Confederacy of Dunces.

I’ve been watching the slow motion catastrophe that is ‘Rent 2 Rent’ [sic] for a while, as have other NL writers. Despite the high profile collapse of the poster boy and cheerleader, Unidaplace, last autumn, owing many thousands (and the simultaneous vanishing of the boss, Daniel Burton, until tracked down by Channel 4 news), there are still plenty of people entering into these arrangements.

Why? Well, the promise to the property owner/landlord is of a fixed reliable rent for an extended period, and not having to do things like deal with tenants, managing agents and the like. In fact, they can just sit back and let the reliable rent roll in. The Rent 2 Rent (R2R) ‘tenant’ gets to sub-let the property, probably subdividing rooms and/or turning living rooms into bedrooms, stuffing in more tenants on a room only letting, and pocketing the difference. And the tenants get… well, an expensive room.

So, landlord win, R2R win, and sub-tenants… done over, but who cares? No.

The reason lawyers are not fun at parties is that we tend to spend a lot of our days thinking about what happens if things go wrong. And in the R2R set up, things can and almost certainly will go very, very wrong indeed. This is a quick look at exactly how much of a mess can be created by laziness, stupidity and greed.

The agreement

What sort of agreement does the owner/landlord have with the R2R party? I have heard of all sorts of variants: Commercial leases for 2, 5 or even 10 years (the latter being an interest that must be registered with the Land Registry, just as a reminder); ‘agency agreements’ which somehow give the ‘agents’ a remarkably free hand; specific ‘rent to rent’ tenancy agreements; and even ‘assured short hold tenancy agreements’. One example that crossed my desk the other day used a pro forma ‘company let’ tenancy agreement. (I was advising a freeholder and advised there was a breach of lease by the flat owner who had let to the R2R).

Terms of these agreements likewise vary. Some offer a full repairing lease, others, like the ‘shorthold tenancy agreements’ are silent on such issues, or put the repairing obligation on to the property owner. Some are silent on sub-letting, others provide for the R2R tenant to give ‘licences’ to occupiers, some do actually provide for sub-letting to tenants.

Clearly, the terms of the agreement are crucial. But the evidence is that landlords are signing up to any old thing, usually ‘drafted’ (or downloaded, or borrowed from somewhere else) by the R2R party.

For reasons which will no doubt be obvious to any housing lawyer, but may need some explaining for property owners, tenants and, most definitely the R2R set ups themselves, any form of agreement that is not a commercial lease is going to be a disaster.

The R2R party most certainly can’t have an assured short hold tenancy, as they may well be a company, but will most certainly not be resident. The simple fact that a non-resident company can’t possibly have an AST hasn’t stopped one imaginative R2R company trying to sue the property owner for not protecting the deposit with a deposit scheme. They lost, eventually.

An agency agreement would leave the property owner liable for everything, from unprotected deposits to repair liabilities, with a direct legal relationship with the tenants, but having ceded all control over appointment of tenants, numbers of tenants, rent levels etc. to the R2R ‘manager’.

A company let is very unlikely to provide for the kind of subletting that takes place in R2R and will probably leave the property owner liable for repairs.

In addition, any agreement that provides for the R2R tent to give ‘licences’ to occupiers is not worth the paper it is written on. Unidaplace were an example and I have seen others. As the occupiers will almost certainly have a particular room of their own, for a periodic rent, the occupiers will have a tenancy, either an assured short hold, or, if not their primary residence, a contractual tenancy. But whatever it is, it will not be a licence. Any R2R set up telling property owners and ‘tenants’ that it gives licences is legally illiterate and just plain wrong. Unlawful eviction claims await.

Property Owner liability

Depending on the nature of the agreement, the property owner could well still be liable for everything from unprotected deposits through repairs, to eviction proceedings. However, even assuming that the agreement is half decently drafted, the owner is not going to escape some liabilities.

There are plenty of examples of property owners discovering that their property has been sub-divided, without their knowledge, and large numbers of tenants installed by the R2R tenant. There is a serious risk of the property becoming an unlicensed HMO, under either statutory or local schemes.  This would prevent the R2R intermediate from using s.21 notices, of course, but may also leave the property owner open to prosecution.
S.72 Housing Act 2004 provides:

72 Offences in relation to licensing of HMOs
(1) A person commits an offence if he is a person having control of or managing an HMO which is required to be licensed under this Part (see section 61(1)) but is not so licensed.

