Rent Default Insurance or a Guarantor?

July 5, 2022 4-minute read
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Assurance loyer impayé ou garant ?

Rent default guarantor or guarantee: Which of these two options should you choose to protect yourself against a tenant’s potential lack of trust?

Rent Default Insurance: Should You Use a Guarantor or a Guarantee to Cover It?

If you’re a landlord, you’re about to sign a lease, and you’re not sure what steps to take to protect yourself against potential rent defaults by the tenant, our real estate agency in Paris's 16th arrondissementth provides explanations to help you understand better.

Require a reliable guarantor Taking out rent default insurance and subscribing to a rent default protection plan are two different forms of protection that help prevent landlords from facing financial difficulties and the risk of non-payment of rent when renting out their property. Each option has its advantages and disadvantages.

The guarantor's natural solution (simple guarantee or joint and several guarantee):

To guard against potential rent defaults, a guarantor—also known as a surety—is an option that a landlord may choose. Provided by an individual or a legal entity, the surety is based on a written agreement signed between the landlord and the guarantor, which obligates the guarantor to pay the rent and utilities on behalf of the tenant if the tenant is unable to do so and fails to meet this obligation.

In the case of a simple security deposit, the landlord contacts the guarantor only after first contacting the tenant to settle the matter.

In the event of joint and several guarantee, the guarantor may be called upon as soon as the first rent payment is missed.

A joint guarantor is preferable for the landlord for the simple reason that the situation will be easier to manage.

Since the 1ster Last January, the amendments regarding surety bonds took effect. A surety bond is now defined as a contract under which a surety undertakes to pay the debtor’s debt to the creditor in the event of the debtor’s default. The specific maximum amount of the surety bond must also be specified in the contract.

Another point to note is that the term of the security deposit may be fixed or indefinite.

This solution is simple and free, with no additional costs or procedures, but it does have some drawbacks: it cannot be 100% guaranteed, and if the tenant or their guarantor fails to meet their payment obligations, you will be forced to take legal action against them, which will result in costs that you will be responsible for.

Enforcing a security deposit isn’t always the most efficient or quickest option—after all, it involves going through the courts and dealing with their delays… That’s why some landlords prefer to purchase insurance against unpaid rent.

The Unpaid Rent Guarantee (GLI)

Rent Default Insurance is a way to protect yourself against a tenant’s potential failure to pay rent. Note that it cannot be combined with a security deposit unless the tenant is a student or an apprentice. It costs, on average, between 2% and 5% of the monthly rent and is deductible from rental income when the landlord files under the actual income tax system.

The amounts of compensation to which this coverage entitles the policyholder may vary from one insurer to another and may be subject to a deductible. Unpaid rent insurance is capped at approximately 90,000 euros and is sometimes limited in duration (12 to 36 months).

GLI coverage protects against risks that may affect the landlord:

  • The collection of unpaid rent, including utilities and taxes, provides a safety net. The coverage must be effective in the event of a problem, given that the contract comes at a cost.
  • Legal and procedural costs in the event of a dispute, which is a relief for the property owner
  • Costs of repairing the dwelling in the event of property damage

This insurance offers tax advantages, as the premiums are deductible from property taxes.

Eligibility for rent default insurance also varies depending on the type of tenant: for those with permanent employment contracts, the rent must not exceed 37% of their monthly income, and for those with fixed-term contracts or temporary workers, this rate drops to 33%. If a tenant is already living in the rental unit, the policyholder must prove that there have been no prior payment issues.

There are only a few drawbacks to consider:

  • The selection of tenant applications, which must meet strict criteria to be approved by the insurer. Tenants must have a reliable and creditworthy profile and must demonstrate a monthly income that is more than three times the amount of the rent, including utilities.
    The tenant must have a stable employment contract. Therefore, the tenant must be either:
  • On a permanent contract, outside the probationary period;
  • On a fixed-term contract, if he has more than 8 months remaining on his contract;
  • A self-employed person with proof of more than 2 years of continuous employment;
  • Retirees are also accepted, students and apprentices who may need a guarantor.
    The housing must be the tenant's primary residence.
  • The insurance company reimburses the costs retroactively 3 or 4 months later,
  • The process of purchasing rent default insurance is strict and requires the landlord to meet certain obligations in order to receive proper compensation.

When you contact our Rental Management Department, you’ll have access to rent default insurance:

    • at the exceptional rate of 1.80% in partnership with ALLIANZ
    • No time limit; total coverage limit of €90,000 per claim.
    • Coverage is unlimited in duration, with no deductible and no waiting period.
    • Coverage of legal expenses (attorney, bailiff, etc.) up to €20,000.
    • Our contract includes legal protection for landlords.

Please feel free to contact our CENTURY 21 Auteuil Immobilier office at 01 42 15 16 21 for any additional information.

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