Is ‘rent-to-rent’ a doomed business model?

Thursday, July 29th, 2021 - By Robin Stewart, Solicitor, Anthony Gold

There’s no question that ‘rent to rent’ is a risky business model, but many landlords are drawn to its promises of easy money and hassle-free letting. Rent-to-rent continues to be popular among landlords, especially in London.

‘Rent-to-rent’ is a way of letting properties where the owner grants a lease to an individual or company, usually for 2-3 years, and that intermediary (the “mesne tenant”) finds sub-tenants who will occupy the property room by room. It is sometimes called ‘guaranteed rent’ because, in theory at least, the owner should be paid a fixed rent regardless of occupancy for the whole of the tenancy. The occupiers and property owner have no direct contractual relationship with each other, making it a relatively hands-off form of letting.

I co-wrote (with David Smith of JMW Solicitors) an article published on London Property Licensing in 2017 “How NOT to do rent-to-rent” which highlighted some of the most serious hazards for landlords.

If anything, the risks of rent-to-rent have increased for landlords since 2017. The expansion of the scope of mandatory HMO licensing in 2018 and the increasing number of local authorities which have an ‘additional’ licensing scheme mean that many more of the properties used for subletting need a licence.

Where there is any non-compliance with the legal requirements for letting, it is now more likely that landlords will face punishments. Enforcement officers tend to be very suspicious of ‘rent-to-rent’, and they will give these properties a lot of attention, and in the Tribunal the current law is that tenants may apply for a rent repayment order against a property owner who is their landlord’s landlord (although this is subject to an appeal Rakusen v Jepson which was heard on 22 July 2021).

Despite these risks, rent-to-rent continues to be a popular business model. While some landlords do know what they are doing and they manage the risks well, others are na√Øve about the problems they might encounter or who they are going into business with. Others are simply crooks themselves. But ‘rent-to-rent’ still has a role to play in the rented sector – it is quite common for local authorities and housing associations to take longer term leases of property in order to use them as temporary accommodation. Universities and companies also sometimes take leases of properties in order to sublet to their students or employees. Subletting (with permission) is not inherently suspicious or illegal – it is just often associated with shabby property management.

So while there is still an appetite among landlords for ‘rent to rent’, and there are still plenty of property managers who are willing to offer this as a business model, some of whom are doing a good job, why would anyone think that rent to rent might be a doomed business model?

The reason I raise this is that I am expecting the abolition of section 21 notices to bring about big changes to how rent-to-rent schemes work.

A section 21 notice is a notice requiring possession of a property let under an assured shorthold tenancy. The landlord does not need to give a reason or justification for evicting the tenant – if the fixed term of the tenancy is over, a section 21 notice may be given (subject to various technical requirements).

From a landlord’s point of view, ‘rent-to-rent’ means giving up control of their property for an agreed amount of time, say three years, and receiving a steady rent during that time. This attractiveness of this offering relies on the assumption that at the end of the three years, the ‘mesne tenant’ will be able to give the property back to the landlord with vacant possession.

Of course, real life is not always so simple. I have often acted for landlords who lost control of their properties, or who have inherited a tenant they would have not chosen. One of the many problems with ‘rent to rent’ is that if one tenant in a house share does not want to move out, it will take a long time to evict them, and if the other rooms are vacant during that time, someone – either the landlord or the rent-to-rent business – is sure to be losing money.

What will change if section 21 notices are abolished is that ‘rent-to-rent’ businesses who grant assured shorthold tenancies will not even be able to pretend that they can guarantee to make things go smoothly at the end of their tenancy. There will be no way to get the property vacant in order to return it to the landlord empty of tenants. This fundamentally changes the nature of the deal from landlord’s point of view.

Of course, it would be naïve to think that rent to rent will disappear completely.

Some businesses will use ‘licence agreements’ rather than tenancy agreements, on the basis that a licence can be terminated by ‘notice to quit’ whenever required. This can be legitimate if the contracts really are licence agreements but using sham licence agreements when the circumstances really amount to a tenancy is well recognised as a scam, and this can be prosecuted as criminal offence under consumer protection legislation.

Other rent to rent businesses will simply not attempt evict their tenants, and when they are required to hand the property back to the landlord (at the end of headlease) the landlord will become the direct landlord of the tenants. This might be a good thing – after all, why should tenants have to leave a property just because there is a change of management – if the landlord does not want to have to deal with the tenants they have ‘inherited’, they can appoint a managing agent. This arrangement might become the norm, but I suspect that it will prove to be unattractive to landlords. After section 21 notices are abolished, and residential tenancies in England become effectively indefinite in length, landlords are likely to be every more cautious about who they grant tenancies to, and letting another person or business chose tenants who could stay forever is not likely to be appealing to landlords.

This suggests to me that rent-to-rent will not survive as a popular business model in its current form after the abolition of section 21 notice.

The author of this blog, Robin Stewart, is a Solicitor in the Housing team at Anthony Gold. His email is ros@anthonygold.co.uk.

Please note that the views and opinions expressed in these 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. This article does not represent legal advice and should not be treated as such.

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