When a Tenancy Doesn’t Go to Plan: The Costs Landlords May Not Expect

Owning an investment property is often about looking at the bigger picture – rental return, property value and long-term growth. But sometimes, it’s the unexpected costs that come with a tenancy that can catch property owners by surprise.

A tenancy ending doesn’t always mean the keys are simply handed back and a new tenant moves straight in. There can be situations involving unpaid rent, damage, belongings left behind, locks needing to be changed, unexpected reletting costs or a property being temporarily unable to be rented.

While good property management plays an important role in reducing risk and managing these situations when they arise, there are some circumstances that are simply outside anyone’s control. This is where having appropriate landlord insurance can become particularly important.

With updated landlord insurance information recently provided to our Property Management team by Terri Scheer, we thought it was a timely opportunity to look at some of the less obvious costs that can arise when a tenancy doesn’t go to plan – and some of the things property owners may want to check within their own insurance cover.

What Happens If Rental Income Suddenly Stops?

For most property owners, regular rental income is an important part of their investment. But there are a number of circumstances that can cause that income to unexpectedly stop.

A tenant may fall into rent arrears or default, leave the property unexpectedly, or fail to provide vacant possession when required. There are also more unusual circumstances, such as the death of a sole tenant, that can result in an unexpected loss of rental income.

Different landlord insurance policies can treat each of these situations differently, with varying limits, conditions and exclusions.

It’s an important distinction because having “loss of rent” included in a policy doesn’t necessarily mean every situation resulting in lost rental income will be treated the same way.

Rather than simply checking whether your policy includes loss-of-rent cover, it may be worth asking: what circumstances does my policy actually cover, and for how long?

What If the Property Can’t Be Rented?

A tenant not paying rent isn't the only reason rental income can be interrupted.

Damage to a property can sometimes leave it temporarily unable to be occupied. In other circumstances, access to the property may be prevented following an insured incident.

In these situations, the financial impact for an owner may extend beyond the cost of repairing the physical damage. There can also be a period where the property isn't generating its usual rental income.

For owners with mortgage repayments and other ongoing property expenses, even a relatively short interruption can make a difference.

This is why it’s worth understanding whether your insurance includes loss of rental income when a property becomes untenantable, what circumstances need to occur for that cover to apply and whether there are any waiting periods or limits involved.

It’s Not Always the Big Expenses

When we think about something going wrong with a tenancy, major property damage or months of unpaid rent are probably the first things that come to mind.

But there can also be a collection of smaller costs involved in resolving a tenancy and preparing a property to be rented again.

Depending on the circumstances and the insurance policy, these could include things such as:

• Reletting expenses
• Changing locks
• Removing and storing goods left at the property
• Costs associated with certain tribunal or court processes
• Repairing tenant-related damage
• Replacing damaged contents or fixtures

On their own, some of these expenses may not seem significant compared with the overall value of an investment property. However, when several occur at once – particularly alongside lost rental income – the total cost can quickly grow.

It’s worth checking your own policy to understand which of these additional expenses, if any, are included and what limits apply.

What Actually Counts as “Contents” in an Unfurnished Rental?

This is another area that can be easy to overlook.

When you hear “contents insurance”, you might immediately think of furniture, televisions and personal belongings. For that reason, an owner of an unfurnished rental property could assume contents cover has little relevance to them.

However, a landlord's contents can include items that remain with the property, such as carpets, curtains, blinds and light fittings.

These are also items that may need to be repaired or replaced following tenant damage or another insured event.

Understanding the difference between building and contents cover – and how your own insurer classifies different parts of the property – can help identify potential gaps before you ever need to make a claim.

What About Tenant and Pet Damage?

Even with careful tenant selection, regular inspections and good communication throughout a tenancy, damage can still occur.

Depending on the policy, specialist landlord insurance may provide protection for certain damage caused by tenants, their family members, invited guests or pets.

However, policies can place specific limits on different types of damage. Pet damage, accidental or intentional tenant damage and scorching damage, for example, may not necessarily be treated in the same way.

Again, the detail matters.

Rather than assuming all tenant-related damage is covered, property owners should understand what their individual policy defines as insured damage, what excesses apply and whether particular types of damage have their own limits.

Has Your Property Changed Since You Took Out Your Policy?

Insurance can easily become something that is organised when an investment property is purchased and then automatically renewed each year.

Meanwhile, the property and the rental market continue to change.

Your weekly rent may have increased. Improvements may have been made to the property. Your circumstances may have changed, or your insurer may have updated its policy terms, premiums, limits or exclusions.

If your property is now achieving considerably more rent than when you first arranged your insurance, for example, it’s worth checking whether your level of rental income protection has kept pace.

The same applies to your building and contents cover.

A policy that was appropriate several years ago may not necessarily reflect the property or its rental income today.

When Did You Last Actually Read Your Policy?

Most of us hope we’ll never need to make an insurance claim, which also makes insurance very easy to set and forget.

But understanding your cover before something happens is far easier than discovering a limit or exclusion when you're already dealing with a difficult situation.

It may be worth taking a few minutes to check:

• What circumstances are covered if rental income stops?
• How long could loss-of-rent cover apply?
• What tenant-related damage is included?
• Is pet damage treated separately?
• What does your insurer consider building versus contents?
• Are costs such as changing locks, removing goods or reletting included?
• What excesses, limits or exclusions apply?
• Does the level of cover still reflect your property's current rent and circumstances?

Landlord insurance can't prevent something from going wrong, but having appropriate cover can form an important part of protecting an investment property when the unexpected happens.

If it’s been a while since you reviewed your policy, now may be a good time to pull it out, understand exactly what you're covered for and speak directly with your insurer or insurance professional if anything is unclear.

This article contains general information only and does not constitute financial or insurance advice. Insurance policies vary between providers and are subject to individual terms, limits, conditions and exclusions. Property owners should refer to their own Product Disclosure Statement and seek appropriate professional advice regarding their individual circumstances.