The ultimate landlord guide to rent to rent
Click to read The ultimate landlord guide to rent to rent
“Guaranteed rent”, or “rent to rent” as it is now commonly known, has become an increasingly popular business model in the private rented sector.
What is rent to rent?
Rent to rent is where a company, a local authority (corporation) or an individual (we’ll call this the “rent to renter”) rents a property off a landlord (owner) and the landlord receives a guaranteed rental income for an agreed term, regardless of whether the property is occupied or not.
The rent to renter then sublets the property to an “occupier tenant” or tenants, at a higher rent than is paid to the landlord owner, making a profit in return for the risk taken and the work to be carried out.
The advantages to the landlord seem obvious: it cuts the hassle out of having to find tenants and setting-up tenancies periodically, or of dealing with a traditional letting agent. There are no concerns about meeting all the legal obligations to the tenant, no void periods, and no call outs or repairs to worry about. At the end of the term the property is returned in the same state it was in when let – in other words no risk and all the time the rent payments are guaranteed.
That’s the theory, and in some cases it’s also fact. But don’t be lulled into a false sense of security – very often the facts don’t match up with the theory. In practice there are myriad problems that can and do occur with rent to rent for both the landlord and the occupying tenant.
This detailed guide is intended to help landlords decide on a sensible course of action when contemplating whether to enter into a rent to rent arrangement. If you are considering handing over your property to a “middleman” rent to renter, for your own “peace of mind” and a guaranteed rent with no hassle, read on to find out all you need to know.
There’s a lot of information to take in here, but you can skip ahead using the menu below to the sections that are most relevant to you.
- What’s the difference between using a traditional letting agent and rent to rent?
- Is rent to rent a totally legal arrangement?
- What are the different types of rent to renter?
- What is the legal basis for rent to rent tenancy agreements?
- Who is responsible for repairs in a rent to rent arrangement?
- What main points should I look out for when entering into a rent to rent arrangement?
- Permissions and obligations when entering into a rent to rent arrangement?
- Insurance, deposits and redress schemes
- How can I check out my rent to renter tenant?
- How do I make sure that things are progressing as they should in a rent to rent arrangement?
- What happens at the end of the term with rent to rent?
- Conclusions and some statistics on rent to rent in practice
1. What’s the difference between using a traditional letting agent and rent to rent?
Rent to rent is a different way of delegating the management of a rental property to the traditional agency arrangement. An agent generally agrees to a let only, or a let and manage service on the landlord’s behalf, in return for a commission – a proportion of the rental income which is typically around 15% for full management.
With rent to rent the property is rented from the landlord by the rent to renter, who in turn sublets to an occupier tenant. The rent to renter has no capital outlay and simply makes money collecting the difference between what is paid to the landlord as guaranteed rent and what is received in rent from the occupier tenant or tenants.
By law, an agent is under a high duty of care to the landlord which obliges the agent to act in the landlord’s best interests at all times. With rent to rent there is no such obligation as the rent to renter, having obtained a legal interest in the property by virtue of the lease, can act solely in their own interests.
2. Is rent to rent a totally legal arrangement?
Given the problems associated with rent to rent and subletting in general, people often assume this arrangement is illegal. However, rent to rent is not illegal, and providing all the statutory rules are complied with, involves no infringement of criminal or civil law. When it works well it is a perfectly legal commercial arrangement, offering all parties a legitimate solution to their property owning and renting needs.
Subletting often hits the headlines because a residential tenant on an assured shorthold tenancy (AST) or occupation contract if in Wales, or a council tenant, does it without the knowledge of the property owner and against the terms of the lease. Clearly this is not the case with rent to rent when the parties have all agreed to subletting in the first place.
Subletting often hits the headlines because a residential tenant on an assured shorthold tenancy (AST) or occupation contract if in Wales, or a council tenant, does it without the knowledge of the property owner and against the terms of the lease. Clearly this is not the case with rent to rent when the parties have all agreed to subletting in the first place.
