Rent2Rent contracts – if you’re going to do it do it right ….

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Order the "Rent to Rent" lease contract template

Rent2Rent companies are using the wrong letting contracts

Whilst I have never been a fan of the Rent2Rent strategy I have to accept that a lot of investors are using Rent2Rent including Housing Associations, Councils and FTSE 250 companies as well as privateers. As it is the mission of Property118 to share best practice, helping these private investors to get their paperwork right fits within our remit, regardless of any other misgivings I might have personally have about the scheme.

What is Rent2Rent?

The way the scheme generally works is that a contract is entered into whereby a property owner rents or signs up to a management contract for his/her property with an investor/manager which includes permission to sublet in return for promises of guaranteed rent, maintenance, management etc. A profit element is built into the deal by investor/manager in the form of a below market rent.

Rent2Rent problems

An example of how things can go horribly wrong is explained in this thread. A property owner was asked to sign an assured shorthold tenancy agreement. To cut a long story short there was a dispute over deposit protection which went to court and the property owner won, even though she had not protected the deposit. She could have claimed substantial damages against the Rent2Rent company but in this instance chose not to. Big lesson learned for the property owner and also the Rent2Renter too!

What are the correct agreements to use for Rent2Rent?

I have consulted with Tessa Shepperson at Landlord Law regarding which type of tenancy agreement should be used. The conclusion was that neither AST’s nor corporate letting agreement are appropriate agreements for the owner and the Rent2Rent company to be using. What is required is a commercial lease drawn up by a corporate property lawyer. Tessa doesn’t get involved with corporate property law so I called in the help of Justin Selig, a qualified and practising corporate property solicitor with The Law department and Landlord Action.

Justin has agreed that subject to demand he will create a legal document template which Rent2Rent companies can  download from Property118 for £97 including VAT. The document will be copyright protected so it can only be used by the person who pays for it and any company in which that person owns more than 26% of the shares. It can, however, be used as many times as that person needs to do so. Therefore there is not a requirement to pay £97 each time the document template is used.

If enough people order the agreements they will be available for download by 31st July 2013. If by 22nd July 2013 there are not enough orders it will be deemed that there is insufficient demand, the project will be scrapped and everybody who has paid will receive a FULL refund.

UPDATE – 23rd July 2013

Sufficient orders have been confirmed and paid for and Justin Selig will have the contracts prepared and ready for us to deliver by the end of this month (July 2013)

UPDATE – 29th July 2013

“Rent to Rent” Lease contract templates are now available for immediate download using the embedded order form below.

Tenancy Agreements between Rent2Rent company and tenantsRent2Rent scheme letting contracts

These will typically be standard AST’s, but there are many kinds. Licences may also be applicable if the tenant has another home. A great article to read about tenancy agreements is this one written by Tessa Shepperson.

VAT on Rent2Rent

Some Rent2Rent investors have set their arrangements up under management contracts and fallen foul of VAT. I have spoken to my accountants and had it confirmed that a commercial lease will get around this problem as the owner of a residential property can not elect to tax for VAT purposes. Therefore, the head lessee (the Rent2Rent investor) doesn’t need to charge VAT to tenants either on this basis.

Order the "Rent to Rent" lease contract template

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Comments

  • Many R2R operators appear to be renting rooms on licenses. This is asking also for trouble in my opinion!

    So far as I am aware there are only three permitted uses for licences. The first is where a room is being rented from a resident landlord, the second being a holiday let arrangement whereby the short term tenant has another home, i.e. a place where they normally reside, receive post and are registered for Council tax, the third is a special exemption offered only to University Halls of Residence. If anybody knows of any other areas where licences apply to residential property please let me know.

    I have been consulted by national media a few times about R2R recently so I have been doing a lot of research, despite having a natural aversion to the scheme.

    There appears to be three types of operators:-

    1) Genuine professionals
    2) Rogues
    3) Amatuers inspired by get rich quick guru’s

    There appears to be three business models for R2R operators to take control of a property.

    A) Management Contracts
    In my opinion this is the most dangerous for the property owner as most don’t realise they can’t divest themselves of their legal responsibilities. R2R operators like them as they don’t generally contravene a property owners mortgage conditions and property management is unregulated too. When things go wrong they simply walk away, in many cases leaving the property owner to sue a shell company with no assets. VAT must be paid on the difference between the gross rent paid to the property owner and the gross rent received by the R2R operator so this is one area which puts the R2R operators off. Most of the people who enter the R2R arena are inspired amatuers. They only envisage success and don’t know of or even consider the downsides. That’s not much help to the property owner either. There is little commercial value in bankrupting a man of straw when it all goes wrong.