[…]

Note that it is not ‘the landlord’ specified in (1), and it is not unknown for Councils to follow the rent when finding who to prosecute, the property owner still getting rent arising from the unlicensed HMO. If the R2R company has disappeared, then the owner is the easier target. For a fine up to £20,000.

Ending things

Which brings us on to what happens if the R2R company fails in its obligations, or disappears, or goes into liquidation, none of which is unknown.

Presuming that the R2R company had some form of tenancy, then the sub-tenants remain. Their tenancies are still perfectly good against the R2R landlord. And they will still be obliged to pay that R2R landlord the contractual rent (although if there is an unlicensed HMO involved, things might be different). The sub-tenants may well find that unprotected deposits have disappeared, repairs aren’t done and the property owner starts hassling them.

But the property owner can do nothing about ending those sub-tenancies directly, even if the R2R tenant has stopped paying rent to them.

The only way for the property owner to lawfully end the sub-tenancies is to end R2R tenancy. A possession order and warrant against the R2R tenant would often only be a starting point though. If the sub-tenancies are ASTs, which most will be, once the R2R tenancy is ended, the ASTs are effective against the property owner, so would need further notice and possession proceedings against the sub-tenants.

But depending on the terms of the R2R tenancy, ending it might be easier said than done. What are the relevant provisions in the agreement that would enable termination, or allegation of breach?

The proceedings will not be as simple as s.21 notice and accelerated possession claim. Forfeiture for breach of commercial lease has a very different and complex set of procedures.

Even if the owner manages to successfully serve proceedings, they might also find the sub-tenants applying to be joined to the proceedings, seeking an order that their sub-tenancies become the direct tenancies of the landlord, or other order.

In short, a mess.

Can it work?

I’ve seen some suggestions that R2R can work because ‘housing associations and councils do it’ via commercial leases of private sector properties. Of course the real difference is not so much the legal agreement (although heaven knows that helps) but the clear financial security and stability of Councils and (most) RSLs. Even if the agreement is well prepared, if the R2R party is an asset-less limited company then there is little that the property owner, or indeed the sub-tenants, can do when it collapses, disappears or reneges on the contractual terms. They can fold up their tents and vanish.

But that is not to say that there aren’t significant problems when Councils and RSLs lease private properties in this manner. For example, where there are repair problems with the building, both the Council/RSL and the property owner may end up facing disrepair and nuisance claims. (And I’ve run such cases and seen each try to claim that the other was responsible under their lease).

Can it work? Maybe. Assuming everybody does everything properly. But private sector R2R  from a lawyer’s perspective looks like a disaster waiting to happen, even with a ‘proper’ agreement between owner and R2R.

The sub-tenants are inevitably going to have to pay a higher rent for less space, get fobbed off about repairs, possibly see their deposit vanish, and are at the relative mercy of the kind of people who think that calling it a ‘licence’ actually means anything in the circumstances.

The property owner risks ending up with no rent, sitting sub-tenants, a property that has been ‘altered’ and maybe facing a prosecution for an unlicensed HMO. (And just possibly an R2R tenant making a farcical claim for an unprotected deposit!)

I’d say the R2R company faces risks, from HMO prosecutions, through disrepair claims, to unprotected deposit claims and unlawful eviction proceedings. But somehow, the kind of people who seem to be going into offering R2R don’t seem the type to be averse to simply liquidating the company and wandering away.

About Giles Peaker

Giles Peaker is a solicitor and partner in the Housing and Public Law team at Anthony Gold Solicitors in South London. You can find him on Linkedin and on Twitter. Known as NL round these parts, and still is Nearly Legal on Google +.
Posted in Assured Shorthold tenancy, Housing law - All, Regulation and planning and tagged , , .

24 Comments

  1. Hi Giles,

    Thanks for sharing your views about Rent to Rent.

    I agree with everything you’ve said.

