Rent To Rent: Hidden Dangers For Landlords

Guaranteed rent to rent deals are growing in popularity. Landlords like them because a property manager deals with tenants and pays rent even when the property is empty. The manager also takes care of any repairs as they must hand the property back in the same condition as when they took it on.

Rent to rent contracts typically last between three and five years. The advantage for a landlord is a guaranteed fixed rent and peace of mind that their investment is in good hands. But some landlords have cautionary tales to tell about their experiences with rent-to-rent.

How rent to rent works

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Rent to rent, also called rent2rent or guaranteed rent, is a multi-layered proposition. A standard letting agreement is between a private landlord and tenant, even if an agent is involved. The tenant agrees to pay the rent in full and on time. While the landlord must keep the home in a good state of repair. Rent to rent introduces a third party. The property manager.

The property manager (immediate landlord) rents the home from the property owner (superior landlord) and pays a guaranteed monthly rent for a fixed term regardless if the property has a tenant. The manager is also responsible for keeping the home in a good state of repair. The rent to rent deal depends on several factors:

• The manager must let the property for a higher rent than the landlord is paid to make a profit

• The property manager having the financial resources to pay the rent even when there are no tenants

• A well-written contract that sets out each side's obligations

The problems with rent-to-rent deals

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The saying goes, if something looks too good to be true, it probably is. Rent-to-rent deals often fall into this category.The landlord generally accepts a lower than market value rent to make the deal work while accepting property costs are defrayed to the manager.

One problem is identifying the middleman if the deal goes wrong. For example, although the manager may sign the rent-to-rent contract with a landlord, they may have a side deal with another manager who could lay off the property to someone else, with each taking a slice of the rent.

Another issue is the financial standing of the property manager. Often the rent to rent contract is with a company with no assets that folds rather than honours the rent guarantee despite having collected the rent.If the management company goes to the wall, the landlord has little prospect of recouping unpaid rent. They could face the cost of evicting tenants or repairing damaged property out of their pocket.

Lastly, any buy-to-let lender and insurer should allow sub-letting or rent-to-rent flouts the terms and conditions of the loan and any insurance policy.

A landlord's rent to rent story

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Landlord Martin Rakusen owns a flat at Mandeville Court, Finchley Road, London NW3, valued at around £1.6 million.He moved out and rented the flat to a property management company on a rent-to-rent contract.

The manager then let the flat to three tenants, who each had a room, then rented another room to a fourth tenant, making the flat an unlicensed house in multiple occupation (HMO).

The manager did nothing to apply for the licence. Nor did they meet the extra health and safety regulations that apply to HMOs.

At the end of their contract, the tenants realised the property broke HMO rules and applied to The First-Tier Property Tribunal for a rent repayment order (RRO) against the landlord, Mr Rakusen. An RRO allows tenants to claim a refund of up to 12 months rent.T

he landlord argued he was not responsible for re-paying the rent as he was not the immediate landlord who received the money or had a contract with the tenants.The tribunal found for the tenants, guided by an earlier Upper Tribunal decision (Goldsborough & Anor v CA Property Management Ltd (2019)). In this case, a judge granted an RRO to the tenants even though they had no contract with the superior landlord.Mr Rakusen appealed the decision to the Upper Tribunal, which again found in favour of the tenants.

Now, the landlord is considering taking the case to the Court of Appeal.

Why the case is important

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Subject to appeal, the case clarifies that a landlord is responsible for refunding tenants under a rent repayment order. This applies even if the immediate landlord received the money and signed the rental agreement with the tenants. The decision holds even if the immediate landlord breaks housing law without the knowledge of the superior landlord.

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If you found this article helpful, you may enjoy our article on Buy-To-Let Stamp Duty. We have more useful articles for landlords in our blog. Find out more about how Oasis Living can help you find the perfect tenants and improve your property management experience. Head to our website now or contact with one of our property experts. See our Guide on renting for tenants here!