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.