Practical Guidance for Property Owners with “Guaranteed Rent” Agreements

If you’ve let your property to a serviced accommodation provider who promised “guaranteed rent,” the recent VAT ruling in HMRC v Sonder Europe Ltd could significantly impact your arrangement. Here’s how you can protect yourself and navigate this changing landscape:

1. Understand the Potential Impact

Serviced accommodation providers using the Rent to Serviced Accommodation (R2SA) model may now face increased VAT liabilities, not just on future revenue but also on backdated VAT assessments. This could leave them struggling to meet their financial obligations, including guaranteed rent payments to you as the property owner.

Key Risks:

• Providers may default on rental payments.
• They could attempt to renegotiate or terminate contracts early.
• In some cases, providers may become insolvent, leaving you with unpaid rent and legal complexities.

2. Review Your Agreement

Carefully examine your contract to understand your rights and obligations. Focus on the following clauses:

• Guaranteed Rent Clauses: Ensure the “guaranteed rent” is legally enforceable. Check if the provider can withhold payments in specific circumstances.
• Termination Clauses: Determine whether the provider can terminate the agreement early and what penalties apply.
• Security Provisions: Look for rent guarantees, deposits, or other security measures that may protect you if the provider defaults.
• Force Majeure Clauses: Assess whether the provider might argue that the VAT ruling constitutes an unforeseeable event allowing them to break the agreement.

3. Open Communication Channels

Proactively engage with the provider to assess their financial position. Open and transparent discussions can help you gauge whether they’re likely to meet their obligations moving forward.

Questions to Ask:

• Are they aware of the VAT ruling, and how do they plan to address it?
• Do they foresee any changes to your agreement as a result of increased VAT liabilities?
• Are they considering restructuring or exiting the serviced accommodation market?

4. Mitigate Your Risks

If you’re concerned about the provider’s ability to fulfil the agreement, take steps to protect yourself:

• Request Financial Updates: Ask for proof of financial stability, such as profit and loss statements or VAT compliance records.
• Enforce Security Deposits: If a deposit was part of the agreement, confirm that it remains intact and accessible.
• Consider Re-letting Options: Explore whether your property could be let to traditional tenants or another operator if the agreement fails.

5. Seek Legal Advice

If you suspect the provider may default or breach the agreement, consult a solicitor experienced in property and commercial law. They can:

• Review your contract to confirm your legal position.
• Advise on remedies if the provider defaults.
• Assist with renegotiating terms or terminating the agreement if necessary.

6. Monitor the Market

Keep an eye on market trends to understand how other property owners and operators are responding. This will help you anticipate potential risks and opportunities for your property.

Key Areas to Watch:

• Whether the provider is part of a broader trend of defaults or insolvencies.
• Demand for traditional lets in your area if you need to switch strategies.
• The potential for new, VAT-compliant operators entering the market.

7. Plan for Contingencies

Prepare a backup plan in case your current agreement fails. This could include:

• Transitioning your property to a traditional rental model.
• Managing the property as a holiday let directly.
• Selling the property if the income stream no longer aligns with your financial goals.

Conclusion

The VAT ruling has created uncertainty for serviced accommodation providers and, by extension, for property owners who rely on guaranteed rent agreements. By reviewing your contract, communicating with the provider, and seeking professional advice, you can minimise risks and ensure you’re prepared for any challenges ahead.

Taking proactive steps now could save you significant stress and financial loss in the future.

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