Everything You Need to Know About Rent to Rent
Rent to Rent sounds like a dream – but could it become a landlord nightmare?
Whether it’s driven by tenants or landlords, the industry isn’t short of ‘innovative thinkers’ who will stop at nothing to create the outcome of their dreams, even if it turns the resulting property and legal structure into a bit of a waking nightmare.
That said, one scheme which has hit the news recently is the rent to rent scheme. Although nothing new, it has boomed in popularity over recent years, and become a real staple in some parts of the country. But is this yet another example of creativity gone too far? Is it just greedy landlords passing the buck to desperate tenants? Or greedy tenants looking to take advantage of lazy landlords? Or, are we just cynical and actually, is it simply a really good idea?
We caught up with property litigation solicitor and head of dispute resolution Adrian McClinton, for his thoughts on how rent to rent can work for landlords, and tenants.
What exactly is rent to rent?
Before we get into the nitty gritty, let’s just clear up exactly what the rent to rent scheme is. We’re hearing more and more about them, but let’s make sure we are all on the same page!
According to Adrian, ‘rent to rent is a type of model that’s gained a bit more popularity in the market. The property owner normally rents their property as a buy-to-let to an individual, or individuals, that use the property as their only or principal home. That’s the pretty much bog standard buy-to-let. A rent to rent scheme is where the property owner instead rents the property to an individual or limited company, that company would call themselves ‘operators’, for the purposes of this conversation’.
The operator then sublets the rooms in the property individually to tenants on assured shorthold tenancies, and you can really start to see where the margin is. If the operator is getting the property on a normal tenancy, they’re making the margin on each individual.
So, with the operator managing all the comings and goings in the property, they are responsible for all of the finding of tenants, overseeing of tenant squabbles and rectifying issues, and in theory, the landlord is able to sit back and relax- and just take the rent from the operator – referred to by some as a ‘Unicorn Scheme’, thanks to their rarity and perfection.
‘That’s typically how they’re presented by the operator,’ warns Adrian. ‘The reality is different’.
What is the reality of rent to rent?
A tenant who does all the landlording legwork does sounds too good to be true… but in our experience, things that sound too good to be true usually are! We now understand the principle, so what’s the reality or rent to rent, does it really offer the best of both worlds?
‘There are many things to think about,’ said Adrian.
- If a landlord is looking at how they own their property, they need to first consider what are the mortgage conditions that they have if they’ve got borrowing on that property? The likelihood is that the mortgage will stipulate what type of agreement the property owner can enter into. It’s likely to read that if they’re going to let the property, they must let it as an assured shorthold tenancy
- The second consideration follows on from that and concerns the insurance that they have. The likelihood is that the insurance stipulates the type of tenancy that the property owner can enter into
- Finally, the agreement that they would enter into with the operator. Property owners that want to terminate a rent to rent agreement find that a lot of these agreements are very badly drafted. They tend to be weighted very much in the favour of operators, perhaps deliberately so, but it makes it very difficult to terminate them
Could landlords find themselves in hot water?
Presumably there are ways around those issues though? And if legally you are on the right path to begin with, it still sort of sounds like a nice option, if you want to kick back and relax a little bit?
If you tick the boxes with your mortgage, insurer, and get a proper solicitor to draw up your agreement, you should be home and dry on the legal front, right?
‘Local authorities want to know if the property is an HMO, a house of multiple occupation. If you are renting your property to somebody who then turns it into an HMO without letting the local authority know, that can cause serious problems,’ warned Adrian.
‘More often than not, the operator will need to turn a property into an HMO, which requires licensing within certain parameters. And it is then the operators, or what you hope is the operator’s obligation, to obtain the right licensing to carry out the right words to the property to ensure that it’s safe to use as an HMO’.
‘It may or may not be clear from the agreement between the property owner and the operator as to whose obligation that is, whether it’s even an obligation of the agreement itself. We touched on this on a previous Mashroom Show, where a particular individual in central London ended up being fined £11,000 by the local authority when his operator hadn’t fully informed him. At the Tribunal, the local authority said ‘No, it’s your responsibility. You’re the landlord’’.
Hang on, so the operator’s mistakes can come back and bite the landlord in the back pocket, despite having handed over control?
It’s very concerning because the property owner no longer has control of the property, and yet they’re being lumbered with the obligations and the requirements to comply with the regulations in place.
Clearly having a mortgage on a property makes a difference when it comes to planning this route, but is it important to consider whether you own the freehold of the property, or are a leaseholder?
‘As well as the mortgage consideration, a lot of leases will stipulate the type of sub-tenancy that a property owner can enter into,’ explains Adrian. ‘A lot of those leases will state that a property is not to be used as a house of multiple occupation, and any agreement that’s entered into is only with one joint party, for residential purposes and uses an assured shorthold tenancy. This means that a property owner could be in breach of their lease conditions, as well as the mortgage conditions. I’ve acted for freeholders that have had to take action against leaseholders that I’ve been using the property in this way, which is a breach of the terms of the lease’.
A bad job?
So, in a nutshell rent to rent sounds like a pretty dangerous way to plan for a relaxing landlord experience. But still, thousands of landlords are choosing to take the risk. Are there any circumstances where it can be a good idea?
‘I think that the rent to rent scheme could work for a property owner, but in very limited circumstances,’ admits Adrian.
It will probably only work where the property owner owns the property outright, the property itself is within an area that doesn’t require HMO licencing or it’s clear within the agreement whose obligation is to obtain those licences, and there is no lending on the property as well.
In those circumstances, would you be confident in telling a client to go for it if they asked your opinion?
‘Maybe, where we have those limited circumstances in place. But without a shadow of a doubt, it’s very important that if anyone is considering handing over the most prized asset that they have to another individual or limited company, it is vital that they carry out due diligence on that individual and they ensure that they get the right legal documentation in place, so it’s absolutely clear whose obligation it is to do what.’