Updated: Oct 12, 2021
Ongoing legal liability
Though part of the rent-to-rent proposition's appeal lies in the promise of providing a rental income while relieving the landlord of their responsibilities, it’s not necessarily so straightforward. Regardless of whether or not compliance has been signed off to a third party, the landlord often remains on the hook. If the property becomes an unlicensed HMO, becomes overcrowded, isn’t fire or gas safe then the landlord can still be fined by the local authority.
Contracts that aren’t fit for purpose
Many landlords and rent-to-rent operators fall into the trap of using the wrong type of contract for the nature of their agreement. The only proper way to enter into a rent-to-rent agreement with an agent who intends to sublet your property is to draw up a commercial lease.
A common mistake made by agents is to enter into an AST (a type of tenancy with a strict legal definition that can only be used where the tenant is actually living in the property) with the landlord and issue licences to the subtenants. This is incorrect, and an AST contract will contain several irrelevant clauses while not addressing many of the most important conditions of your commercial arrangement.
As with any legal contract, it’s essential to read any agreements very carefully before entering into the lease. The contract should state clearly:
who is responsible for maintenance and repairs
who is responsible for arranging the relevant compliance documentation
the term of the agreement
the amount of rent that is guaranteed
the terms according to which the lease might be renewed or terminated
the mechanism of redress if the middle tenant fails to honour the rent guarantee
If you are entering into a private rent-to-rent arrangement, the safest option is to seek professional legal advice and have a qualified professional review the contract before you sign.
Invalidating the terms of your mortgage, head lease, or insurance policy
Before agreeing to terms with any agent, landlords should check the terms of their mortgage, head lease, and insurance policies. It is often the case that a mortgage provider or freeholder will only grant permission to let your property subject to certain conditions (e.g. a provider might only permit you to enter an assured shorthold tenancy with minimum and/or maximum term lengths). Similarly, it’s highly likely that your landlord’s insurance does not cover rent-to-rent arrangements (the likelihood of property damage or other incidents for which the policy would be required to pay out is far higher with more tenant turnover).
If you don’t confirm with the relevant providers that you have permission to use a guaranteed rent scheme to let your property, it’s very easy to find yourself in a lot of trouble down the line.
The company doesn’t have the financial resources or inclination to honour the guarantee
Companies have limited liability, and many agents and services offering guaranteed rent schemes are small businesses or individual investors with little financial backing. If the company cannot let the property at a high enough monthly rent, or the property remains unoccupied for long periods of time, there’s a real risk that they won’t be able to meet your guaranteed monthly rental payments.
If something were to go wrong with the rent-to-rent arrangement, or the company were to go bust, it can be even more difficult to regain control of your property than if it were necessary to evict live-in tenants. If the agent is liquidated then the tenancy agreement becomes void, and the landlord can issue a notice of eviction to the subtenants. However, if the middle tenant goes into administration and continues to trade, the subtenants can resist court proceedings to evict by claiming for ‘relief of forfeiture.’ In either case, matters are complicated by the fact that the landlord and subtenants do not have any direct relationship.
If the middle tenant is receiving rent from the subtenant but not paying the guaranteed monthly sum to the landlord, the landlord has to take legal action against the company. No tenancy is ever risk free and, while it may seem like the more secure option, these schemes come loaded with the potential to end in a different kind of nightmare scenario.
The best way to mitigate risk is to either lease your property directly to a local authority for use as social housing, or to do extensive due diligence prior to entering into any agreement with a private company.