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Turning down free money: landlords and the problem of the split incentive

Riley Brooke • 16/11/2021

On November 11 the NSW ban on evictions for impacted tenants ended. We’ve now moved into a period of transitional protections. This means if you are an 'impacted tenant' and built up rent arrears during the moratorium period (14 July – 11 November) there are still restrictions in place to protect you against eviction for arrears. A landlord can only evict you for arrears during the transitional period if the Tribunal determines it’s ‘fair and reasonable’ to do so. One of the ways in which this is determined is by whether landlords have participated in ‘good faith’ negotiations and whether they’ve applied for any of the available financial assistance provided by government for rent relief, such as the Residential Tenancy Support Payment or the land tax rebate.

Another change from November 11 is that renters who meet the eligibility requirements as 'Covid-19 impacted tenants' will now be able to directly apply for the residential tenancy support payment. This payment was a new feature of the residential tenancy support package put in place when the July-November 2021 lockdown began. Initially a rent relief payment of $1500, it was increased to $3,000 then eventually up to a maximum of $4,500. The payment is made directly into the rent account of the landlord or managing agent, and applied as a rent credit or to offset a rent reduction provided by the landlord. However, until November 11, only landlords were able to make a claim for the payment.

While the relief payments were a welcome new initiative in the 2021 package, limiting the ability to apply for the payment only to landlords was a problem.

Landlords simply weren’t applying for the rebate

It became apparent quite quickly that too few landlords were actually applying for and accessing the rebate. When the rent relief package was first announced in July, local Tenants’ Advice and Advocacy Services began hearing directly from impacted renters. These renters had talked to their landlord about being Covid-impacted and asked for a rent reduction. They’d made their landlord aware of the available relief payment or the alternative option - land tax relief. But their request for a reduction was either met with a ‘no’, or simply with silence.

While initially landlords’ reluctance may have been because of a lack of awareness or because of delays in making information and application forms about the payment available, this was certainly not the only reason. Renters explained they’d heard from their agent the landlord wasn’t confident they’d actually receive the payment from Fair Trading or that there would be lengthy delays in the processing of the payment. One renter was told directly: ‘I’d just prefer to take arrears out of your bond. It’s easier’.

It's not clear the extent to which some agents were even really passing on the requests. We heard of some larger agencies simply declaring a small rent reduction for all their tenants for the period rather than filling out the paperwork for people actually in need. It is unclear to what extent their landlords had any say at all in this decision, but agents are hired by the landlord to represent them and ultimately landlords are responsible for the decisions taken on their behalf. 

Whatever the reason, landlords and their agents were simply not willing to do the work involved to sustain the tenancies for the current renter, especially as the renter was demonstrating to them their significant financial hardship. Similarly to last year, it appears some more ruthless landlords calculated they’d reduce their overall risk if they stonewalled a reduction request, allowed the rental debt to accrue until the current renter could not bear it and vacated so the landlord could find a replacement tenant with more certain employment. This is a risky move, but it relies on two powerful forces - inertia and fear.   

Renters who found themselves in this situation were left with very little recourse. Between July 14 and November 11, only landlords were able to apply for the rebate. Many tenants would have been more than willing to fill out the simple paperwork required to access the rebate, but they weren’t eligible to apply for the rebate directly.

Chris rents in the Eastern suburbs. He lost his job quite quickly when this wave of Covid-19 hit. He was relieved when the moratorium was announced, and immediately got in touch with his landlord to ask for a rent reduction. Unfortunately, his landlord didn’t respond to his request. After a few weeks of waiting and receiving no response he believed his landlord wasn’t going to provide a waiver. At that point Chris made the hard decision to give notice because he was very worried about the arrears that had already built up to that point and would continue to grow. He borrowed some money from family and dipped into his remaining savings to clear the arrears once he’d given notice. Chris’s landlord has got in touch. He told Chris he wouldn’t be applying for any financial assistance or reducing rent at this point (retrospectively or for the remaining time Chris will be in the tenancy) because Chris was leaving the tenancy.

You can see this experience reflected in the available data on the number of applications for the support payment. According to Fair Trading NSW, between 10 August and 5 November 2021, the numbers of applications for the subsidy, and the amounts paid out, were as follows:

  • 16,432 applications received
  • 15,160 applications approved ($35.26 million)
  • 782 applications declined
  • 490 applications in progress
  • $28.03 million paid to applicants with a further $2.96 million to be paid on 12 November 2021.

Given that the NSW Government budgeted $210 million for the initial $1500 subsidy based on their assessment of how many households were likely to be eligible, this illustrates serious undersubscription.

