Calculating Interest on Rent Arrears

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    Calculating Interest on Rent Arrears

    Hi,

    Can anyone tell me how you calculate the interest on outstanding rent owed? I've never had to go down this road before but my tenant insists on not paying his rent, even though he's been on holiday to Italy twice since moving in to the property in April! (Once was after he decided not to pay his rent!)

    Anyway, I'd be very grateful for any advice/help in this regard. Btw, the tenancy agreement he signed has a clause stating that 8% above The Bank of England base rate will be charged for late payment of rent. Is this excessive? Before signing the agreement, I emailed it to him for him to check and he did not make any comments regarding this clause. Also, when recently I tried to negotiate with him a time for him to settle the outstanding arrears, in front of a witness, I said if the rent isn't paid by a given period I would be enforcing the 'late penalty' clause in the tenancy agreement. He said it was fine.

    Thanks in advance.

    #2
    So you can charge 8.5% per annum on rent owed.

    Use this to find the amount of interests due over one year: debt x 0.085
    Then divide the result by 365 to find the daily amount of interest.

    Finally multiply this daily interest by the number of days the debt has been due to find the amount of interest due to date.

    For example if T owes £1000, you can charge 23.3p of interest per day.

    Comment


      #3
      8pc might be seen as extortionate as well.
      I offer no guarantee that anything I say is correct. wysiwyg

      Comment


        #4
        Originally posted by jta View Post
        8pc might be seen as extortionate as well.
        I think you're right, 8% over base is high
        My advice is not based on formal legal training but experience gained in 20+ years in the letting industry.

        Comment


          #5
          OFT guidance (google OFT356) talks about what is OK or not - 8.5% sounds unfair to me.. Entirely irrelevant to your question but in Scotland it's illegal anyway..
          I am legally unqualified: If you need to rely on advice check it with a suitable authority - eg a solicitor specialising in landlord/tenant law...

          Comment


            #6
            The statutory interest that can be charge on unpaid commercial invoices is currently 8% above BoE rate. Credit cards rates are 15-20%. Personal loans from banks are 7%+. Inflation is at ~5%.
            So 8.5% doe not seem extortionate in the present case.

            Comment


              #7
              And in Scotland unpaid decrees (=ccj) go up @8%.....

              Having said all that is the interest gained actually worth the effort, letters, admin costs??? As jjlandlord says, if rent is £1k per month that's 23p a day so if T is a week late - £1:61???

              OFT guidance...

              3.46 We regard a requirement to pay unreasonable interest on arrears of rent, at
              a rate substantially above the clearing banks' base rates, as an unfair
              penalty. We regard the imposition of a fixed daily or monthly charge for
              overdue rent, and regardless of the amount due or the surrounding
              circumstances, as being penal rather than compensatory in nature, and
              unfair. Tenants would have to pay more than the cost of making up the
              deficit caused by their default.
              There's also the point -Jeffrey's I think - about wording of interest. If it says "8% above BoE Base rate" that could be argued to be 0.5% x 1.08 = 0.54%, whereas is it says "8 percentage points above BoE Base rate" then that would be 8.5%. If 0.54% the instead of £1:61 for a week late rent it would only be 10p I think....
              I am legally unqualified: If you need to rely on advice check it with a suitable authority - eg a solicitor specialising in landlord/tenant law...

              Comment


                #8
                Originally posted by jjlandlord View Post
                The statutory interest that can be charge on unpaid commercial invoices is currently 8% above BoE rate. Credit cards rates are 15-20%. Personal loans from banks are 7%+. Inflation is at ~5%.
                So 8.5% doe not seem extortionate in the present case.
                Possibly not extortionate, but probably penal under the law of contract. Remember that damages for breach of contract are to put the party suffering the breach in the same position he would have been in had the breach not occurred. When it comes to late payment of rent the measure of damges is assumed to be the interest the landlord would have earned if he had had the money on deposit. The general consensus of opinion is that 4% above base rate is reasonable.

                Comment


                  #9
                  Originally posted by theartfullodger View Post
                  There's also the point -Jeffrey's I think - about wording of interest. If it says "8% above BoE Base rate" that could be argued to be 0.5% x 1.08 = 0.54%, whereas is it says "8 percentage points above BoE Base rate" then that would be 8.5%. If 0.54% the instead of £1:61 for a week late rent it would only be 10p I think....
                  I remember that and always phrase that way now.

                  Comment


                    #10
                    Originally posted by theartfullodger View Post
                    There's also the point -Jeffrey's I think - about wording of interest. If it says "8% above BoE Base rate" that could be argued to be 0.5% x 1.08 = 0.54%, whereas is it says "8 percentage points above BoE Base rate" then that would be 8.5%. If 0.54% the instead of £1:61 for a week late rent it would only be 10p I think....
                    Very good point.