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3. What are the different types of rent to renter?
Local authorities
Local authorities will often take on tenancies from owner landlords to house families or homeless people when they find it difficult to place them in private tenancies. These could be seen as the gold standard of rent to rent arrangements as they are backed by the professional organisation of a local authority corporation. The agreement usually states that the property will be returned at the end of the term in a tenantable state, with a guaranteed rent having been paid throughout. Having said that, landlords should read the agreement carefully and get legal advice before signing as even these rent to rent arrangements with local authorities have not been without their problems.
Property management companies
Some companies and letting agents now specialise in the rent to rent business. These operators are a little more risky to deal with than a local authority – you should always do proper due diligence to find an operator with a good reputation and a successful track record. But, and this is a big but, there are some less than legitimate operators in this field and there have been many horror stories in the media of late where things have gone horribly wrong. Choosing a reputable company or agency in the first place is of crucial importance for landlords, and this involves doing thorough due diligence checks at the outset.
Private individuals
This is the riskier end of rent to rent. There is no doubt that some private individuals are operating some perfectly legitimate and successful rent to rent schemes, providing their landlords and their tenants with all the benefits from rent to rent that they seek. But, there are also some individuals, straight out of the “get-rich-quick” seminars, with no prior property management experience, who are likely to mess up big time.
4. What is the legal basis for rent to rent tenancy agreements?
With rent to rent there are not one but two tenancies in place – one between the owner landlord and the rent to renter, and one between the rent to renter and the occupier tenant(s). This rather complicates things as the former is a type of business arrangement, which requires a specific commercial contract (lease), and the latter is a residential tenancy which comes under the Housing Acts, with all of the letting obligations that entails, and requires an assured shorthold tenancy (AST) or occupation contract agreement.
The commercial tenancy agreement is similar to ones used for letting shops and offices and comes under the Landlord and Tenant Act 1954 (LTA 1954) and, unless executed correctly, gives the rent to renter a high degree of tenure protection. So much so that the landlord could find it impossible to regain possession. For this reason, it is vital that landlords seek legal advice from an experienced property lawyer when agreeing to or drawing up a rent to rent lease.
A standard commercial lease gives the tenant security of tenure, but there is a means of avoiding this. You can avoid a forced renewal of the lease at the end of the term by letting “outside of the Act”. This involves serving on the tenant a prescribed notice, no less than 14 days prior to the tenancy starting, which informs the tenant that there will be no protection. This should be acknowledged in writing by the tenant by way of a signed declaration and the lease must include provisions which exclude sections 24 and 28 of the Landlord and Tenant Act, with reference to the notice and declaration. Letting outside of the Act is an accepted practice in commercial lettings used by most professional property companies and is a useful safeguard for any rent to rent agreement.
A standard commercial lease, such as an off-the-shelf Law Society lease, which would be entirely suitable for a commercial let of a small shop or office, will not suffice for a rent to rent arrangement. Rent to rent needs a purpose drawn lease, with specific technical clauses relating to the rent to rent arrangement, for example restrictions on alterations to the property, which only an experienced property lawyer can provide.
The level of risk that remains with the landlord depends largely on how this arrangement is set up between the landlord and the rent to renter. In theory, at least some of the liability for non-compliance of rules, for example letting a house in multiple occupation (HMO) without a licence, may be shared between the landlord and rent to renter.
Rent to renters must comply with all the Housing Act regulations as they are letting to a residential tenant. These regulations include making sure the necessary permissions have been granted, that lettings comply with planning Use Class rules, that licences are in place and paid for, that the deposit is properly protected, and right to rent checks are made.
They must also serve all the appropriate statutory information and notices on the occupier tenant, plus carry out the usual due diligence checks, such as credit checks and referencing. The rent to renter will organise their own rent collections and deal with any repairs that are reasonably requested. Total Landlord, also powered by Total Property, has created a comprehensive guide to legislation for landlords which explains all your legal obligations in detail.