    B) The MOST dangerous method
    Many so called guru’s teaching others about R2r in return for extortionate fees haven’t got a clue what they are doing and use completely the wrong contracts. They think they know a bit about the law and chop and change tenancy agreements and call them something different. Amending an AST, giving it a two month term and then calling it a licence is a classic example.

    C) Commercial Leases
    If R2R is to be done properly it needs to follow a very similar model to the fully repairing and insuring lease schemes offered by housing associations. However, that’s not perfect either as many of those arrangements result in breaches of mortgage conditions for property owners who have a domestic or buy to let mortgage. The main difference between a commercial lease and a management contract for R2R is that all liability associated with subletting can be passed from the property owner to the R2R landlord. Therefore, if the R2R operator breaches HMO regulations it’s his fault, same goes for gas checks, tenancy agreements, deposit protection etc. The arrangement needs to be set up properly though and property owners should only consider offering their property under this arrangement having completed thorough due diligence, i.e. if it all goes wrong, who’s to blame and what are the chances of the property owner being able to recover any losses?

    The risk being taken by a property owner when doing a R2R deal is far greater than the risk a mortgage company takes when lending money. Not only does the property owner need to consider whether he will get paid, he also has to consider many other legal responsibilities and damage to his property.

    I am working with Justin Selig at The Law Department and Landlord Action with a view to creating the correct agreements for genuine R2R operators to be using.

    I have decided to put my personal feelings towards the scheme aside and to help the R2R operators who are genuine to do things properly, at least in terms of getting their paperwork right and making it fair. It may well be that R2R becomes regulated in time but that’s no reason not to help the genuine operators to get their paperwork right in the meantime. In fact, I think it’s a very good reason.
    .
    Mark Alexander recently posted…Tenancy agreements – At the end of the fixed termMy Profile


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  • Our advice, steer carefully.

    First, a guarantee from a big company is worth nothing if the business goes bust, so just think what a guarantee form a private operator is worth. Yes, less than nothing.

    Second bit of advice gained from personal experience over many years: Rent to Rent sometimes seems connected to HMO management.

    Well, in London at least, the returns from HMOs are not nearly as high as some claim. But what is always higher (compared to standard whole lets and AST situations) is the costs of management, esp. around wear and tear and general maintenance but also of managing the occupants themselves.

    Free advice


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  • If it is that there is insufficient demand and the project is scrapped, will there be an alternative option/arrangement for those who have shown interest?


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  • Hi Tristan

    Yes, if that happens I will advise all interested parties the cost of the legal work and it will be up to them to decide whether they want a refund or to split the cost between them.
    Mark Alexander recently posted…Another Foxtons case from 2010 – reader requests helpMy Profile


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  • UPDATE

    Sufficient orders have been confirmed and paid for and Justin Selig will have the contracts prepared and ready for us to diliver by the end of this month (July 2013)
    Mark Alexander recently posted…Property Investment – what would you buy?My Profile


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  • Hi
    I just want to clarify what you are selling here. It is a contract between the owner and alimited co?

    Peter


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  • Reply to the comment left by “Peter Pals” at “23/07/2013 – 16:19″:

    Hi Peter, yes that’s right, it’s a professionally drafted commercial lease between the owner of the property and the rent2rent company, which could be a limited company, or a partnership, or a sole trader.
    Mark Alexander recently posted…Building a letting agency businessMy Profile


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  • Thanks Mark. So how is this different to a standard Company Let agreement, which is essentially a commercial lease. It is what i use alot with owners where I am offered props that I then sublet to a specific type of tenant (not rooms) who pays me more than I (my company) am paying the landlord. I then give tenant a licence to occupy.


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  • Reply to the comment left by “Peter Pals” at “23/07/2013 – 16:39″:

    Hi Peter, I’m not sure that I understand what you are doing exactly, please help me by answering these questions.

    Who do you give the licence to occupy to?

    Is the tenant you are subletting to using the property as their principal private residence?

    Under your standard company let agreement, who is liable for any laws which you break, either intentionally or not? For example, Gas Safety, HMO licencing, illegal eviction, deposit protection etc.
    .
    Mark Alexander recently posted…Building a letting agency businessMy Profile


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  • Licence to occupy is to the person staying, sometimes for a few days sometimes for months, but never their principal private residence. Owner is responsible for gas safety and other laws etc, but this can be varied in the Co let agreement. No tenancy created therefore tenancy laws not applicable?


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