                    Originally posted by Lawcruncher View Post
                    Possibly not extortionate, but probably penal under the law of contract
                    Why is 8 percentage points above BoE rate the statutory rate for late payment of invoices, then? commercial vs. consumer?

                    Originally posted by Lawcruncher View Post
                    The general consensus of opinion is that 4% above base rate is reasonable.
                    And I would like to know where this "consensus" comes from.
                    Especially in the current economic climate, 4.5% may not even compensate for inflation or worse taking the LL's admin costs in account.

                    Let's remember how much banks charge should you be late in your debts payments... Ah but they have the dough to "sponsor" MPs.

                    Comment


                      #11
                      Originally posted by jjlandlord View Post



                      Why is 8 percentage points above BoE rate the statutory rate for late payment of invoices, then? commercial vs. consumer?TE]
                      Perhaps because although it is a business for the LL it is not a commercial enterprise for the T, so much as his home. It's a basic need, not a means of making money, as a commercial tenancy is for an entrepreneur.



                      And I would like to know where this "consensus" comes from.
                      Especially in the current economic climate, 4.5% may not even compensate for inflation or worse taking the LL's admin costs in account.
                      So charge the T your admin costs as well - so much (£10?) for each reminder letter sent. You cannot of course charge them the penalties you may incur (due to their late payment of rent) for your consequential late payment of your mortgage.
                      'Pause you who read this, and think for a moment of the long chain of iron or gold, of thorns or flowers, that would never have bound you, but for the formation fo the first link on one memorable day'. Charles Dickens, Great Expectations

                      Comment


                        #12
                        Originally posted by jjlandlord View Post

                        Why is 8 percentage points above BoE rate the statutory rate for late payment of invoices, then? commercial vs. consumer?
                        Agreements between companies tend to be on the basis that it is 1) common practice and 2) the party are more knowledgeable of the transaction and have taken sufficient care before entering into the transaction. Contracts created with your average Joe are viewed in a different light.
                        [I]The opinions I give are simply my opinions and interpretations of what I have learnt, in numerous years as a property professional, I would not rely upon them without consulting with a paid advisor and providing them with all the relevant facts[I]

                        Comment


                          #13
                          Originally posted by mind the gap View Post
                          So charge the T your admin costs as well - so much (£10?) for each reminder letter sent.
                          Which could very well be equivalent, or more, than charging 8.5% on late rent.

                          I still think that 8.5% is perfectly reasonable and will continue to do so until a judge says it is not.

                          From the OFT document: "In this example, x is an interest rate that reflects a genuine pre-estimate of the reasonable costs that late payment by the tenant will cause the landlord to incur."

                          As posted before, should a tenant owes £1000 if the LL charges 8.5% pa. on it, it is equivalent to 23p a day.
                          If we consider that £10 per reminder letter is reasonable, then at 23p a day the cost of the letter is covered only after more than 43 days.

                          Two possible conclusions:
                          - Either 8.5% is actually cheap
                          - LL should not charge interests but a fixed fee.

                          Comment


                            #14
                            The statutory interest payable on unpaid commercial invoices was introduced to address a particular mischief. The mischief was that (a) large business were making use of small businesses and delaying payment of invoices because the longer they retained the funds the more interest they earned and (b) small businesses were on that account running into financial difficulties. The problem was solved by making it unprofitable to retain funds.

                            Where statutory interest does not apply the general law applies. The thrust of the law is that you cannot benefit from a breach of contract. As I said, the measure of damages for late payment of rent is the interest the landlord would have earned if the funds had been placed on deposit. It cannot go beyond that because the same principle has to apply in all cases and landlords' circumstances differ.

                            When it comes to making fixed charges, the law, whether applying the rules relating to contractual penalties or the Unfair Terms in Consumer Contracts Regulations, looks to see what the core terms of the contract are. The essence of a tenancy is that the landlord supplies property in exchange for money i.e. the profit comes from the rent. If a landlord wants to make a separate charge for any administration he cannot charge for his time, but only charge the actual cost, which will be no more than the cost of the stationery and the stamp. Is there any other business where the supplier seeks to impose charges on its customers to cover the cost of credit control?

                            Comment


                              #15
                              Credit card Co's?

                              It has been debated on this Forum that applying a daily late payment charge is 'unfair' but a charge of £12 for each month rent is paid late as per CC & OFT guidance is prob acceptable. CCs then charge interest on the overdue amount at around 1.5 - 2% / month.
                              I accept I am the Bank of Mum & Dad, but I don't have a banking licence to lend money to anyone else for holidays etc.

                              Comment

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