5. Who is responsible for repairs in a rent to rent arrangement?
Who deals with repairs and who is ultimately responsible for repairs in a rent to rent arrangement is a complex area and needs to be agreed and incorporated into the commercial rent to rent lease agreement. Ideally, the agreement should provide for the property to be returned to the landlord at the end of the term in its original tenantable state. This is particularly important should the rent to renter have made any alterations.
In order to avoid issues requiring resolution at the end of the tenancy over dilapidations and who pays for what, the landlord should arrange for a schedule of condition to be drawn up by an independent third party, ideally a chartered surveyor, and agreed by the parties and attached to the lease at the outset.
Residential landlords are subject to repairing obligations under Section 11 of the Landlord and Tenant Act 1985, and the only way these obligations can be avoided is if the property is let for seven years or more without a break clause in the agreement. Any letting over seven years means that the lease title and property details (floor plans) must be registered with the Land Registry. All this is unlikely in a rent to rent arrangement.
It is not possible to draw up a contract whereby the landlord avoids all responsibility for repairs. Under Section 11 the rent to renter is liable to the occupier and the landlord is liable to the rent to renter for repairs, although the landlord can make the rent to renter responsible for repairs and maintenance not covered by Section 11, and also the state of the property at the end of the term.
6. What main points should I look out for when entering into a rent to rent arrangement?
Landlords entering into such arrangements need to look beyond the obvious appeal of having no hassle and guaranteed rent. They will only achieve this if they deal with a reliable rent to renter, and unfortunately the evidence suggests that there are at least as many unreliable ones as there are reliable ones.
Key to this is checking out the reputation and track record of the rent to renter and then making sure that the agreement between landlord and rent to renter is watertight. Often the agreement will be provided by the rent to renter, whether this is a local authority, specialist rent to rent company or an individual. Do not sign up to such an agreement unless it has been properly scrutinised and if necessary amended by your own solicitor, and one with excellent property knowledge.
Make sure you understand the intentions of the rent to renter regarding the type and number of tenants to be allowed into the property at any one time, including whether there is a possibility of the property being used for short term Airbnb type lettings. In order to maximise income and therefore profits, squeezing as many tenants as possible into the property is an obvious strategy, and some rent to renters will go down this route, with or without the landlord owner’s knowledge or permission.
Some rent to renters will even go as far as reconfiguring the internals of the property, sub-dividing rooms, and using basement or attic space. This is a concern for the landlord owner for two reasons: one that a lot of work may be needed to return the property to its original state and two, an HMO requires planning consent and a licence to operate. Some rent to renters have no intention of returning the property to its original state, or indeed of operating within the licensing laws.
7. Permissions and obligations when entering into a rent to rent arrangement?
Leaseholder
If the landlord is a leaseholder they will need the permission of the freeholder to enter into a rent to rent arrangement. Ordinarily freeholders will allow subletting to specific categories of tenant on an AST only, which would exclude the possibility of a rent to rent arrangement entirely. Landlord leaseholders should check the terms of their lease and be aware that if they apply for consent there will be a fee to pay to the freeholder. Failure to observe the lease terms could result in forfeiture of the lease.
Mortgagee
Where there is a mortgage in place the landlord will need the consent of the mortgage lender. Again, as with insurance, most mortgage agreements require the property to be let on an AST or occupation contract only. As the rent to rent arrangement is giving a commercial tenant an interest in the property the mortgage company will need to take a view on this, given the possibility of an increased risk.
Planning
Consent will usually be required from the local authority if an HMO is created. An HMO licence, as well as potentially a local area selective or additional local authority licence, may also be required.
In Greater London, specific legislation means that planning consent is necessary where a property is to be let for less than 90 consecutive nights (short term Airbnb lets fall into this category) in any one calendar year. This requires a change of use.
