amount of bureaucracy involved. For these reason, tenants are very reluctant to give such guarantees but this doesn’t necessarily mean they are bad tenants so perhaps do not insist.

 

Personal Guarantees

 

Especially where tenants are reluctant to give bank guarantees, owners should ask for a personal guarantee. This will be a binding guarantee from a third party stipulating that where the tenant is in default they will pay for the tenant’s obligations. In case of a natural person it can be from a spouse, parents or relatives and if it’s a company it can be from its directors or shareholders.  Especially in the case of limited liability companies with very little or no track history a personal guarantee is imperative.  While such guarantees are subject to enforcement in court they create significant incentive for the tenant to comply. Naturally, people are generally discomforted being a defendant in legal proceedings and will in turn exercise pressure to the primary tenant to fulfill their obligations. Even if out of court settlement fails, at the very least you have an additional recourse.

 

Deposits

 

This is very established practice widely acceptable both by owners and tenants. In essence the tenant pays an amount upfront, normally the equivalent of one rent, as guarantee for performance of the tenancy agreement and specifically to cover any damages made to the property.  There is a common misconception, especially amongst tenants, to withhold payment of last rent prior to termination and ask the owner to keep the deposit.  Should the owner agree, it defeats the underlying purpose as the deposit cannot serve as safeguard for anything other than last rent payment. If there are damages the owner must make a claim and open a dispute with the tenant to recover, if at all possible.  For this reason, owners must ensure to explicitly state in the tenancy agreement that the deposit cannot be considered as payment of rent under any circumstance and that payment of final rent is payable as customary. Deposit should only be returned once the owner duly inspects the property and ensures there are no damages.

 

Post-Dated Cheques

 

This is an old school, side-door practice, not particularly advised by legal counsel but it is nevertheless used and can be effective in some instances.  This calls for the tenant to deliver a number of post-dated cheques in advance. Owner will either cash the cheques when rent accrues or return the cheques to the tenant upon due payment by other methods, provided that the owner will at all times have enough post-dated cheques for a predefined future period, say 6 months, as customary.  Where the cheque is submitted but it does not clear then the tenant is “in theory” the subject of possible criminal charges, which, if proven guilty, may result in imprisonments or fines.  The legal effectiveness of this is method is questionable and there has been case law suggesting a legal defence arising from, inter alia, the fact that at the time of issuance there may be no consideration. Matters will have to be litigated on the facts. In any event, the fear alone of criminal charges being brought and tried in court, and all consequences this entails, is an extremely powerful incentive for tenants to comply with their obligations. When considering to opt-in to such practices parties should be mindful of their respective bank’s policies.

 

Utilities

 

This is another questionable, indirect practice, customarily advised against by legal counsel as enforcement can be inhumane and unethical especially in the case or residential tenants. However, this is an existing practice and can be an effective tool against truly exploitative bad faith tenants.  This basically entails structuring the rights and obligations under the tenancy agreement so that the legal obligation to pay for electricity, water and other utilities for the use remains with the owner of the property and the tenant reimburses the owner after the fact. Where the tenant is in breach of its obligations for rent or otherwise the owner can cease to perform this particular obligation which will result in termination of service by the utility companies rendering the property inhabitable and thus forcing the tenant to comply with the obligations of the tenancy agreement.  Although this generally remains a civil matter, such actions by the owner may constitute a “de-facto” eviction or breach of other landlord obligations. This again will have to be litigated.  For these reasons, such practices should be avoided. Noteworthy to mention that the owner may be left with considerable payment obligations against utility companies over and above rent due.

 

Photos and Inventory

 

Especially in terms of damages to the property, it is advisable to prepare a thorough inventory of items included in the apartment and take several pictures of the inventory and the property in general prior to granting possession of the property to the tenant.  You should include the inventory in the tenancy agreement, either embedded in the terms or as an annex, and you should also mail, email or otherwise deliver the pictures to the tenant in a way that establishes the condition of the property prior to releasing possession. This can later constitute as evidence in any dispute in connection with damages to the property beyond normal wear and tear.

 

Long Initial Tenancy Periods.

 

Especially for properties falling under the scope of rent control laws, it is best for owners to avoid dealing with a “statutory tenant”, who is afforded certain protections under law which can be exploited against owners in certain instances.  For example, where a tenant qualifies as a “statutory tenant” under the rent control laws, then matters such as evictions or rent increase are governed by law irrespective of relevant provisions in any tenancy agreement, whether valid or terminated. As statutory tenancy is defined as a tenancy that exist at the termination of the initial tenancy period there is an argument to create extremely lengthy initial rental periods with a right of termination by notice commencing after the commercially sought minimum tenancy period. This can theoretically be effective especially in terms of maintaining rent increase as a matter of contract and not law. Having said that, the question of whether termination has otherwise occurred and what in fact constitutes initial rental period and statutory tenant is a matter to be determined on the facts of each particular case when litigated at special rent control courts.  In any event owners opting in this practice will be in better position that those who do not, especially when used as a negotiating tool in any out of court dispute resolution effort.

 

The above constitute prevailing practices available to owners for protection against bad tenants, some of which are quite effective and others less so.  Surely, use of any combination of the above will serve as an arsenal of tools against defaulting tenants and will facilitate enforcement of tenancy agreements under the obsolete and, for some, biased regime of tenancy dispute resolution in Cyprus.  To incorporate any one or more of the above practices in any tenancy situation and to apply each particular tool to specific circumstance or facts, owners should seek the advice and the drafting skills of experienced and specialist lawyers.

 

For more information on the above or for any other matter please do not hesitate to contact us at admin@playbell.com.