What is a dishonoured rent payment?
A dishonoured rent payment occurs when a rental payment made by the tenant bounces in the trust account. As a result, it is shown on the debit column of the bank statement.
So when this happens, what do you do? We detail the best practice solution you can implement when a dishonoured tenant rent payment occurs in your agency.
How to deal with a dishonoured rent payment
A dishonoured rent payment works in the same way as any direct debit system…
- The payment is debited from the tenants bank account.
- If they don’t have the funds in their account, the payment will bounce on the agent’s side.
This often happens with agents that use direct debit as a method of payment. The tenant’s account has been debited for the rent yet there are NIL funds for the transaction to be made.
Some banks and payment gateway systems will show the money on the agency side as ‘clear’ as a credit. Unfortunately, in actual fact, the money hasn’t actually been due to insufficient funds in the tenant’s account.
Is this a problem?
Yes it is. This is a huge problem at EOM headquarters, as you can essentially pay the Landlord funds that your agency trust account hasn’t technically received. This can lead to massive breaches in your audit. You are essentially putting the Landlords ledger into negative.
Best practice steps to implement to avoid this scenario
Previously, old server-based software would allow you to enter the negative amount against the Landlord. This was a huge breach against regulations. Our solution is to avoid this happening in the first place. How do you do that you ask?
Turn on the 3 day clearance rule in the back end of your software under banking settings. This will avoid rejected payments being sent to the owner. Uncleared rent payments will now show on the owners EOM statement. As a heads up, the common feedback you will receive will be: “why can’t I have my money if it’s there?”
The answer?
It is important that everyone in the office explains this scenario the same way.
“The method we have for collecting rent is via Direct Debit from your tenants account. Unfortunately the bank shows these funds in our account as clear transactions. However, like a cheque, they have a 3 day clearance. We legally cannot disburse funds to you that haven’t cleared our account.”
This easy to understand explanation will do the trick to putting your Landlord’s minds at ease.
Jane Morgan is the Director of End of Month Angels, a consultancy firm specialising in Trust Accounting. Jane knows the legislative requirements of running a successful Real Estate office through her 23 years industry experience. Don’t trust just anyone with your trust accounting. Book an appointment with an End of Month Angel today.