Landlords and the Dangers of Rent-to-Rent

Rent-to-Rent refers to the practice of landlords letting a whole property to a tenant (usually a limited company), which is then allowed to sublet the property or individual rooms to other tenants, typically for an amount greater than the rent they pay to the landlord.

On the face of it, rent-to-rent can seem beneficial to landlords – they receive a regular income, whilst their tenant deals with the practicalities of actually renting out the property to occupiers. However, Landlords must consider carefully whether entering into such an agreement is really worth the risks.

The property dispute specialists at Osbornes Law are experienced in advising landlords and tenants on rent-to-rent and subletting matters. We have highlighted below 5 key dangers in rent-to-rent for the landlord

Tenancy Agreement and Terms and Conditions – If you are permitting your tenant to sublet, the terms of the rent-to-rent agreement are crucial for all parties.

In practice, agreements are often poorly drafted and fail to adequately protect the landlord. Landlords rarely consult solicitors prior to entering into tenancy agreements and will use template tenancy agreements which are designed for residential tenants and are not appropriate for Rent to Rent agreements. Often these agreements are supplied by the rent-to-rent company, which has very different priorities to the landlord.

Crucially, landlords should put in place commercial terms that, for example, provide for the types of agreement which the Rent to Rent company can grant to occupiers and the number of people who are allowed to occupy the Property.

Landlords may wish to consider including a condition prohibiting subletting unless certain conditions are agreed. For example, if the tenant needs to leave the country for work purposes for a year you may be willing for the property to be sublet on terms agreed. Remember, it is your property and you have the upper hand.

Houses in multiple occupation (HMO) – Rent to Rent companies will often subdivide the property into more rooms than the landlord is aware of. If the property is let to 3 or more people who form separate households and share facilities (kitchen, bathroom etc) it may be deemed to be an HMO.

If the landlord does not have a licence to operate an HMO this can lead to criminal prosecution and substantial fines for the landlord. Operating an HMO also subjects the landlord to tighter fire safety regulations, including being expected to consider whether they need emergency escape lighting and the need for signs, notices and fire detection and warnings systems in bedrooms. If the landlord is not aware that the property is being run as an HMO this can cause significant issues with local authorities.

In addition, tenants who have lived in an unlicensed HMO are entitled to apply for “Rent Repayment Orders”. If successful tenants can recover up to 12 months of rent paid from the Landlord.

Licensing – Increasing numbers of local authorities operate a selective licensing scheme which requires landlords to obtain a licence to let the property regardless of the number of occupiers. It is crucial that landlords establish who of the landlord and tenant is responsible for applying for and renewing this licence as failure to obtain a licence can lead to fines for the Landlord as well as applications for Rent Repayment Orders (see above) from the tenants.

Insurance – The landlord will need to check whether their insurance policy adequately covers the situation where the tenant sublets the property. A standard policy is unlikely to cover subletting it as an HMO – or at all. It may be that letting the property as a Rent to Rent will be a breach of the insurance policy, which could lead to a refusal to meet claims.

Mortgage conditions – Where the property is on a buy-to-let mortgage, it is vital to check that the lender’s mortgage terms and conditions permit the Landlords tenant to sublet. If necessary, ask the lender for permission if you are planning to allow the tenant to sublet. If the lender will not allow it and your tenant is subletting, you could be treated as being in breach of your lender’s conditions. The lender could take possession of the property, calling in the loan.

Rent Arrears – Rent to Rent companies will often offer landlords a “Guaranteed Rent” by stating that the Landlords rent will be paid regardless of whether the property is occupied or they receive rent from their tenants, however there are various pitfalls with such agreements. In reality if the Rent to Rent company is not receiving rent it will rarely pay rent to the Landlord. Rent to Rent companies are often specifically structured so as to have no assets, often leaving Landlords with no ability to recover arrears. It is crucial that the landlord investigates the Rent to Rent company extensively before entering into any tenancy agreement. We would also suggest insisting that a Director of the Company act as guarantor under any tenancy agreement.

What if you have already entered into a Rent to Rent Agreement? If you have already entered into a Rent to Rent Contract and are not receiving rent from the Rent to Rent company the landlord will be forced to issue Court Proceedings to end their tenancy. If not managed correctly this can be a long process, during which the landlord is unlikely to be receiving any rent. Our litigation team can assist with obtaining possession as quickly as possible to avoid losses accruing.

Key takeaways

It can seem, at first blush, a win-win for landlords thinking about renting out their properties for guaranteed, regular rent in return for allowing the tenant to sublet your property.

However, it is wise to make sure you’re able to make an informed decision with the benefit of expert legal advice before going down this route.