We first published this article back in 2013. It has been resurrected because the information provided within it is just as relevant today as it was back then and the Rent to Rent strategy continues to be a hot topic of discussion at many of the UK’s property networking Events.
We produced this guide to share answers to some of the most frequently asked questions relating to this subject, specifically in relation to contracts.
When can tenants be offered a license as opposed to an AST?
The benefits of providing a license is that it is much easier to evict tenants. There is no requirement for a minimum 6 month term, no requirement to give them two months notice and no requirement to obtain a Court order and instruct bailiffs to regain possession if a tenant refuses to move out after the notice period. Furthermore, tenants deposits do not need to be protected in a tenancy deposit scheme if a property/room is let on license or a lodgers agreement, which is a form of license. No wonder Rent to Renters want to offer licenses instead of AST then!
However, licenses can only be used under the following circumstances:-
1) The room/property is being rented as holiday accommodation. You may need to prove that the occupier of the room or property has another residence though, e.g. a place where they are registered on the voters roll.
2) You are a live in landlord. If you live in the property yourself you can take in lodgers
3) If you provide a service such as a hostel or a B&B. For example, if you provide cleaning services including changing the bedding once a week or breakfasts in the morning.
What if none of the above apply?
If none of the above apply then the basis of the tenants occupation of the property is an AST whatever your contract says. This is because legislation in the housing and 1988 (and subsequent updates) and the landlord and tenant act 1985 over-rule whatever your contract says.
What is the right contract to have between the property owner and the Rent to Renter?
First, you need to understand what is the wrong type of contract and why.
Company Let Agreement (AKA corporate letting agreement)
These allow a company to use the premises to provide accommodation for their employees. If you are using a company let agreement and subletting a property or a room within it to a person who is not your employee then you will be in breach of the agreement. Many Rent to Rent companies are using these agreements in ignorance of this fact. They do so because deposits do not need to be protected with a tenancy deposit scheme.
AST (Assured Shorthold Tenancy Agreement)
AST’s do not generally allow subletting, therefore, any subletting without the owners permission is a breach of contract. Furthermore, the property owner could obtain possession of the property after just 6 months, even sooner if you are in breach of contract. If you have sublet the property and your tenants are still occupying the property after the owner has obtained possession you could be held liable and subjected to claims for massive financial compensation.
The correct agreement between a property owner and a Rent to Renter is a commercial lease.
Don’t use just any old off the peg commercial lease , you need one which is professionally drafted specifically for Rent to Rent which includes clear, fair and reasonable provisions for subletting a residential property. Do bear in mind that the property owner is highly likely to seek professional advice about the contract between you. The owner will generally be advised not to lease the property for more than 5 years and to ensure the lease is contracted out of the landlords and tenant act 1954 to ensure that it is his choice alone whether to offer to extend the arrangement by granting a new lease at the end of the contracted period. The owner of the property will also be advised to ensure that you become responsible for the maximum number of residents, maintenance, basis of occupancy/subletting, licensing and statutory requirements and maximum number of occupants. Therefore, it is important to be able to offer a well drafted document covering all of these points at the earliest possible opportunity. This will give the property owner and his professional advisers confidence in you being a professional operator.
Successful Rent to Rent Case Study
Let me give you a great example of a lady I spoke to about her success story.
She came across a situation whereby an elderly guest house owner had fallen ill and moved into a granny annexe at her childrens home. The Guest House was on the Lincolnshire Coast and the children were based in the Home Counties. The Guest House had been in the family for for two generations and the family are reluctant to sell it. Based on profits, the family were advised by a professional commercial agent that the market rental value for the property was £1,000 pcm. The decision of the family was to let the property for 5 years prior to making a decision on whether to sell it OR for one of her grandchildren to run it OR to continue to rent it as a going concern. As the property was already registered as a guest house it already met all of the requirements to be a HMO. There were no selective licensing or Article 4 barriers to contend with in the area.
The rent to renter I spoke to had interesting plans for the property. She had spoken to the local authorities about the requirement for temporary accommodation for victims of domestic violence and homelessness as a result of mortgage repossessions and other forms of eviction. Her son would reside in the property as caretaker and would also serve breakfast and offer a basic cleaning service including a weekly change of bed linen. Under the circumstances, all rooms could be let on licenses. The profits on this activity amounted to more than £5,000 per month and within a week all 16 rooms were full.
Rent to Rent Commercial Lease Contract
To have a suitable contract professionally drafted and ready to present to a property owner and his professional advisers typically costs around £3,000. In the case study presented above the lady purchased our Rent to Rent Commercial Lease template for just £97. The document template was professionally drafted by Justin Selig who is a qualified solicitor specialising in property and contract law. The Rent to Rent Commercial Lease Template has been one of the most popular premium downloads on this website. The lady in our case study required a few amendments to the standard template due to the sub-letting arrangements in the template being drafted to assume AST’s would be used, however, that was easily sorted by her own solicitor who charged her just £300 to make the necessary amendments. In all she saved over £2,500 in legal fees and now makes over £5,000 pcm from her first Rent to Rent deal. Needless to say, she is now on the lookout for similar opportunities!