The rent-to-rent business model is a relatively new subsection of the UK’s private rental sector. It has curried favour with online influencers and underpins many of the ‘zero money down’ landlord schemes which are advertised online.
However, the concept is facing growing public pressure, with some fearing that the scheme provides a backdoor scheme for rogue landlords to shirk their responsibilities. Housing campaigners have brought a case before the Supreme Court, hoping to define who should be deemed ultimately responsible for rent-to-rent properties, with the final ruling potentially having wide-reaching repercussions for landlords and intermediaries alike.
How Does Rent-to-rent Work?
The rent-to-rent model seems to offer would-be landlords a holy grail opportunity. The chance to establish oneself in the private rental sector and earn income without requiring a substantial deposit to put down on a first house. Rent-to-rent arrangements entail a third party (Renter) person or limited company taking on the rent of a property to sublet it for a profit. Landlords who agree to the arrangement permit the ‘Renter’ to sublet the property in exchange for a more hands-off approach and supposed greater security of income. From the Renter’s perspective, there is the opportunity to use entrepreneurship and grit to add value and manufacture a profitable income stream without having to invest substantial capital upfront.
There are a host of different rent-to-rent strategies that can be employed, depending on the property. The simplest strategy entails negotiating with a landlord to achieve a discounted rent in return for ‘securing’ their future income. The Renter takes on responsibility for letting out and maintaining the property, whilst the landlord benefits from a stable and consistent rent across multiple years. Some investors opt to take this strategy further, seeking out unfurnished lets and furnishing them to add value and generate a greater return. Others seek large multiple-room homes which can be sublet as HMOs (Houses in Multiple Occupation), turbocharging their returns by letting each room individually. Some astute landlords attempt to utilise tenancy length arbitrage by taking on longer-term agreements and subletting the properties on short-term lets, either as Airbnb or holiday lets.
No matter what the strategy is, the basic premise remains the same. Adding value and earning profit by taking on the active management of a rental property on behalf of a landlord.
For a more detailed guide of the pros and cons of rent-to-rent, Landlord Vision has a comprehensive blog on the matter here:
Why Is Rent-to-rent Controversial?
Despite appearing to be a panacea for would-be landlords seeking to establish a foothold in the private rental sector, rent-to-rent is embroiled in controversy. The model itself is inherently risky, with Renters earning a premium through taking on the risks of a landlord, without attaining the capital growth of owning a property. Void periods, bills and maintenance costs all become the responsibility of the Renter, without capital growth they make up any potential shortfalls. Furthermore, the landlord retains the final control and can choose to sell the property part-way through the agreement or may fall behind on their mortgage payments, putting the property at risk of repossession.
Rent-to-rent is Controversial Among Landlords
From the landlord’s perspective, rent-to-rent isn’t all that it’s made out to be. Whilst there can be the opportunity to secure long-term stable income from reputable renters, the model can still be a minefield of risks for landlords. Rent-to-rent arrangements can invalidate landlord insurance, be non-permissible under lease agreements, or breach mortgage terms – running the risk of the property being repossessed. Not only that but the agreements themselves are far removed from traditional ASTs (Assured Shorthold Tenancies), meaning it is important to have clauses defining maintenance and licensing responsibilities. Equally, the Renters themselves may be rogue operators who may return your property in a poor state of repair or with unsavoury tenants in situ.
Rent-to-rent is Also Controversial Among Tenants
It is not just landlords and Renters for whom the concept of rent-to-rent is controversial, tenants can also fall victim to the model. It is argued by campaigners that the arrangements can provide a backdoor for unethical landlords to shirk their responsibilities. They believe that some rogue landlords are using limited companies in rent-to-rent arrangements as a tool to avoid their legal duties and to make it more difficult for tenants to track them down when properties are neglected and left in poor condition.
The Case for Rent-to-Rent in Question
The case being brought before the Supreme Court is Rakusen vs Jensen. The centrepiece of the case is a property let through a rent-to-rent arrangement which lacked a necessary HMO license. The property in question was allegedly in a poor state of repair, with reports of vermin in the common areas, a lack of locks on the individual rooms, improper fire safety and dangerous electrics in the bathroom. After discovering that the property was without the required HMO licenses, the tenants came together to seek a Rent Repayment Order (RRO) from the ultimate landlord – Mr Rakusen.
The case was initially raised to The Upper Tribunal which ruled in the tenant’s favour, affirming that the RRO could be applied against the ultimate landlord of the property. However, this was appealed by Mr Rakusen who escalated the case to the Court of Appeals, who decided to rule in favour of the landlord. The issue has since been escalated to the Supreme Court, to make a final ruling on the matter.
The Supreme Court Will Decide on the Rent-to-rent Case
The Supreme Court must now decide whether the final responsibility for ensuring an HMO license is in place rests with the ultimate landlord or the rent-to-rent management company, with whom the tenancy agreement is signed. The decision itself may have far wider ramifications than this specific case, potentially setting a broader precedent around the ultimate responsibility for compliance in rent-to-rent arrangements.
The NRLA’s Perspective on Rent-to-rent
The case has attracted the attention of the National Residential Landlords Association (NRLA), which is not supporting either party, but rather seeking to represent the broader landlord community. Whilst the NRLA is keen to warn that ignorance of the situation is not a legal protection for landlords, David Smith from JMW Solicitors – who are making their case to the Supreme Court – states:
Of course, landlords should be responsible about who they let to, but there are simply things that they can’t control.
Adding that property owners should not be held liable if a rent-to-rent company has become the de-facto landlord and lied to them. It is a difficult situation for both owners and tenants alike, but owners should not be liable for compensation.
Just because both parties are victims doesn’t mean landlords should be held responsible.
NRLA Chief Executive, Ben Beadle, highlights that current Rent Repayment Orders are unfair to property owners, who are liable to pay back the total amount of rent paid by subtenants, irrespective of the likelihood that the actual income they receive is significantly lower once the intermediary Renter has taken their share. He states:
it seems unconscionable that a landlord should be subject to a financial penalty to a sub-tenant, whose existence he might not even be aware of, as a result of the dishonesty or failures of the tenant. While landlords may be subject to prosecution or civil penalties in these situations, the additional penalty of a rent repayment order is an excessive punishment