Landlord Insurance Against Non-Payment of Rent
Friday 04 November 2016
Landlords in France can take out an insurance policy against the non-payment of rent, but it does require due diligence is undertaken.In one shape or form many international owners of property in France are also landlords, whether as owners of a chambre d'hôte, a gîte or letting of their own property.
Due to the transient nature of such lettings, the issue of non-payment of rent rarely presents itself.
However, where a property is let out on an annual basis, to a tenant for whom the property is their principal home, it becomes a much more significant issue.
That applies whether the property is let furnished or unfurnished, for if the property is their principal home tenants have strong security of tenure.
Although the incidences of rent arrears in the private rental sector in France are low (around 3% of properties let), whether as a result of increasing financial insecurity or a lack of fidelity, it is a growing problem.
As the process of evicting a non-paying tenant from your property is complex, lengthy and expensive, landlords of such properties need to act with the utmost caution.
One of the most effective ways for a landlord to sleep peacefully at night is to take out an insurance policy against the non-payment of rent.
Such policies are called garantie loyers impayés (GLI) or garantie des risques locatifs.
They are offered by around a dozen insurance companies in France, with the main providers being Macif, Sacapp, Solly Azar, PGA Assurances and Suffren Assurances associées (SAA). Some banks, such as Crédit Agricole, Crédit Foncier, LCL, and Société Général, also offer the policies.
However, without exception you cannot rely totally on such policies, all of which have a range of important conditions and limitations attached to them.
Landlord The first pre-requisite of most policies is that landlords carry out their own vetting of prospective tenants to confirm that they meet the eligibility criteria set out in the policy. Rarely do insurers take on this responsibility directly themselves, and if they do so it may well be charged.
The most important of these criteria is that the rent should not exceed 33% of the net monthly income of the tenant(s). In some cases this figure can be as low as 25%, particularly if earnings are variable or insecure, but it may also be slightly higher for high quality applicants.
This requirement applies notwithstanding the fact that the insurer will also wish to satisfy themselves as to the suitability of the tenant, which they will normally do by an examination of the documentation provided to them by the landlord.
The documentation needed sometimes means that it is not possible to obtain a policy to cover the risk of rent arrears from international tenants, who may not have a secure employment or business record in France. It is less the case for those who are retired and in receipt of a pension.
If the circumstances of a tenant change during the course of the tenancy the risk is taken on by the insurer at the time of entering into the insurance contract.
In addition to providing suitable proof of income and status, the landlord will also be required to ensure that all appropriate procedures in relation to the letting are (or have been) properly carried out, including preparation of a written tenancy agreement. This is necessary to ensure that a lack of due procedure does not impair legal proceedings for recovery of arrears of rent.
The same due diligence applies in relation to any default in payment by the tenant, when the landlord will be required to comply with the procedures set out in the insurance policy.
All will need to be signed, sealed and delivered, failing which the insurer may well refuse to pay out in the event of a claim being made.
Contract ConditionsAs to the contract conditions themselves, they vary in the level of the insurance premium and scope of their coverage.
Expect to pay a premium of between 2.5% and 4% of gross rental income. This cost is a deductible expense, provided you are not taxed on the basis of micro-foncier (standard fixed cost allowance).
Although all insurers have a limit on the level of the monthly rent they are prepared to cover, in the overwhelming majority of cases the ceiling is set high enough to cover the overwhelming majority of rents.
A more pertinent restriction might well be the total level of arrears covered by the policy; some insurers restrict it to a maximum sum or period, whist in other cases there are no restrictions. The contract offered by SAA has no restrictions, but it also has one of the highest premiums.
Some insurers also set a probationary period of up to six months at the start of the contract, with the policy only becoming effective provided there have been no rental payment irregularities during this period. This applies particularly in relation to existing tenants.
If you are seeking to insure for a tenant currently in situ, the insurer will also require a clean rental payment record, for which proof will be required.
In addition to covering the loss of rental income, most contracts also cover costs in connection with legal proceedings against the tenant for recovery of any rent arrears.
In general, the insurers prefer to take on the legal process themselves, using their own appointed solicitors, although the landlord will be expected to undertake the preliminary notice procedures. The policy will normally require that a strict procedure is adopted by the landlord should the tenant get into arrears of rent.
Most contracts also offer a range of optional extras, such as cover for vacancy of the property, or damages caused to the property by the tenant, as well as legal costs in non-rental disputes with the tenant. Whether these are worth the additional premium that may be payable is a judgement the landlord has to make.
Managing AgentsAs an alternative to undertaking your own vetting and taking out your own insurance policy, it is of course possible to engage managing agents.
If you do so, one advantage is that you would be able to benefit, not only from their expertise, but also cheaper insurance premiums, as they are able to use policies that are only available to property professionals.
Conversely, you will be obliged to pay the estate agent fee.
As with the insurance policies, you will also need to choose your agent with care.
This article was featured in our Newsletter dated 04/11/2016