Landlords have certain goals when letting out their properties. Chief among these is often to try to ensure maximum return for minimum risk. This is why a diligent landlord will always ensure proper referencing is carried out on their prospective new tenant to establish that person/company’s credit worthiness and instruct a competent letting agent to assist. There is however inherent risk with this though. Tenants can look perfect on paper but as soon as they move in entirely unforeseeable problems arise. With this in mind, the attraction of companies willing to take on this risk for the landlord is obvious.
‘Guaranteed Rent’ or ‘Rent to Rent’ agreements are becoming more and more common. This is where the tenant takes out a tenancy with the Landlord but not for use by themselves. This agreement entitles that tenant to then sub-let the property of other occupiers, presumably for a profit, whilst paying a pre-agreed rent to the Landlord. The landlord has no day-to-day dealings with the sub-tenant and leaves this all to their tenant to organise. On the face of it, this sort of arrangement feels like a win-win. The landlord gets a rent which is normally below market rent due to the risk taken on but from a tenant that they can rely on. The Tenant can use their experience in the industry whilst working within the parameters set in the agreement, to try to achieve a profit margin they are happy with and manage the property themselves. However, in practice things do not always work out exactly how both sides originally envisage.
The agreement is crucial. This outlines what will be expected of each party in the agreement. Standard template agreements are rarely fit for this purpose without alteration like they often are with Assured Shorthold Tenancies. There are far more criteria that needs to be accounted for such as clarifying whom takes on repairing obligations, are there any restrictions on use, who will get the necessary safety checks carried out and what will happen if the party responsible does not comply with these responsibilities etc. After this there is the landlord wanting to exert some control over who is going to move in and what they are going to do in the property (the importance of which will be detailed later in this blog) and so what type of agreement is to be used for any sub-tenancies, is there any maximum or minimum term, how many occupiers are allowed and if it is over a certain threshold, who will get the necessary property license. This is by no means an exhaustive list and details just some of the likely factors that both parties will want to account for. You want to avoid at all costs a situation where you are working through problems as they are happening with neither party sure of where they stand, presumably blaming each other and trying to rely on what both parties thought the understanding was.
Some landlords are under the misguided impression that because the property is theirs, they can do with it what they want. Often not through any sense of entitlement but just they were not aware that another party has a say. A landlord is often subject to consent from any number of third parties who may dictate how a property can be used. Whether this is a mortgage provider, freeholder, insurance provider or the local authority any of these third parties can impose obligations on the landlord which can include who the property can be let to. Failure to comply can lead to serious ramifications ranging from fines to re-possession of the property and so before these sorts of arrangements are entered into, it is important for landlords to check if they are authorised to do so and if so, whether there are any limitations to this authorisation.
What happens if things go wrong?
Unfortunately over the course of the last couple of years this has happened. Some tenants have fallen into arrears because they were not able to find sub-tenants and even going insolvent in some situations. This leaves the landlord in a difficult situation of the property being occupied by someone they do not know and often (particularly if the agreement has not been drawn up correctly as detailed earlier) having no clue as to the terms of any contract that the tenant may have entered into. Equally, the subtenant’s agreement does not unwind just because the landlord’s direct tenant is in arrears or is no longer in existence especially when the occupiers are in the property lawfully given the landlord’s consent initial to the tenant. Section 18 Housing Act 1988 addresses this. The Landlord would need to assess the likely rights given to the sub-tenant either by engaging with the sub-tenant directly or in the absence of co-operation from the sub-tenant trying to work out what is the maximum that they could have been given and using that as a benchmark. As you will appreciate it is far from an exact science at this stage and far from ideal is court proceedings are required.
The Rent to Rent/Guaranteed Rent structure is sound. If done correctly, it can be closer to the win-win scenario that it appears from the outset. However, to achieve this balance the agent/tenant suggesting to enter into this, needs to be one that knows what they are doing and are going to be reliable otherwise the risks quickly start to outweigh the potential benefits fairly quickly.
Should you, find yourselves in difficulty regarding this, it is important to seek advice as early as possible. Boyes Turner would certainly be able to assist with this and should your require further assistance, I can be contacted at [email protected] .