According to a recent press release issued by TPN Credit Bureau, landlords should proceed with caution when prospective tenants offer to pay their rent upfront in cash.
"While at first the landlord may be impressed and happy to receive upfront payments for between 6 - 12 months in advance, payments may come to a screeching halt because of a change in the tenant's financial situation.
At this point however, the landlord has been primed to trust the tenant as upfront payments have a powerful positive impact on the relationship of trust. Because of the history of large upfront payments, the landlord may allow the tenant some leeway - to their own detriment.
While not always the case, a willingness to pay upfront may allude to the fact that money comes and goes for that tenant. While they can feast now, famine may very well follow later."
TPN adds another problem that often arises with upfront rental payments is that landlords and tenants don't agree upfront on how the payment of utilities will be handled.
"You may have agreed that the tenant will pay the rental upfront but if the utilities are not included in the rental amount, you must ensure that the tenant is aware that they will be required to make a monthly utility payment. This should be clearly set out in the lease agreement.
Landlords should also note that regardless of whether the tenant has paid the lease upfront or not, the tenant is still entitled to cancel their fixed-term lease in terms of section 14 of the Consumer Protection Act by giving 20 business days' notice and being liable for a cancellation penalty.
A significant problem arises when that penalty is paid and the landlord is required to refund the tenant the balance of the rental for the remainder of the contract period if those funds have already been spent. This is also the case when the tenant cancels early."
TPN advises that if you are willing to accept upfront rentals despite the risks, you should definitely make use of an estate agent as the intermediary.
"An arrangement can be made for the upfront rental to be paid into the agency's trust account where it will accrue interest for the tenant's benefit and where the landlord can be paid out monthly.
Alternatively, the landlord can place the money in a separate account with a monthly withdrawal set up to periodically release the rental amount."
Seeff says:
Adrian Louw, Seeff's Manager at the Century City branch, says that there are definitely benefits to tenants paying rent upfront as it offers excellent security and could put the tenant at the top of the list of applicants.
The difficulty could, however, arise if the upfront rent is only for a period of the lease; say six out of the twelve months of the contract.
He therefore recommends strongly that all tenant applications should be vetted thoroughly regardless of how the tenant intends to pay. Offering to pay the lease upfront should not be a way for a bad applicant to circumvent the process. This is vital to managing the risks associated with rentals.
Tenants looking to pay upfront should also be subjected to FICA scrutiny to combat any potential that it may be a money laundering ruse. What could for example happen is that the tenant would pay six months upfront, but then use the CPA provision and cancel giving 20 business days' notice by their second month. This time though they would provide a different bank account for the rental refund.
Mark Johnson, Seeff's MD for the North Coast, says while they are always cautious at this branch, they do accept upfront rental payments provided that the source of the funds can be verified to insure that it is not part of a money laundering scam.
"We do have upfront payment being offered but for different reasons - the first is in order to negotiate a better rental price and secondly due to concerns over a negative credit score.
In the case of the second reason we do additional reference checks to satisfy the landlord that we are not dealing with a delinquent tenant. Qualifying the tenant thoroughly should alleviate any concerns over upfront rental payments".
Johnson concludes by saying that holding an upfront rental in a third party trust account where it is then paid across to the landlord monthly is also a very good idea to protect both the landlord and the tenant.
Steve van Wyk, Seeff's MD in Centurion, concludes that tenants should be aware that upfront rentals don't benefit tenants in general - unless there are other issues at play like trying to circumvent a bad credit score.
"Even though an arrangement can sometimes be made between a tenant and an estate agent in order for the tenant to still earn interest on the upfront rental funds, in many cases the tenant will lose the interest he or she would've otherwise earned on the money.
In addition there is normally no discount for paying the rental upfront so there really isn't much benefit."