Is Rent To Rent Legal in The UK?

Nikka Sulton

Is Rent To Rent Legal in The UK?

Rent to rent involves a company, local authority, or individual (the “rent-to-renter”) renting a property from a landlord, ensuring a guaranteed rental income. The rent-to-renter then sublets to occupier tenants at a higher rate, generating profit.

While it offers advantages like hassle-free tenant management for the landlord, the practical implementation often presents challenges. The theory suggests no concerns about legal obligations, void periods, or property maintenance. At the term end, the property is returned in its initial state, minimizing risks, and ensuring consistent rent payments.

However, in practice, numerous issues can arise for both landlords and tenants. This comprehensive guide aims to provide landlords with insights to navigate the decision-making process when considering a rent-to-rent arrangement. If contemplating entrusting your property to a rent-to-renter for guaranteed rent and peace of mind, continue reading for essential information.

What’s the difference between using a traditional letting agent and rent to rent?

Rent to rent offers an alternative to the conventional agency model for managing rental properties. In a traditional agency setup, an agent agrees to a let-only or let-and-manage service, earning a commission, usually around 15% of the rental income.

In contrast, rent to rent involves the rent-to-renter leasing the property from the landlord and subletting it to an occupier tenant. The rent-to-renter, with no upfront capital investment, profits from the difference between the guaranteed rent paid to the landlord and the rent collected from the occupier tenant. Unlike agents bound by a duty of care to the landlord, rent to rent allows the rent-to-renter to act solely in their own interests, without the same legal obligations.

Is rent to rent a totally legal arrangement?

Despite common misconceptions, rent to rent is not illegal. When all statutory rules are followed, it complies with both criminal and civil law, making it a legitimate and legal commercial arrangement. Rent to rent, when executed correctly, provides a lawful solution to the property needs of all parties involved.

Subletting often gains attention when residential tenants engage in it without the property owner’s knowledge, violating the terms of their lease. However, rent to rent differs in that all parties have agreed to subletting from the outset, eliminating any clandestine or unauthorized actions. This distinction highlights the legality of rent to rent when conducted within the bounds of agreed-upon terms and legal requirements.

What are the different types of rent to renter?

Local Authorities:

Local authorities often engage in rent to rent arrangements, taking on tenancies from landlords to house families or homeless individuals. These arrangements, backed by the professional organization of a local authority, are considered a gold standard. However, landlords should carefully review the agreement and seek legal advice, as even these arrangements with local authorities have faced challenges.

Property Management Companies:

Some companies and letting agents specialize in rent to rent business. While these operators may pose a slightly higher risk than local authorities, thorough due diligence is crucial. Choosing a reputable company or agency is paramount, as there have been instances of less-than-legitimate operators causing issues. Landlords should conduct thorough checks to ensure a company’s reputation and track record before engaging in a rent to rent arrangement.

Private Individuals:

Engaging with private individuals in rent to rent agreements is considered riskier. While some individuals may operate legitimate and successful rent to rent schemes, others, particularly those lacking prior property management experience, may encounter significant challenges. Landlords should exercise caution and thoroughly vet private individuals to mitigate potential risks associated with this end of the rent to rent spectrum.

What is the legal basis for rent to rent tenancy agreements?

With rent to rent, two tenancies coexist – one between the owner landlord and the rent to renter, and another between the rent to renter and the occupier tenant(s). This complexity arises from the former being a business arrangement requiring a specific commercial contract (lease), while the latter is a residential tenancy under the Housing Acts, necessitating an assured shorthold tenancy (AST) or occupation contract.

The commercial tenancy agreement, governed by the Landlord and Tenant Act 1954, grants the rent to renter significant tenure protection. Seeking legal advice from an experienced property lawyer is crucial for landlords to navigate this complex arrangement and avoid potential difficulties in regaining possession.

To prevent forced lease renewal, landlords can let “outside of the Act” by providing a prescribed notice to the tenant, acknowledging in writing that no protection will be afforded. This practice, widely used in commercial lettings, requires specific provisions excluding sections 24 and 28 of the Landlord and Tenant Act, providing a safeguard for rent to rent agreements.

A standard commercial lease is insufficient for rent to rent; a purpose-drawn lease with specific technical clauses is essential. The level of risk for the landlord depends on how the arrangement is structured. Liability for non-compliance, such as letting a house in multiple occupation without a license, may be shared between the landlord and rent to renter in theory.

Rent to renters must comply with Housing Act regulations, ensuring necessary permissions, adherence to planning Use Class rules, proper licenses, protected deposits, and conducting right-to-rent checks. They handle rent collections, address reasonable repair requests, and fulfill due diligence, including credit checks and referencing, for the occupier tenant.

Who is responsible for repairs in a rent to rent arrangement?

The allocation of repair responsibilities in a rent-to-rent arrangement is intricate and necessitates inclusion in the commercial lease agreement. Ideally, the agreement should outline the return of the property to the landlord in its original tenantable state at the term’s end, particularly if alterations were made by the rent-to-renter.

To prevent disputes over dilapidations and clarify financial responsibilities, a schedule of condition, drafted by an independent third party like a chartered surveyor, should be agreed upon by both parties and attached to the lease at the outset.

