Dubai: After a recent spike in rental demand, more tenants have been paying their rents with one cheque since late last year, as opposed to it paying in four or more cheque payments, primarily because landlords prefer to get all their payments upfront and take advantage of the wider rush to rent.
But doesn’t that put tenants at a disadvantage, if they pay off all of their annual rent in one go? What are the downsides to doing so as opposed to paying their rent in four, six or even 12 cheque payments? If anything, the financial risk that could entail is significant. Let’s delve deeper and find out more.
More landlords asking for one cheque payments?
“Landlords have been asking to be paid upfront in one cheque,” said Andrew Bailey, a real estate consultant currently working out of Abu Dhabi. “But in order to get tenants to agree to pay a lump sum right away, rental rates vary on the number of cheques paid, the cheapest being a one cheque payment.
“However, not everyone has an entire year’s rent available at their disposal, this is why many resort to multiple cheque payments. While paying in multiple cheques often means paying more, it does help tenants avoid bank loans.” But is it worth the risk when paying less for a single-cheque rental contract?
What are the risks of paying rent in a single cheque?
While fraud is considered one of the most common risks with cheques, there are other downsides to consider as well, particularly when opting to pay your rent with a single cheque.
“It’s true that tenants can clearly benefit in the long run by agreeing to pay in one cheque and negotiating lower annual rents, but they are at a disadvantage as landlords may have more to gain than renters,” said Pankaj Bhatia, vice president of a UAE-based real estate research and analytics firm.
So, even though tenants stand to financially gain in the long-term when paying with a single cheque, in the short-term, the risks outweigh the perks for such renters, and also, landlords get a two-pronged guarantee. Here’s how.
It’s true that tenants can clearly benefit in the long run by agreeing to pay in one cheque and negotiating lower annual rents, but they are at a disadvantage as landlords may have more to gain than renters
Costs offset gains for tenants paying with one cheque
“Beyond the contract guarantee, landlords additionally get money-backed assurance that tenants won’t renege on their contract since a lump sum has been exchanged in advance, not to mention being flush with cash at the start of the contract as opposed to when rent is paid in instalments,” Bhatia added.
“However, for a tenant, aside from he or she having to shell out a big amount at the start of the rental period, any change of plans the tenant may have later in the year would most likely put him or her at an inflexible disadvantage, depending on the state of the renter’s finances.”
Another disadvantage is that as tenants typically write out post-dated cheques a year in advance, and while this gives landlords the security that the payment will be made, it can cause problems for financially uncertain renters who may eventually have to take out a personal loan to pay their rent.
Landlords stand to lose for every cheque they encash
When looking at single-cheque rent payments from a landlord’s perspective, they stand to lose for every cheque they have to encash. So for them, the lesser number of cheques to be liquidated, the better. This is also partly why tenants stand to gain on rental rates when opting to pay rent with one cheque.
“For landlords, handling cheques are often a hassle, be it the collection, storage and cashing post-dated rent cheques. Moreover, this facility comes at a cost for them, usually between 3 per cent and 5 per cent of the annual rental income,” Bailey further noted.
“This is why most landlords charge an additional Dh1,000, Dh2,000 or Dh4,000 in rent if there are many cheques. Landlords also need to manage their cash flow and pay the mortgage taken out on the property. Failure to pay a mortgage is far worse than failure to pay a credit card or a personal loan.”
Major strides made to change how rents are being paid
Significant strides have been made to transform how rents are being paid with the UAE Central Bank’s plans to have a direct debit payment system, which aims to enable tenants to pay their rent through their bank accounts and credit cards rather than using the traditional post-dated cheque system.
The Dubai Land Department (DLD) inked a deal last year to digitise rental cheque payments through the UAEDDS with Emirates NBD. Similarly, in 2018, Dubai realty service provider Asteco started a digital payment service for tenants, allowing them to pay rent by direct debit with National Bank of Fujairah.
“Moving from a manual to an automated digital system is set to benefit landlords and property management companies, as well as tenants. Landlords and property managers will no longer have to deal in post-dated cheques, while tenants will have a more options for flexible payments,” added Bhatia.
“If the system is moving to direct debit, most landlords will treat the rental of a property on a month-to-month basis than as a yearly contract. It will be far easier and simpler to have a recurring monthly tenancy contract than a yearly contract.”
Multiple cheque-based lease agreements became popular during the peak COVID-19 phase, and there were several landlords who allowed direct debit of payment through credit cards to help tenants meet their obligations.
While rent is usually paid by post-dated cheques, typically split in one or four payments, there have been instances on and off when rents are to be paid in a lump sum at the start of the rental period. However, while there are long-term gains for tenants, there are risks to consider.
On the upside, tenants benefit from negotiating lower annual rents by agreeing to pay in one cheque, and according to some UAE-based real estate brokers, multi-national companies often prefer to pay one cheque and are still happy to do so.
However, on the downside, not only is setting aside a lump sum amount at the start of the rental period questionable for many potential renters, any change of plans during the year might abruptly hamper cash flow for the tenant, who later may be also forced to take a loan to pay rent and fall into debt.
“Currently, the bright spot in the future of the rental market is that with digitisation of the cheque system, rental prices will stabilise more than it has ever been – and this will be welcomed as good news for both tenants and landlords alike,” said Bailey.