The problem of the “split incentive”

The significant undersubscription for this subsidy illustrates the problem of the “split incentive”. The “split incentive” refers to a phenomenon where landlords will not wear a cost for something that will benefit the tenant without obvious return to the landlord. They feel it isn’t worth putting in the effort or financial investment for something that may not significantly benefit them personally. Sometimes governments attempt to overcome this split incentive with subsidies or grants - but even this may not be enough.

The problem of the split incentive appears across many tenancy issues. The most common example we talk about is the problem of energy efficiency for rental homes (though strictly speaking, there are split incentives for nearly everything). Landlords are often unwilling to invest in upgrades to make a home more energy efficient, even where direct subsidies or financial incentives are offered, because the resulting comfort and cost savings are experienced by the renter, and improved energy efficiency does not necessarily mean a higher rent.  

Where a landlord sees a renter’s home as simply an investment, and the relationship between the landlord and tenant as simply a business transaction, the administrative effort involved in applying for what - at least with the Residential Tenancy Support Payment - is essentially free money can be enough of a barrier. The additional benefit from accessing this subsidy is the renter's security and stability in their home. The landlords refusing to access the subsidy generally don't see any extra return or benefit to themselves from granting this security to their tenants - or may even actually anticipate a benefit to themselves from removing the current tenants and replacing them - so even the offer of risk-free government money isn't enough of an incentive to complete the paperwork to access the payment.

Split incentives are a thorny problem in tenancy, but especially iniquitous (grossly unfair) in this situation, where a landlord’s reluctance or refusal to take up a subsidy or incentive can have such a significant impact on the life and livelihood/s of the renting household. For the renter, the landlord’s decision to make the time - or not - to fill out some paperwork might be the difference between them sustaining their tenancy or having to move out and find new housing, possibly carrying significant debt, and leaving with a ‘bad’ rent record.*

Esther rents her home in the Blue Mountains. Esther lost income due to Covid-19 and when the moratorium was announced she contacted her landlord to request a rent reduction. She followed up with an email providing evidence she met the definition of ‘impacted tenant’. Her landlord was slow to respond, but when he did it was to inform her he felt it was time the tenancy ended in any case and he was sending through a ‘no grounds’ termination notice. Knowing she was unable to challenge the eviction, Esther continued to request her rent be reduced and let her landlord know about the available relief payment. Her landlord declined her request for a rent reduction, telling her he’d rather just collect any arrears from her bond when she left.

Now impacted renters can directly apply for relief

The change to allow renters to directly apply for rent relief is excellent news! Impacted renters from November 11 can directly apply for a relief payment of up to $4500. This will help to clear many impacted tenants’ rental arrears, and will also help to avoid disputes and recovery action for rent. To access the payment, they will need:

  • proof of a residential tenancy agreement (bond lodgement details, or a copy of the agreement);
  • to declare they are COVID-impacted (having experienced a reduction in their household income of at least 25% since July 14); and
  • a consent form signed by their landlord (landlord’s consent to release their account details for the rent to be deposited).

Payments can only be deposited into rent accounts (e.g. the landlord’s or agent’s account) as a rent credit, not into the renters’ own personal account. The impacted renter will receive the full $4500, unless the landlord has already accessed a portion of the rebate. For example, if a landlord has already claimed $2,000 and reduced their rent up to this value, the renter will only be eligible to apply for a ‘top up’ of $2,500.

And the payment can be applied for even where a renter no longer resides at the property. Where a tenancy has ended, but an impacted renter still owes arrears to their former landlord, they can apply for the payment to pay off any outstanding arrears.

Renters won’t have to be in arrears to receive the payment

Another great thing about the streamlining of the payment - renters will be now be able to apply for the payment even where they are not actually in rental arrears. The payment will be deposited into their rental account as credit, allowing them to flexibly decide how and when they reduce their rent.

Housing is so important that we know many renters when experiencing financial distress ensure rent is paid before all else. COVID-impacted renters may not be in rental arrears, but only because they are now thousands of dollars in debt in other areas, such as on their utility bills, credit card debt, phone or internet debt – or a combination of all of the above. The ability to access the residential tenancy support payment as credit should hopefully give impacted renters some leeway, and the time they need to get back onto their feet.

Conclusion

The changes to the residential tenancy support payment from November 11 mean impacted renters can now by-pass their landlord, when the landlord is reluctant, slow to respond, or even just refusing to engage. We're pleased with the changes, and we hope all those renters who have experienced hardship and frustration accessing support these past few months can now benefit. If you think you might be eligible, you can find out more information in our Renters' guide to COVID-19, or apply for the payment online through Service NSW.

 

* Though formally Covid impacted renters are protected from being listed on tenant databases for arrears accrued during this period, in practice renters will likely be disadvantaged by the arrears documented in their rent record.