Rent Arrears: Resolution Guide and Prevention Strategies
Rent Arrears: An Unavoidable Risk in Real Estate Investment
In real estate investment, rent arrears are one of the most common troubles faced by property owners. Along with vacant units, this issue directly impacts revenue, and mishandling it can prolong the problem and expand losses.
This article explains everything from initial response procedures when rent arrears occur, through legal processes, to building systems to prevent arrears from happening in the first place.
Initial Response When Arrears Occur
Step 1: Situation Confirmation and Contact
When rent payment is not confirmed, first contact the tenant promptly.
- Phone call: Confirm if payment was forgotten. Failed automated transfers due to insufficient account balance are also common
- Written notice: Send a document when the phone cannot be reached or to create a record
- In-person visit: Also serves as a wellness check if contact cannot be established
What matters in the initial response is to respond without emotion and confirm the facts. Many cases are resolved simply with a call if it's just a forgotten transfer or insufficient funds.
Step 2: Payment Plan Discussion
If the tenant is willing to pay, discuss a payment plan for the arrears.
- If full repayment is difficult, propose installment payments
- Create a written agreement with clear payment dates
- Establish in advance what happens if the agreement is not honored
The records of actions taken at this stage become important evidence in later legal proceedings. Always record the date, time, content, and the other party's response.
Collection Procedures and Legal Rules
Important Points When Collecting
There are legal rules governing rent collection, and excessive collection efforts can constitute illegal activity.
Actions that are prohibited:
- Visits or calls at late night or early morning
- Posting notices on apartment doors (may constitute defamation or privacy violation)
- Changing locks or removing belongings (self-help remedies are prohibited)
- Contacting the tenant's workplace (without their consent)
- Loud demands for payment or threatening behavior
These actions constitute tortious conduct and carry the risk that the owner could be sued for damages.
Using Registered Mail with Proof of Contents
If collection efforts are not progressing, send a registered mail with proof of contents. This type of mail has the following benefits:
- The date and content of sending can be officially certified
- Has a psychological effect on the tenant
- Is legally effective as a notice prerequisite for contract termination
In the registered mail with proof of contents, clearly state the arrears amount, payment deadline, and that the contract will be terminated if payment is not made by the deadline.
Requesting Payment from Guarantor or Guarantee Company
When There Is a Personal Guarantor
A guarantor has the same payment obligation as the principal debtor (tenant). If collection from the tenant is difficult, you can request payment from the guarantor.
However, due to the revised Civil Code effective April 2020, a personal guarantor must have a maximum guarantee amount (cap) set. A guarantee contract without a set cap is invalid, so check the contract contents.
When Using a Rent Guarantee Company
When contracted with a rent guarantee company, the company covers the arrears by paying on the landlord's behalf.
Important points when using a guarantee company:
- Meet reporting deadlines: If you do not report to the guarantee company within a certain period from the start of arrears, you may not receive the guarantee
- Submit required documents without omission: Promptly submit reports and evidence documents requested by the guarantee company
- Confirm coverage scope: Whether the guarantee covers rent only or also includes restoration costs and litigation expenses depends on the contract terms
Options for Legal Proceedings
When resolution through discussion is difficult, proceed to legal proceedings.
Payment Demand Procedure
A simplified procedure through the court to order payment.
- Advantages: Faster with document review only, lower costs
- Disadvantages: If the other party objects, it becomes ordinary litigation
- Effective when the main goal is recovering the arrears amount
Small Claims Court
A simplified litigation procedure available when the arrears amount is 600,000 yen or less.
- Decision is rendered after typically one hearing
- Easier to handle without an attorney
- Many cases result in settlement
Eviction Lawsuit
A lawsuit to seek eviction when arrears are prolonged.
- Generally, arrears of 3 months or more is considered grounds for contract termination
- Typically filed after notice (such as registered mail)
- If the tenant does not vacate voluntarily after judgment is final, forced execution proceedings are necessary
- Involves considerable costs including attorney fees and enforcement fees
Legal proceedings take time and money, so compare recovery probability against costs before deciding. Consulting with an attorney early is recommended.
Building Systems to Prevent Arrears
Most importantly, establish systems to prevent arrears from occurring in the first place.
Thorough Tenant Screening
- Income standards: Set screening criteria based on the ratio of income to rent
- Verification of workplace and tenure: Assess whether there is stable income
- Past arrears history: Indirectly confirmed through the guarantee company's screening
Making Rent Guarantee Company Mandatory
In today's rental market, using a rent guarantee company as a condition for tenancy is becoming standard. By using a guarantee company, you can significantly reduce the risk of arrears.
Implementing Automatic Bank Transfer or Credit Card Payment
To prevent arrears due to forgotten payments, introduce automatic payment systems.
- Automatic bank transfer: Automatic withdrawal each month
- Credit card payment: Higher convenience for tenants
Early Detection and Quick Response System
When arrears occur, do not leave it unaddressed—establish a system to contact the tenant within the next day or within several days. If management is delegated to a property management company, confirm in advance the reporting and response procedure when arrears occur.
Conclusion
Handling rent arrears hinges on quick initial action and adherence to proper procedures. Emotional responses and illegal collection efforts are counterproductive, requiring calm responses with legal proceedings in mind.
And most importantly, prevention through thorough tenant screening and utilizing guarantee companies is key. Build systems to minimize arrears risk and achieve stable rental property management.