The market practice of sub-letting a residential property to another party such as a landlord, property manager or local authority (commonly known as rent-to-rent or guaranteed rent) over a fixed long term contract is an attractive model for some property owners.
There are key advantages to both sides of the deal: The owner of the property gets a guaranteed rent for the contract length (normally 3-5 years) with the property guaranteed to be returned in good condition, with the middle manager (known as the landlord in this situation) entering into a legally binding contract.
For the manager, they get to rent out the property as if they owned it and collect a full market rent from tenants, paying the owner a lower sum (hopefully!) and pocketing the difference. The way in which this model will become extremely lucrative is if the property owner splits the property up and rents each room out individually.
This is an ideal model that property gurus up and down the country tout to their students when running their entry level courses in succeeding in the property market with little capital – “become a property millionaire and give up your rat-race day job”, is often the eye-catching headline.
However, for property owners, this model can be fraught with problems and difficulties. Paul Shamplina’s Channel 5 show “Extreme Nightmare Tenants” provides extreme examples of this.
The show examples how landlords that enter into contracts with middlemen who are not a reputable company or local authority can be left with an uninhabitable property and a huge bill to go with it. Properties can be wrecked beyond cosmetic damage with middlemen dividing homes for multi-occupation, operating properties without HMO licenses and after failing to pass on any rent, will return the property in a run-down state – if you are lucky.
A similar situation occurred in the Goldsbrough & Anor v CA Property Management Ltd at the Upper Tribunal (2019).
In 2016, a Rent Repayment Order was introduced to allow a court to order a landlord to re-pay rent taken as compensation to the tenant where the property was being rented out illegally (I.e without a license)
Goldsbrough & Anor filled an RRO after discovering the absence of an HMO license on their rental property. This raised the question, who pays the rent? Under the Housing and Planning act 2016 the tenants are due their full rent while the property was unlicensed, leaving this debt to be paid by either the property owner or landlord (property management company).
The initial belief would be that the property owner who has sublet the property to a management company would be free from the liability. The company who has sublet the property is at fault as they entered into the unlicensed letting agreement, not the property owners. This was the position of Mr & Mrs Gardiner, the owners of the property.
However, the tribunal disagreed with the property owners and found in favour of the tenants who believed that the property management company was acting merely as an agent and the property owners were in fact liable. The tribunal concluded that the 2016 Housing and Planning act states an RRO can be made against “a landlord” and does not specify that is must be a direct landlord.
From this, we now understand that a tribunal could go one way or the other when determining who is liable for the repayment of the rent. A lot would depend on the solvency of the parties involved, this is something a landlord should keep in mind when entering into sub-let agreements.
The key takeaways from all of this are:
- Great care is needed when entering into a rent-to-rent arrangement unless you are certain the under landlord (property manager) is reputable.
- Legally the arrangement is complex and requires a water-tight commercial contract – an AST simply will not do.
- Owners should seek legal advice before signing any sub-letting agreement.
- Make sure the property is properly licensed and meets all the regulatory requirements for the intended use.