Rent-to-Rent – Problem and Solution?

by Mark Alexander

2 years ago

Rent-to-Rent – Problem and Solution?

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Rent-to-Rent – Problem and Solution?

The Rent-to-Rent business model I am going to explain in this article might help Rent-to-Rent operators to close many more deals in a fully transparent and ethical manner.

Rent-to-Rent is concept I have an interest in, not as an operator but as a landlord with some four bed properties which could be very much what Rent-to-Rent operators are looking for.

I live in Malta these days and all I really want is an easy life and regular cashflow. Managing properties which are let on a room-by-room basis simply isn’t a good fit for my lifestyle requirements.

My properties are all currently let to families and elderly people but from time to time they do become vacant. A long term arrangement with no rental voids, whereby a Rent-to-Rent operator is managing all aspects of the property, is very attractive to people like me. Naturally, I would only consider handing over my properties to a Rent-to-Rent operator who is able to prove high levels of solvency and credibility. If they have no money to risk and no credibility to lose then I’m just not interested.

The Problem

Any sensible Rent-to-Rent operator would want me to commit to handing over the property for at least three to seven years. I have no problem with that in principle as I’m in the business long term. My rental income is my pension. However, I have buy-to-let mortgages on these properties and the maximum tenancy term permitted under the mortgages is typically 12 months. That’s no good to a Rent-to-Rent operator who may be looking to spend around £10,000 furnishing the property to a good standard. What the Rent-to-Rent operator needs is a much longer term commitment in order to recoup initial investment and to make a profit.

If the Rent-to-Rent operator utilises a management contract then he’s going to get stung with VAT at some point. That’s going to reduce his margins significantly so he’s clearly going to have to factor that into the rent he negotiates with me. I can’t sign a five or seven year lease with him because that would put me in breach of my mortgage terms.

Whenever Rent-to-Rent operators find a prospect like me it often ends up in a stalemate position.

The Solution

I agree to sign a comprehensive but easy to understand legal document known as a Deed of Assurance.

NOTE – updated as of 11/09/2016 – the form of Deed of Assurance available to purchase on this website requires modification before using it for Rent to Rent purposes. Please seek legal advice on this until such time as we are able to make a template document available for purchase here, which is accompanied with an appropriate form of tenancy agreement. A standard AST will NOT suffice..

Put in very simple terms, the Deed stipulates that if I serve notice, despite the Rent-to-Rent operator having acted impeccably and stuck to the terms of the tenancy, then I have to pay an agreed level of compensation.

The Deed does not prevent me in any way from ending the tenancy so I’m not in breach of my mortgage conditions, but I would be liable to pay substantial compensation to the Rent to Rent operator if he had done nothing wrong.

If the Rent-to-Rent operator hasn’t stuck to the terms of the tenancy agreement, for example if he fails to pay rent, then the Deed provides conditions to ensure that no compensation would be payable for ending the tenancy.

The basis of the tenancy would of course provide rights to sublet. It is the Deed of Assurance that provides the Rent-to-Rent operator with the assurances he needs. NOTE – the property owner will also need to purchase sublet insurance.

Rent-To-Rent Due Diligence

This cuts both ways.

First, the landlord needs to be convinced that the Rent-to-Rent operator isn’t “a man of straw”. The landlord should insist to see a copy of Rent-to-Rent operators credit file, accounts, bank statements, proof of ID, proof of residence and the same level of formal referencing he would ordinarily insist upon if he was letting to a family. Personally, I’d probably want to talk to other property owners who have previously handed their properties over to him too. In addition to this, if provisions are not made in the tenancy agreement, the property owner should also insist on the Rent-to-Rent operator providing a side letter giving an irrevocable undertaking to observe and engage in any licensing of the property which may be required now or in the future at his own expense for the purpose of renting the property on a room by room basis and to accept all liability arising from non-compliance.

From the Rent-to-Rent operators perspective, he also needs to know the property owner isn’t a “man of straw”. The Deed of Assurance is worthless if the property owner is on the verge of repossession and/or bankruptcy. Therefore, the same information should be insisted upon being provided to the Rent-to-Rent operator by the property owner. Additionally, the Rent-to-Rent operator should also insist on seeing evidence that the property will be insured on the basis that rooms will be sublet and also that the property owners mortgage allows for this. A side letter providing an irrevocable undertaking, for the same period as the term of the Deed of Assurance, to maintain such insurance and only to refinance with a mortgage lender which allows for subletting on a room by room basis should also be provide by the property owner to the Rent-to-Rent operator.

About the Deed of Assurance document template

I had my legal adviser prepare a Deed of Assurance template many years ago, albeit for a different purpose. It cost a lot of time and money to get it absolutely right but the investment has returned me many times the cost. My target market for tenants was elderly people or young families who would want to rent my properties for many years. Providing them with a Deed of Assurance gave me a competitive advantage because the thing they all feared most was being served with notice. A Deed of Assurance didn’t stop me doing that but it did provide my tenants with comfort in the knowledge that I would have to pay them a big chunk of money to deal with moving costs and associated inconveniences if I decided to evict them through no fault of their own. They liked the fact that I was one of very few landlords who not only said I was in the business long term, I was also prepared to put my money where my mouth is. The term of the Deed of Assurance commitment and compensation amount payable for breaking the deal are all negotiable of course. My thought process here is that use of a modified version of the Deed of Assurance model might allow Rent-to-Rent operators flexibility and a much higher degree of certainty when closing deals. Isn’t it this higher level of commitment that all Rent-to-Rent operators require?

CONCLUSION

Subject to legal advice confirming the Deed of Assurance concept and associated documentation is viable, all credible Rent-to-Rent operators may one day consider a bespoke form of the Deed of Assurance legal document template (copyright Property118 Ltd) as an essential part of their negotiating toolkit.

Always seek professional legal advice on any contract you are considering entering into.

Expression Of Interest - Rent to Rent Strategy Documentation

It is only a matter of time before we will have the correct documentation available for sale. Such has been the level of interest in this particular article we have instructed our lawyers to consider and, if possible, make the necessary modifications to the Deed of Assurance template and to draft a fully compliant tenancy agreement to be used in conjunction with it. Our mission here is to help both property owners and Rent-To-Rent operators to have the proper documentation and strategy to deal ethically and in a compliant manner. To recover our costs, and hopefully make a profit, we plan to sell the documentation templates for £97. No money will be requested until the documentation has been drafted and signed off by our legal advisers. Completing this form does not commit you to anything, it is to register your interest so that we can contact you again when the documentation is available.


Comments

Mark Alexander

2 years ago

The above article was amended on 11th September 2016 after Giles Peaker @NearlyLegal pointed out why AST's were wholly inappropriate for Rent to Rent. This was a mistake on my part, hence the article was amended accordingly.

Giles and I have agreed, therefore, that now the corrections have been made, all comments exchanged on this matter are no longer appropriate and have been deleted from both his website as well as this one. Furthermore, commenting on both websites has been closed.
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