Will coronavirus affect attitudes towards referencing and rent guarantee products?

One of the most important aspects of being a successful and profitable agent is selecting the right tenants.

The industry manages this by conducting thorough referencing and credit checks on prospective tenants, mostly through referencing agencies and often tied to rent guarantee insurance-based products.

However, in the Covid-19 environment our standard practices, behaviours and willingness to adapt have rapidly changed. Many tenants are refusing to pay rent during the lockdown period and could (and probably will) in turn have a negative impact on their credit rating as afar as renting a property is concerned.

Could this lead to more tenants failing reference checks, or will it lead to agents and landlords potentially relaxing referencing requirements across the board?

Perhaps there will be a more liberal view where exceptions can be made based on individual scenarios. Or will this area remain immutable, and the industry will continue with the existing tried and tested processes in place?

Finding tenants quickly to keep void periods to a minimum was on the top of the agenda for most agents and landlords pre-Covid-19 – so in an environment where there could be less movement, at least for a while to come, pressure will be on to find a tenant quickly. Potentially, this could lead to a relaxing of standards.

Most letting agents would agree that sourcing quality tenants is paramount to the interests of their clients, which requires thorough tenant referencing. So, once the wave of ‘we are in this together’ subsides and the fall-out from a weakened economy continues, many agents will continue to take the diligent approach.

Will this mean more tenants failing referencing and therefore will it be tougher to find good tenants?

Most landlords who go it alone may take a more accommodating approach and accept that tenants only defaulted as a result of this tough period and accept them. However, this may mask other issues (tenant propensity to pay) and potentially cause the landlord a headache at a later stage.

Many will agree that the rent gain for a shortened void period does not counteract the issues caused by a tenant struggling to pay.

I’m sure the NRLA will be working hard to educate its members about the importance of good referencing when faced with tenants who do not quite pass a reference check in this new era.

The other consideration is rent guarantee insurance (RGI). Personally, I cannot see underwriters looking for ways to factor in special circumstances for virus pandemics or if they do it will be too expensive.

So, for the many landlords who seek the additional security these policies offer,  relaxing referencing standards will just not be an option. At an average of £120 a year, these are not particularly expensive policies, and I can only envisage more landlords seeking them out for new tenancies.

In fact, many agents will be urging landlords to take these policies out where the client has been reluctant to in the past. However, it is possible RGI products will start to become more restrictive and/or more expensive if insurers anticipate a surge in claims.

Some insurance policies have already become restrictive and more expensive – travel and event insurance to name two.

If landlords currently have RGI products, there are now new aspects to consider in dealing with immediate rent issues with existing tenants.

A recent article in The Guardian has put the spotlight on insurance policies, and how insurance companies will deal with them in context of the coronavirus.

Direct Line says: “We’ll provide cover for any unpaid rent if you have to repossess your property. If your tenants can’t pay, we will”. This means that you can only make a claim if measures have been taken to repossess the property.

But will they pay out for coronavirus? Direct Lines goes onto say: “Once the tenant has not paid rent for 30 days and the relevant Section 21 or Section 8 notice has been issued, then you can claim”.

From March 26 2020, landlords have to give renters three months’ notice if they intend to seek possession (during the pandemic). This means the landlord cannot apply to start the court process until after this period. Therefore, if proceedings cannot be commenced until much later, this leaves landlords unable to claim on their policy in the short-term.

Direct Line said: “The situation with coronavirus is unprecedented, and the actions of the landlord will vary depending on the circumstances they are faced with and those facing the tenant.”

“Just because a landlord has rent guarantee cover doesn’t mean that they will call upon the policy to make a claim in every circumstance.”

So, there is an expectation that landlords will be flexible, allow payment holidays or reduce the rent if their tenants encounter financial difficulty during this three-month period. It is then up to the landlords and agents to decide what happens after this.

So while RGI products do not provide an imminent solution for landlords during Covid-19, in the longer-term they are invaluable. However, if greater restrictions are applied as a result of the pandemic, and we see stricter referencing, then ultimately tenants will be disadvantaged as it will be more difficult to pass the reference.

However, let’s envisage a more positive outcome! These potential shifts in industry behaviours and processes could be the catalyst for the government to address the eviction process in terms of court reform.

A fairer eviction process will minimise the need for stricter referencing and tenant selection, providing a more equitable industry for everyone.

I would be interested in other people’s views on this and also those from within the referencing and insurance markets.

*Nick Lyons is Founder and CEO of No Letting Go, the UK's largest provider of inventory services