Right to rent
Under the right to rent legislation it falls on the person granting permission to occupy to comply with the provisions, including carrying out the appropriate checks and copying ID and other documents. The agreement between the landlord owner and the rent to renter should make it clear that it is the rent to renter who is responsible for these checks.
In other jurisdictions there may be additional requirements and complications. For example, in Wales landlords need to be registered and obtain a licence to self-manage. In the case of rent to rent it is not the landlord owner who needs to be registered but the immediate residential landlord, the rent to renter, who will also need a licence to manage. Again, this should be stipulated in the rent to rent agreement when letting in Wales.
Council tax
Although the rent to rent operation involves a business arrangement, the property remains a dwelling house for council tax purposes. This means that the rent to renter is liable to pay council tax for the periods when the property is unoccupied. If the property is let on a divided basis, such as HMO bed-sits, then the rent to renter will be liable to pay council tax on the individual rooms, whether they are occupied or not. Total Landlord’s guide, ‘When is a landlord responsible for council tax?’ contains more useful information.
Gas and electrical safety checks
During the normal management of the rent to rent arrangement the rent to renter will be responsible for ensuring making sure that gas and electrical checks are carried out at the time required – every 12 months for gas and every five years for electrical checks – and that the relevant landlord safety certificates are supplied to the tenants or the local authority on request.
8. Insurance, deposits and property redress schemes
Most rental property insurance policies, which cover buildings and contents as well as the public (third party) liability of the landlord, require the occupier to be a direct tenant of the mortgagee and be on an AST or occupation contract. The landlord will therefore need the consent of the insurer in writing in order to rent to a none Housing Act tenant in a rent to rent arrangement. If insurance consent is forthcoming, it’s a good idea for the landlord owner to take out this cover directly with the insurance company, as opposed to trusting the rent to renter to do so, and building the cost into the rent or by way of a service charge.
In order to safeguard the landlord owner the rent to renter should be covered by professional indemnity (PI) insurance. This should be stipulated in the rent to rent agreement and the landlord owner should request to see a copy of the policy.
Steve Barnes, Associate of Broking at Total Landlord Insurance, also powered by Total Property, advises:
“Insurance cover for rent to rent is a specialist area provided on an individual client basis. My advice to any landlord contemplating this is to make sure that your rent to renter tenant is covered by professional indemnity (PI) insurance.”
Deposits
When occupiers pay a deposit it is the responsibility of their landlord (the rent to renter) to protect it in one of the Government approved schemes, such as mydeposits, within 30 days and to serve the relevant documentation.
Complications arise if the rent to renter’s term ends and the occupier is still in the property. In this case, all responsibility for maintaining the tenancy falls back onto the landlord owner, and in the case of a deposit the occupier is entitled to its return (subject to deductions) when they leave.
The danger here is that if the rent to renter did not protect the deposit, the landlord owner is liable for returning it, regardless of the fact they never received it in the first place.
Provision should be made in the rent to rent agreement that any outstanding deposits be transferred to the owner landlord and re-protected, with new prescribed information being served on the tenant within 30 days.
In all of the above the rent to rent agreement must be crystal clear as to whose responsibility it is to comply, and this responsibility should be placed squarely on the shoulders of the rent to renter.
Sean Hooker, Head of Redress at the Property Redress Scheme, also powered by Total Property, says: “As a landlord owner you are vulnerable if your rent to renter fails to protect their tenants’ deposits. You could find yourself having to repay deposits in this situation, even if you never received them yourself. It’s therefore a good idea to make it a requirement that your rent to renter supplies you with proof of deposit protections.”
Property redress schemes
Given the propensity for issues requiring formal resolution with rent to rent, landlord bodies recommend that rent to renters join one of the voluntary property redress schemes. Ideally, this should be specified in the rent to rent agreement.
The Property Redress Scheme (PRS) offers an interactive way of sorting out formal resolution cases between landlords and tenants with the help of a professional mediator, a third expert who does not take sides. The mediator will take a professional and independent view, helping to resolve any issues in a fair way.
