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Thursday, July 31, 2008

Weeding out the dodgy tenants

How well do you know your tenants? And do you really know what's going on in your rented properties? You may think that it's none of your business what your tenants get up to behind closed doors. But what if one of your investment properties is being used for illegal activities – such as growing cannabis?

Forgive the pun, but cannabis farms are a growing problem for landlords and also for their insurers. Over the past year, the landlords insurance team at Alan Boswell Group has seen a number of very substantial claims for damage arising from use of let properties for cultivation of cannabis. In some cases, the weed production has been on a truly industrial scale with the property being severely damaged through structural changes, modified electrical supplies and water leakages.

From the outside these "grow houses" often look much like any other property in the same street. But inside they will have been transformed into a forest of cannabis plants; fed and lit by an array of pipes and electrical wires.

Occasionally there will be signs to see from the outside: perhaps the windows will be obscured to hide the activity or they may be lined with polythene for insulation. There will generally be considerable condensation which may be visible on windows and a distinctive, pungent smell may be noticeable.

Fire Hazard
If your tenant is a dedicated weed farmer, he will set up a fully-fledged factory system. Holes will be punched through your walls and ceilings to make way for pipes and cables. The walls themselves may be lined with reflective (and flammable) materials and modifications will be made to the electrical wiring to bypass the electricity meter.

As you can imagine, apart from the obvious damage to the fabric of the building, tampering with the electrics dramatically increases the risk of fire. This is heightened by the use of high powered lighting systems which draw a huge current and throw out vast amounts of heat.

Guarding your Investment

As a serious property investor you will already have comprehensive
landlords insurance in place. But you shouldn't simply rely on insurers picking up the pieces. You have a duty to protect your property and to minimise any potential losses.

Whether you manage your property yourself or use an agent, thorough vetting of tenants is essential:

  • Conduct background checks including bank details

  • Obtain references

  • Do not accept payment of rent in cash

It's best to avoid short-term lettings, especially if the tenant is offering to pay up front for the full term of the tenancy. Once the tenancy has begun, regular inspections should be made so that you can spot the warning signs.

Remember that your insurer might decline to pay for any damage if it is found that you have been negligent in your tenant vetting and property management obligations. And with claims costs averaging around £40,000, landlords insurance providers tend to look very closely at the background to these losses and examine the processes the landlord has followed.

In the longer term, it's possible insurers will want to exclude cover for these kinds of losses. Even if your insurer indemnifies you, you'll have the hassle of dealing with a damaged property and a policy excess to pay. Clearly the best solution is simply to get to know your prospective tenants better and steer well clear of the problem cases.

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