March 8, 2009


Coming up: Rental insurance

First-of-its-kind policy will insure landlords against tenants absconding or defaulting on rentals

By Joyce Teo, Property Correspondent

Next month, Jardine Lloyd Thompson and QBE Insurance Group will launch a rent protection insurance policy aimed at protecting landlords of private homes and HDB flats.

The timing of this first-of-its-kind product in Singapore is perfect given rising instances of early terminations as global economic conditions worsen.

'This is something you can find in Australia. We talked about offering it here a year ago and it is now ready,' said Institute of Estate Agents (IEA) president Jeff Foo. 'From feedback gathered from our members, there are more people breaking their leases early this downturn compared with the previous downturn. Landlords are not really protected.'

Landlords can buy the insurance, endorsed by the IEA, from their agents.

Details are a bit hazy at the moment as feedback on the product is still being gathered and tweaks may be made.

Basically, the insurance - for a lease of at least 12 months - protects against a loss of rent under certain circumstances, such as rental default and the tenant absconding.

The premium will be fixed at a certain percentage of a month's rent, for instance at 15per cent. And there will be a deductible period, which means the insurance kicks in only after a certain period of zero rental income for the landlord.

Property agents say some tenants are terminating their leases early because they have lost their jobs and have to return to their home countries.

Even company leases - much preferred as they carry less risk - are falling prey to the recession.

Recently, a fund management company broke its lease early when it was wound up about five months after the lease had started. Instead of continuing with rental payments for the rest of the mandatory 12-month period, the company negotiated with the landlord and paid a smaller sum, said an agent who declined to be named.

'Currently we are seeing about two to three instances of rental defaults a week...Last year, there were hardly any in a month,' said Century 21 Omega 21 Realty chief executive Herman Yeo.

They are also seeing more early terminations. 'In many instances, these are due to job attrition and expats leaving the country,' said Mr Yeo.

PropNex chief executive Mohd Ismail said his agency has also seen a slight rise in the number of clients exercising the diplomatic clause this year. But these cases comprise only 5per cent or so of the firm's 1,000 rental cases a month.

A diplomatic clause in the tenancy agreement allows tenants to end their lease - most here are for two years - after the first 12 months by giving up to three months' notice. But the tenant has to supply proof that he has to leave Singapore for good.

Property consultancy CB Richard Ellis says it is industry practice for companies to negotiate privately with landlords to find a replacement tenant for the remaining period of the lease.

If there is a shortfall between what the replacement tenant is willing to pay and the original rent, the company has to make up the difference.

Still, in the current climate, there may be cases of tenants who want to break their leases early because they have lost their jobs and have problems paying up.

In one case, a tenant was laid off six months into the lease. He wanted to stay on in Singapore and requested a rent reduction while he looked for another job.

The landlord can offer a discount until the tenant finds a job or until the latter can exercise his diplomatic clause, agents said. Alternatively, he may allow the tenant to find a replacement tenant to take over the unit, at least until the time he can exercise his diplomatic clause, they said.

Flexibility is key in such times, agents said.

Still, the rent protection insurance will prove handy in cases where the tenant absconds, said Mr Foo. 'At this time, when the market is so difficult, it is an added protection for landlords.'

Some landlords dependent on their rentals for their mortgage payments may get peace of mind from the insurance, while others may not want to pay for it, agents said.

Nevertheless, they will soon have a choice.

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