Sean says, “Rent to rent or guaranteed rent arrangements can be successful and they are a convenient way of taking the hassle out of letting property for landlord owners. However, this is dependent on dealing with a reliable rent to rent operator, with both parties being aware of the issues involved, and on setting the arrangement upon a proper legal footing. As a safeguard, it’s a really good idea to insist that the rent to renter joins a property redress scheme, just in case things do go wrong.”
Julie Ford, a mediator with the Property Redress Scheme’s Tenancy Mediation Service and adviser at HF Assist, the helpline for letting agents, adds, “as there are so many variables with a rent to rent situation, it isn’t cut and dried when issues requiring resolution arise. With that in mind, mediation can offer a great alternative to expensive court action, which can provide a mutually agreeable outcome for all.”
Protect your deposit today
If you have taken a cash deposit, you must protect it in a government authorised scheme within 30 calendar days.
9. How can I check out my rent to renter?
Given the risks inherent in rent to rent, it’s important for landlords to check out a prospective rent to renter thoroughly. Unless you are dealing with a local authority or a reputable specialist company it would be prudent to have an application form for this purpose, pretty much as you would when taking on a tenant – this establishes and records the facts as a starting point.
Very often the rent to renter will be a limited company, so initial checks can easily be carried out online via the Companies House website. This can be followed up by background checks, carried out by one of the many credit reference agencies. It may also be prudent to get personal guarantees from the directors, so individual credit checks can be carried out on them as well.
You should be looking for experience in managing lettings and a successful track record. You can ask to be put in contact with previous landlords who they have dealt with on rent to rent, asking them for a reference, and you can ask around to establish the rent to renter’s reputation. Don’t overlook the power of a Google search which often reveals much background information, both good and bad!
Obviously, discretion is needed with these checks and judgement is required as to how far to go – perhaps only minimum checks would be needed with a local authority rent to rent arrangement, whereas maximum checks would be needed for an unknown individual who is looking to rent to rent.
Phil Gee, Managing Director at Northwood, who have operated a guaranteed rent model for the last 28 years, says: “The rent to rent market has been blighted recently due to the amount of unprofessional and opportunistic operators in the sector. It’s essential that landlords carry out their own due diligence into any company or individual that they are going to trust their property with. Simple checks on Companies House and review sites can potentially save a lot of stress and financial loss. This is an absolute must do before entrusting someone with the keys to your property.”
10. How do I make sure that things are progressing as they should in a rent to rent arrangement?
As a landlord owner you have let the property on a commercial basis and therefore you don’t have an automatic right to carry out periodic inspections. However, you can observe what’s going on – the comings and goings of the tenant/s will tell you who is occupying your property and how many occupiers there are.
Establishing contacts with neighbours is always a good strategy for any landlord, regardless of rent to rent arrangements, so try to get to know neighbours who will be happy to report anything they see as untoward.
It’s a good idea to maintain regular contact with your rent to renter and ask for updates on what’s going on with the letting, checking that the necessary checks are being made and the statutory obligations are being complied with.
11. What happens at the end of the term?
This is often the trickiest part of the whole process. That’s primarily because the rent to rent lease term may come to an end before the residential occupier has left.
Secondly, when the rent to rent lease term ends the rent to renter may not leave voluntarily, in which case the landlord owner would need to serve a “notice to quit” and if necessary apply to the court to regain possession by way of a lease forfeiture.
Thirdly, and this is perhaps the thorniest issue of all, how do you deal with dilapidations? If the occupier tenant has left, then this should be straightforward. You do an inspection, ideally with an independent third party such as the surveyor who did the original schedule of condition, then you draw up a schedule of dilapidations.
You then agree with the rent to renter how this has to be handled. Does the rent to renter do the reinstatement, or does the landlord owner do it and charge the rent to renter?