    There are a number of problems with this strategy that I have voiced concerns about on Property Tribes including:

    1. Rent 2 Rent attracts people of limited financial means to the Private Rented Sector thinking that they can get rich quick from the strategy.

    I actually saw a post on a FaceBook group of a newbie saying:

    “I’ve done a Rent to Rent course and taken over my first property, but have been unable to let all the rooms. Can anyone advise me how to avoid paying the landlord the rent until I get the rooms let?”.

    As you say, RSL’s, councils, and Guaranteed Rent services like the one operated by Northwood, come with financial credibility and back up. An individual renting a property cannot offer a comparable guarantee and may be solely relying on getting the property fully let as individual rooms, in order to pay the rent to the landlord.

    2. When R 2 R goes wrong, it causes anti-landlord sentiment as people don’t understand that the R2R practitioner is to blame, not the landlord.

    3. Tenants may be abused by nefarious individuals who are just doing it to make a quick buck or don’t have a clue how to manage multiple tenants in a property business. i.e. deposits not protected, lack of maintenance and repairs.

    4. The R2R’er is essentially guaranteeing the rent, even though, if the sub-tenants don’t pay, they may not be able to afford it.

    5. With rents on the rise, I think its going to be hard for R2R’ers to rent a property sufficiently enough below market value to create enough margin. Therefore, I suspect that properties that are set up as R2R and do not perform financially mean that the R2R’er can just walk away and leave a mess for the landlord and sub-tenants to clear up.

  2. Thank you Giles, this is an important article and like Vanessa I am aware of many issues that this strategy is causing. In the West Midlands the local authorities are actively searching for rent to rent properties because they know that tenants are being crammed in and are not being provided with sufficient amenities. I asked who they would go after and they told me the name listed at Land Registry because the rent to renter has probably go no assets. As Vanessa has said this is being taught in GRQ seminars as a good way to get into property when you have no money. I am going to point landlords to this article when they ask my advice on rent to rent. – well done.

  3. As explained by the legal practitioner above, there are numerous problems with the R2R system as it is being operated today in the UK. My question is: is there a way this could be done legally with minimum risks to the landlord and or tenants? Financial stability seems to be the only viable reason Local Authorities and RSLs are able to do R2R successfully to some limited extent. We need to find a way backed legislation, to enable the private sector to play role here. There is a housing problem mostly in London and I feel efforts should be coordinated to maximise available rooms.
    Uwa
    Zodiacstorm property services

    • I don’t think legislation would make much difference to the risk level. And any suggestion that the state should somehow underwrite R2R strikes me as downright perverse.

  4. In my opinion any property that is being converted to an HMO should need building regulations approval. Regardless of the need for affordable homes, people must be protected from accommodation that is offered but it not Fit for Purpose. If a property can be converted to a decent HMO, and many can, the PRS is meeting a need but we cannot hide behind that to facilitate overcrowding and poor conditions – this is like selling stockings during the war! Not all Rent to Renters are chopping properties up, some are offering a lower guaranteed rent and making their profit by charging tenants market rent – this is what local authorities are doing. My concern is about the greedy ones and the ones who have no money behind them to maintain an HMO – which as we all know is a very expensive exercise – and to pay the rent when they have voids. Using R2R as a NMD strategy is just wrong.

  5. Hi Giles

    It’s a very well written article, nothing that has not been previously said on Property118 though, including the case of the R2R limited company which signed up one of our readers and tried to sue her for not protecting the deposit and obviously lost! See >>> http://www.property118.com/rent2rent-scheme-gone-wrong/38375/

    The R2R model isn’t one for me but it can work well under the right circumstances. As with all forms of property deals, there are clueless inspired amateurs with no morals whatsoever and some very professional businesses at the other end of the scale. Sadly, most R2R operators are at the wrong end of this scale. Many criticise them but the best way to fix the problem is to raise exposure and help the people who want to do things right. The Nearly Legal article helps to raise exposure but more is required.

    [Advertising removed by NL because, well, we don’t allow advertising].

    • Mark, I don’t think the 118 discussion did cover all the ground (and I actually linked to the page about the deposit claim). The 118 discussion didn’t address the tricky bits. It didn’t go over the problems the owner would face in trying to recover possession of an occupied property and it didn’t really touch on HMO liability and most certainly didn’t address the problem of what happens when an assetless R2R party goes bust or vanishes. No matter how correct the form of the contractual agreement, that leaves both owner and tenants high and dry. There is no point in trying to enforce a contract against a company in liquidation.

