Rent 2 Rent: Who is the Landlord?

Rent 2 Rent: Who is the Landlord?

Rent to Rent has been a popular strategy encouraged by a number of property training groups as a strategy which allows you to get started in property when you perhaps do not have a sufficient deposit to purchase an investment property.

Such a strategy operates whereby a company or individual, often classed as the immediate landlord, rents a property from a property Owner, often called the superior landlord. The immediate landlord deals with the tenancy management issues and the superior landlord supposedly enjoys a less management intensive tenancy.

This has proved an attractive option for owners of multi let properties, HMOs, student accommodation and the like and I know several people who successfully operate in this space.

I have previously raised concerns with the model and suspect the strategy will become even more challenging in the event that Section 21 evictions are abolished. The removal of non fault evictions could be hugely problematic if the superior landlord requires their property back and the immediate landlord is perhaps unable to secure vacant possession in a timely fashion.

In the meantime there is an interesting legal case working its way through the Courts which will serve to identify who is the liable landlord in a rent to rent agreement in respect of a rent prepayment order.

Rent Repayment Orders, if you wish to research them, were introduced by Section 40 of the Housing and Planning Act 2016 and can be levied where there is a failure to comply with a required housing improvement or through failure to obtain or comply with a selective or HMO licence. The order can require the repayment of up to 12 months rent back to the tenant or to the local authority in the event that the tenant is in receipt of housing benefits.

The current legal debate known as the Rakusen v Jepson case seeks to determine whether a rent repayment order can only be made against the immediate landlord or whether the ultimate property Owner is liable.

In this case, the tenants initially claimed the rent repayment order from the Owner of the property  rather than the rent to rent operator on the basis that an HMO licence was required but not obtained. Initially the courts agreed with this submission.  This decision was appealed and it was subsequently agreed that the penalty should be borne by the rent to rent operator. The tenant appealed this second decision and we currently await to see what the Supreme Court will decide.

Regardless of the outcome this will be a stressful situation for all concerned. Indeed if the superior landlord is liable for the rent repayment order they will potentially be paying a greater sum than they ever received, assuming that the immediate landlord was taking a percentage of the rent collected as their fee.

In my opinion it is a very difficult issue to decide upon. I believe the Rent to Rent operator should take some liability as they have been responsible for the arrangement of the tenancy agreements, the day to day management, rent collection and compliance to ensure the property and therefore the tenants are safe. That said, the superior landlord is the property Owner and it seems inequitable that they can entirely pass their responsibilities to a third party.

Regardless of the outcome I recommend that if you are intent on operating a rent to rent arrangement that you  ensure that all licences and required permissions are in place with a written agreement in place between yourself and the superior landlord, if you are expecting the superior landlord to arrange these. This in itself will require some careful research as there is not as yet an accessible database of filed licence applications which can be searched. In short, I suggest that you create a thorough suite of documents and perhaps have them checked by a suitably experienced solicitor. Furthermore I suggest you have a robust terms of business letter which is explicit in terms of the role that you will undertake and the role expected of the superior landlord.

The cost of living issues currently being experienced will likely lead to an increase in the number of these types of claims and so any protection you can put in place is likely to prove to be a very valuable investment.

Rent to rent operators should also consider who the superior landlord is and how trustworthy they are. You do not want to get into regulatory issues as a result of someone else not fulfilling their legal obligations. You should therefore undertake the same due diligence that you would in selecting any business or joint venture partner.