- To retain the tenant/s, take over all the responsibilities for managing the tenancy and collect the rent direct, or otherwise delegate this to a letting agent
- The tenant/s may be willing to surrender the tenancy given the rent to rent situation
- To seek possession using the no-fault Section 21 process*, presuming the tenant’s contractual term has ended and the tenancy is now periodic
- To seek possession using Section 8 of the Housing Act 1988 as amended, using the appropriate ground/s for possession where there is a breach of contract
Obviously, if the tenant occupier is still in place then that complicates things no end. Should you do an inspection at the end of the rent to rent term with the occupier tenant’s agreement, and then agree to financial compensation? Or do you wait until the occupier leaves? All these questions and scenarios need to be taken care of in the rent to rent agreement.
Once possession has been obtained by the landlord owner, the owner will take over as the direct landlord of the residential occupier/s, if they are still in place.
Because residential tenants have legal protection, regardless of who their landlord is, the landlord owner then has a decision to make:
Where the landlord owner takes over as the direct landlord of the occupier tenant/s, complications can arise where the rent receipts, legal documentation and deposit details are held by the rent to renter. The rent to renter may cooperate, or not, depending on the relationship.
*Abolition of Section 21 – the Government has promised to abolish the no-fault Section 21 eviction process which if enacted will pose a real problem for rent to rent arrangements. The proposed replacement by an indeterminate tenancy means that there is no guarantee that the rent to renter will be in a position to return the property to the landlord owner with vacant possession.
One possible solution is to have the tenant/s on licence agreements. This is easier said than done. A licence will avoid creating a tenancy, which means the tenant can be removed at the end of the contract term by means of a simple notice to quit, similar to a lodger.
But, and this is a big but, to establish a genuine licence situation certain strict conditions must be met: (1) the landlord must have complete access to manage at all times and the licensee occupier must not have exclusive possession of any part of the property. (2) the management must be active and comprehensive with services provided. Relying on a rent to renter to avoid creating a residential tenancy, and to do all that’s required to achieve that, could be asking too much in many cases.
12. Conclusions and some statistics on rent to rent in practice
The Property Redress Scheme (PRS) issued figures that show how the rising popularity of rent to rent arrangements is resulting in an increasing number of complaints over time:
1 September 2018 – 31 August 2019: 50
1 September 2019 – 31 August 2020: 58 (+16%)
1 September 2020 – 31 August 2021: 71 (+22.41%)
This data should be a warning signal to any landlord contemplating rent to rent.
Problems do occur regularly, mainly because the parties have not fully understood the complexities, or made proper legal provisions in the arrangement, as outlined above.
Paul Shamplina, Founder of eviction specialists, Landlord Action, also powered by Total Property , says: “In my view, if it is not carried out diligently [rent-to-rent arrangements] the landlord loses control of the property which is where the problems begin. I suppose I speak from being at the sharp end of dealing with evictions but I would advise any landlords entering into such an agreement to tread very carefully.”
If you have reached this far, you can see that rent to rent enters the realm of legal complexity and is often not the letting nirvana it is portrayed as, despite the promises of hassle-free, guaranteed rent and a property returned in good condition at the end of the term.
It is so easy for both landlord owner and rent to renter to enter into such an arrangement without fully understanding all the issues involved. This guide aims to enlighten and prepare any landlord considering entering into a rent to rent arrangement for the potential risks involved.
For more relevant information, National Residential Landlord Association (NRLA) recommended supplier, the PRS Tenancy Mediation Service, has written an article, ‘The pitfalls of rent to rent: Navigating challenges through mediation’, which explains more about how mediation can help parties reach a mutually agreeable resolution when there are disagreements in rent to rent cases. And this article on mediation and guaranteed rent contracts features case studies to illustrate how the PRS Tenancy Mediation Service can help.
Find out more
Read the Property Redress Scheme's guide to how guaranteed rent and rent to rent works.