Residential landlords adhere to Section 11 of the Landlord and Tenant Act 1985, imposing repairing obligations. These obligations can only be avoided if the property is let for seven years or more without a break clause, a scenario unlikely in rent-to-rent arrangements.

Creating a contract where the landlord entirely avoids repair responsibilities is not feasible. Under Section 11, the rent-to-renter is liable to the occupier, and the landlord is liable to the rent-to-renter for repairs. However, the landlord can assign responsibility for repairs and maintenance not covered by Section 11 to the rent-to-renter, along with the property’s condition at the term’s conclusion.

What main points should I look out for when entering into a rent to rent arrangement?

Landlords entering into such agreements should look beyond the apparent advantages of hassle-free management and guaranteed rent. Success hinges on dealing with a trustworthy rent-to-renter, but evidence suggests both reliable and unreliable entities exist.

Critical steps include scrutinizing the reputation and track record of the rent-to-renter and ensuring the agreement between landlord and rent-to-renter is robust. Whether provided by a local authority, a specialized rent-to-rent company, or an individual, the agreement must undergo thorough scrutiny by a solicitor with excellent property knowledge before signing.

Understanding the rent-to-renter’s intentions regarding the type and number of tenants, including the possibility of short-term Airbnb-type lettings, is crucial. Some may aim to maximize income by accommodating as many tenants as possible, potentially without the landlord’s knowledge or permission.

Certain rent-to-renters may even reconfigure the property’s internals, dividing rooms or utilizing basement/attic space. This poses concerns for landlords due to the potential need for extensive work to restore the property and the requirement for planning consent and an HMO license. Some rent-to-renters may not intend to adhere to licensing laws or return the property to its original state.

Insurance, deposits and property redress schemes

Insurance

In the realm of rental property insurance, policies encompassing buildings, contents, and public liability typically necessitate the occupier to be a direct tenant under an AST or occupation contract with the mortgagee. To embark on a rent-to-rent arrangement with a non-Housing Act tenant, landlords must secure written consent from their insurer. If consent is granted, it is prudent for the landlord to directly obtain the necessary coverage, ensuring protection against potential risks.

Moreover, within the rent-to-rent agreement, it’s crucial to stipulate that the rent-to-renter possesses professional indemnity (PI) insurance. This provision serves as an additional layer of security for the landlord. It is advisable for landlords to request and review a copy of the PI insurance policy held by the rent-to-renter. This strategic approach, as recommended by Steve Barnes, Associate Director at Total Landlord Insurance, helps landlords navigate the intricacies of insurance in the context of rent-to-rent arrangements.

Deposits

Ensuring the protection of occupiers’ deposits in government-approved schemes falls under the responsibility of the rent-to-renter. They must complete this process within 30 days and serve the relevant documentation. Complications may arise if the rent-to-renter’s term concludes while the occupier remains in the property. In such cases, all tenancy maintenance responsibilities revert to the landlord owner. If the deposit wasn’t protected by the rent-to-renter, the landlord owner is still liable for its return, even if they never received it initially.

To address this, the rent-to-rent agreement should outline the process for transferring any outstanding deposits to the owner landlord, who must re-protect them and serve new prescribed information to the tenant within 30 days. Clarity in the agreement is essential, clearly assigning responsibility to the rent-to-renter. Sean Hooker, Head of Redress at the Property Redress Scheme, emphasizes the importance of landlords requiring proof of deposit protections from their rent-to-renter to avoid potential vulnerabilities.

Property redress schemes

Given the potential for disputes in rent-to-rent arrangements, landlord bodies recommend that rent-to-renters join voluntary property redress schemes, an inclusion that can be specified in the rent-to-rent agreement. The Property Redress Scheme (PRS) provides an interactive platform for resolving disputes between landlords and tenants through professional mediation. A neutral mediator, not taking sides, offers an independent view to help achieve a fair resolution.

Sean Hooker emphasizes the success of rent-to-rent or guaranteed rent arrangements, provided both parties are aware of the complexities and the agreement is legally sound. To safeguard the process, insisting that the rent-to-renter joins a property redress scheme adds an extra layer of protection in case of issues. Julie Ford, a mediator with the Property Redress Scheme, highlights the flexibility of mediation as a cost-effective alternative to court action, offering mutually agreeable outcomes in the variable landscape of rent-to-rent situations.

How can I check out my rent to renter?

Given the inherent risks in rent-to-rent, thorough vetting of prospective rent-to-renters is crucial for landlords. For applicants, especially limited companies, initial checks on the Companies House website can provide basic information. Subsequent background checks by credit reference agencies, including personal guarantees from directors, add an extra layer of verification. Seeking proof of experience, a successful track record, and contacting previous landlords for references contribute to assessing the rent-to-renter’s credibility. A Google search can reveal additional background information, aiding in making informed decisions.

Phil Gee, Managing Director at Northwood, emphasizes the importance of landlords conducting due diligence, especially considering the presence of unprofessional operators in the rent-to-rent sector over the past eighteen months. Checking Companies House, review sites, and other sources helps landlords avoid stress and potential financial losses before entrusting their property to a rent-to-renter.