Rent to Rent Contracts – lots of questions?

by Readers Question

9:31 AM, 21st December 2020
About a month ago

Rent to Rent Contracts – lots of questions?

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Rent to Rent Contracts – lots of questions?

Do I need to protect a deposit via a protection scheme if received from a company for the lease of my house to them, if it is a commercial let and therefore NOT an AST?

Is it best to contract out of the L & T Act 1954 so they (the Company) have no automatic right to contract renewal? Are there any other things I need to consider if I opt out?

Do I need to make it clear that it is a contractual rather than statutory contract so if the contract is continued by mutual agreement after the end of the fixed term, that I am not liable for Council Tax if they leave before the three months notice, or is this irrelevant in a Commercial Contract?

I have asked my solicitor, and he says that the Rent 2 Rent market is tricky as no real regulation in regard to what constitutes this kind of contract arrangements.

If the poop hits the fan with the contractual relationship – who acts as the Ombudsman in this situation?

Any advice welcome 🙂

Reluctant landlord


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Comments

Ian Narbeth

10:49 AM, 21st December 2020
About a month ago

Reluctant landlord, if the solids hit the air-conditioning you will get covered in s**t. Unless you have personal guarantees and indemnities from a director of the company (and he/she is a person of substance) I would advise any property owner against R2R. Issues about contracting out of the 1954 Act fade into insignificance compared to the risks you run.

One of the biggest is that if the R2R company operates an HMO and fails to get licensed the tenants can seek a Rent Repayment Order from you. So you might have received say £1250 rent a month (£15,000 a year). The R2R company receives say £35,000 from its tenants, spends £10,000 on overheads and pockets £10,000. If it fails to get licensed, the tenants could seek rent repayment orders for up to £35,000 from you. You in turn might have a claim against the R2R company. However you are likely to find that the company that guaranteed you peace of mind for 5 years has no net assets and the directors wind it up and walk away, perhaps not paying you the last month or two of your £1250.

On the subject of deposits, you do not need to protect the deposit you received from the company.

It is possible to cover all relevant matters in a contract but it will not be worth the paper it is written on if the company is a £100 newly-formed SPV and you don't have a well-drafted guarantee and indemnity from someone of substance.

Tessa Shepperson

11:05 AM, 21st December 2020
About a month ago

You need to be REALLY careful with rent to rent. It can be good but it can all go horribly wrong and you may have no come back at all. Watch the video with David Smith here where he explains why: https://landlordlaw.co.uk/member_video/david-smiths-talk-on-rent-to-rent-arrangements/
We ran a Rent to Rent training day last month (in association with JMW solicitors) which has been turned into an online course: https://landlordlaw.co.uk/landlord-law-2020-rent-to-rent-day/ Note that there is also a 'pay extra' tenancy agreement that you can buy if you sign up. If you are thinking of doing rent to rent we recommend you take this course first as it will explain the real facts to you and give guidance on how to avoid the pitfalls.

Ian Narbeth

11:56 AM, 21st December 2020
About a month ago

Reply to the comment left by Tessa Shepperson at 21/12/2020 - 11:05Tessa, David Smith says the key issue is having a good agreement so that the parties know what their rights and responsibilities are. I agree that it is a key issue but my issue about who you are dealing with is fundamental. I receive numerous letters every month offering to manage my HMOs. Sometimes it is obvious that the writers have been on the same course as the template letters are identical.
Without fail, the prospective R2R merchants use an SPV, usually formed in the past year, which has no assets and no filed accounts. They also, without fail, tell me what a difficult job it is to manage an HMO and how they will "guarantee" me five years of uninterrupted income and no stress. What they never mention is that they have years of experience, are licensed landlords in my area and that they can provide references from satisfied property owners. I would hazard a guess that they don't and can't.
In light of the Goldsbrough & Anor v CA Property Management Ltd & Ors case, the risk of a Rent Repayment Order against the property owner is massive. No matter how good the R2R contract is (and I am sure David's is a good document) the over-arching problem is that if you contract with a man/company of straw you are likely to end up in trouble.

RL

12:05 PM, 21st December 2020
About a month ago

Reply to the comment left by Ian Narbeth at 21/12/2020 - 10:49
Ian - the provider is listed as a registered provider and therefore exempt from requiring official HMO licence as far as I can see from a list just sent to my by the Council.
I still don't understand why it is nigh on impossible to due proper due diligence on such providers. There is very little info on them, no understanding if they have to abide by any specific code of conduct (like an Managing Company would have to be under) and therefore what you do if there is a complaint about them, and more worryingly the Council wont say if they find them good bad or indifferent even if they admit they use them!

As far as I can se there is neither a place where I can go to see if other LL's use them and again ask for feedback. Disconcerting to say the least.

Tessa Shepperson

12:25 PM, 21st December 2020
About a month ago

Reply to the comment left by Ian Narbeth at 21/12/2020 - 11:56
Absolutely. I couldn't agree more.

The course we offer is about warning landlords what the pitfalls are. We don't really recommend doing 'rent to rent' but if people want to do it, or are stuck in rent to rent arrangments with issues, the course will be able to help.

We decided to run it so there was at least some training out there which told the real facts and did not encourage people to enter into unsuitable arrangements.

David drafted up the agreement as it is really hard to find a decent rent to rent agreement - apparently, most people just adapt AST agreements which as you will know are totally unsuitable. A bespoke agreement will cost in the region of £1,000-£2,000 whereas landlords can get this agreement and the course for £420.

Checking out the 'rent to rent' tenant is extremely important I agree, but so is the agreement. For example, I understand that some Local Authority rent to rent agreements (which some people would assume are OK) provide that landlords cannot end the tenancy while there are sub-tenants in occupation.

Ian Narbeth

12:36 PM, 21st December 2020
About a month ago

Reply to the comment left by WP at 21/12/2020 - 12:05
WP, are you Reluctant Landlord? The original post did not mention that the company is "listed as a registered provider" which would have been useful information. However, if you are dealing with a registered provider, the person of straw problem should be less.

You can always ask for references and to see one or more of the other houses that the company operates.

RL

12:50 PM, 21st December 2020
About a month ago

Reply to the comment left by Ian Narbeth at 21/12/2020 - 12:36
Yes I am the same person - sorry for confusion! My head is getting a battering this morning. I'm getting very sceptical about the Company that I contacted who wants to take on my property on a R2R basis now. I have just wanted the presentation that Tessa recommended by David Smith (amazing) thanks you for posting. Am going to fire off a lot of questions to them now see how they respond.

Ian Narbeth

12:58 PM, 21st December 2020
About a month ago

Reply to the comment left by RL at 21/12/2020 - 12:50
Hi WP or shall I call you RL? It's getting confusing for the rest of us!

As I have said no matter what your contract says and (I would add) no matter what brilliant answers you get to your due diligence questions, if the company fails to perform you have a problem if it has no substance.

Why don't you employ a reputable agent to fully manage the property for you?

RL

14:33 PM, 21st December 2020
About a month ago

Reply to the comment left by Ian Narbeth at 21/12/2020 - 12:58
I've updated my listing details to RL/Reluctant landlord to stop any further confusion.

David

16:21 PM, 21st December 2020
About a month ago

If you mean a Registered Social Landlord, then I would be even more careful if I were you. Search the forums for reports from other landlords about RLSs and Council reneging on promises to make good damage to property etc.

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