Advice for Landlords: How NOT to do rent-to-rent

Friday, January 13th, 2017 - By David Smith & Robin Stewart at Anthony Gold Solicitors

‘Rent-to-rent’ or ‘guaranteed rent’ has become a popular business model for landlords and letting agents, particularly in London. In a rent-to-rent arrangement the landlord grants a lease to an individual or company, usually for 2-3 years. That person then finds tenants who will occupy the property on a short term basis. This is different from using a managing agent because the landlord should be paid a fixed rent regardless of occupancy for the whole of the terms by the ‘middle tenant’ and the landlord has no direct contractual relationship with the occupiers of the property.

This takes away some of the uncertainty and unpredictability that landlords face when using a managing agent. However, many cases we have dealt with recently prove that a rent-to-rent arrangement certainly does not mean guaranteed rent in your pocket. There are common mistakes we are seeing again and again, so here are our tips for how not to do rent-to-rent:

1. Using an AST agreement
An assured shorthold tenancy (“AST”) is a type of tenancy that has a strict legal definition. You can only have an AST where the tenant (or one of the joint tenants) is actually living in the property. Using an AST agreement between the landlord and the middle tenant is completely wrong – it is likely that the tenancy agreement will not contain all the terms you need and it will definitely contain lots of irrelevant clauses.

2. Using a standard company let.
This is slightly better than using an AST but if you download a standard company let agreement that was not designed for rent-to-rent it’s not going to cover the issues that are specific to rent-to-rent. Some company lets will prohibit the tenant from granting their own sub-tenancies – if that’s what the middle tenant wants to do, your company let agreement is not suitable.

3. Not worrying about HMO licences.
The head landlord and the middle tenant may both assume that the other is responsible for HMO licensing and they will not be prosecuted for failing to hold a licence. That’s wrong – and the council can probably prosecute both of you!

4. Assigning the whole lease
This is a trap for the middle tenant to fall into – if you assign the whole of the term of your tenancy to the occupiers, you no longer have any interest in the property. The landlord can now claim rent directly from your sub-tenants; there goes your profit! The sub-tenancies should be for a day less than the superior tenancy with the property owner.

5. Breaching mortgage terms and conditions
Even if you have permission to grant tenancies, this might be permission only to grant assured shorthold tenancies for no more than one year. If you breach your mortgage terms, the lender can take possession of the property.

6. Invalidating insurance
Just because you have landlord insurance does not mean that you are covered for a rent-to-rent arrangements. Check your policy carefully.

7. Breaching your lease
As a leaseholder you might be subject to a restriction on short-letting in your property.

8. Ignoring planning permission
If your property is going to be used for short letting or as bedsit accommodation, this may be a change of use. You must check what rules are in force in your area.

9. Not discussing who has responsibility for repairs and safety certificates
Who is responsible for carrying out repairs, and who will do them? If you fail to check your tenancy agreement you will not know what you are signing up for.

10. Not worrying about right to rent
Usually the landlord will be responsible right to rent checks for their own tenants, and then that tenant is responsible for right to rent checks for their subtenants. So in a rent to tent arrangement the middle tenant will be liable for checking the occupier’s status. However, this can be varied by written agreement. Getting this wrong could make you liable for a fine or even criminal conviction.

11. Serving a section 21 notice
You won’t be able to terminate your guaranteed rent agreement by serving a section 21 notice as these only apply to assured shorthold tenancies. At the end of the fixed term the tenancy will simply end unless rent continues to be accepted for the property in which case notice will be needed.

12. Getting into rent-to-rent by accident
If you are buying a property with a tenant already living there, check who they are and what the tenancy agreements say. If you do not check you might find yourself in a rent-to-rent situation by accident. This can be very difficult and expensive to unravel.

13. Not reading the agreement carefully
Because these agreements are primarily contractual in nature the terms in them are important. Landlords can find themselves caught out by agreements that the middle tenant can keep renewing or which make it very difficult to remove the middle tenant when they fail to pay the rent. Rent to rent agreements should be checked carefully by someone who understands them before they are signed or they should only be entered into with a reputable and trustworthy middle tenant.

14. Not checking out the middle tenant
The middle tenant has substantial control over the property. They should be referenced and endorsements sought from current clients. It is also well worth searching for their company name on the internet to try to find out if others have had a bad experience with them. No landlord would let an occupier into their property who could not pay the rent but they are often surprisingly prepared to let a middle tenant of doubtful financial status have control over it in a rent to rent scenario.

If you have any questions and would like legal advice, please contact David Smith, Partner in the Housing team at Anthony Gold. His email is David.Smith@anthonygold.co.uk

Please note that the views and opinions expressed in these guest blogs are those of the author and do not necessarily represent the views of London Property Licensing. These blogs are designed to stimulate discussion and debate within the property industry.