      It is therefore an inherently highly risky enterprise. Unless the financial solidity of the R2R party is clear (and it very rarely is) ‘guarantees’ aren’t worth the paper they are written on. The owner needs to be very clear about what their position is when things go wrong, both contractually and practically.

    • Hi Giles

      I suppose that would depend on which article you are referring to specifically, we have had several discussions about the rent to rent subject. To find several of them just search Google for “property118 rent 2 rent”

  6. Very clear article, thank you. This is something we discussed on our blog back in July, following the infamous ‘Meet the Landlords’ tv programme.

    There are big differences between a properly run and credible Guaranteed Rent offering and the Rent to Rent schemes of late [edited by NL as we don’t allow advertising. I believe I may have mentioned that].

  7. “The only way for the property owner to lawfully end the sub-tenancies is to end R2R tenancy. A possession order and warrant against the R2R tenant would also be effective against the sub-tenants.”
    Not so.
    The basis of RTR is that the subletting is lawful.
    A PO against the RTR is no good against the occupying AST subTenant by reason of s18 HA88.

    18(1)If at any time—
    (a)a dwelling-house is for the time being lawfully let on an assured tenancy, and
    (b)the landlord under the assured tenancy is himself a tenant under a superior tenancy; and
    (c)the superior tenancy comes to an end,

    then, subject to subsection (2) below, the assured tenancy shall continue in existence as a tenancy held of the person whose interest would, apart from the continuance of the assured tenancy, entitle him to actual possession of the dwelling-house at that time.
    etc
    There would need to be an HA88 basis for possession against the occupying AST subtenant.

    • But the R2R is very unlikely to be an AT and so the head landlord would be using common-law forfeiture rather than statutory HA1988 procedures and in that case wouldn’t the sub-tenant be entitled to apply for relief (and in the end to occupy as tenant)? So the result may not be that much different if there are no AT’s around.

    • Yes, which was where I was going just above ‘In short, a mess’. Though I doubt the sub tenants would have funds for relief much of the time.

    • An AST is an AT. For the operation of s18 there is no requirement for the headtenacy to be an AT.
      “the landlord under the assured tenancy is himself a tenant under a superior tenancy; and
      (c)the superior tenancy comes to an end” eg thro forfeiture then by operation of law [s18]

      LL of RTR becomes LL of RTR’s tenant.

      No relief from forfeiture required.

    • Yes, a bit of cross purposes. Relief from forfeiture would apply where sub-tenant not on an AST. Where sub-tenant is AST, then becomes tenant of owner at termination of R2R tenant by operation of law – s.18.

    • Yes, I had hoped that it was clear I was talking about the need for the R2R intermediate to be proceeded against using forfeiture, what the status of the next individual down might be will depend on the nature of the let. My point was that even where there is no statutory 1988 Act protection – the subtenant is not powerless.

  8. Here are a few examples of very good rent to rent schemes. I don’t have a commercial interest in any of them, save for offloading one of my more troublesome properties onto a 5 year, contracted out, FRI lease to a local housing association at this very moment.

    Lease models – Councils, Housing Associations, Group 4

    Management models – Northwoods

    Rather than just slamming an entire business model why not look at it another way and offer advice to people on how to do their due diligence on finding a good one? You could, of course, say only deal with public bodies, RSL’s and FTSE companies but that would be a cop out in my humble opinion.

    Subletting business models are not new, they were around well before we were all a twinkle in our parents eyes.

    • Mark, did you actually read my post? ;-) All of that is dealt with, except Northwoods model, because I don’t know the details of that.

      Now, the question is what other asset rich, financially stable organisation is going to be entering the R2R market? And why on earth would they?

  9. More importantly, good use of a John Kennedy Toole book title. Deserves to be more widely read and enjoyed.

  10. Pingback: Subletting can lead to unlicensed HMO | Property118.com

  11. Pingback: Three Myths and Misconceptions about rent to rent » The Landlord Law Blog

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