Solicitor warning on rent-to-rent...

A solicitor has warned landlords about rent-to-rent (R2R) agreements – an investment strategy that has proved controversial over the past few months.

Writing on the Nearly Legal blog, Giles Peaker, a solicitor and partner in the Housing and Public Law team at Anthony Gold Solicitors in South London, describes R2R as a “slow motion catastrophe”.

Despite the high profile collapse of R2R poster boy Daniel Burton and his company Unidaplace last Autumn, Peaker warns that there are still plenty of landlords entering into R2R subletting arrangements.

Rent-to-rent involves a “tenant” letting the property from a landlord then subletting the rooms individually to tenants. Living rooms and dining rooms are often turned into extra bedrooms to up the rental income. In theory the R2R tenant offers the landlord a guaranteed rent and a hands-off investment.

But Peaker warns that there a multitude of things that could go wrong – as highlighted by Burton closing the Unidaplace office last summer despite owing tens of thousands of pounds to tenants in unreturned deposits.

“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,” says Peaker. “What sort of agreement does the owner/landlord have with the R2R party? I have heard of all sorts of variants: Commercial leases for two, five 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 shorthold 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.”

Peaker says that any form of agreement that is not a commercial lease is going to be a disaster. His blog post explains why the R2R agent can’t have an assured shorthold tenancy (AST) and why an agency agreement would leave the property owner liable for everything despite having ceded all control of the property to the R2R ‘manager’.

He also criticises R2R companies that give licences to occupiers instead of an AST and says this could result in unlawful eviction claims.

“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,” he says, “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.”

Peaker then describes the scenario if the rent-to-rent company fails in its obligations, disappears, or goes into liquidation.

“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,” he says, “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 also be effective against the sub-tenants.”

Peaker acknowledges that R2R is often done by councils and housing associations but says it’s a “disaster waiting to happen” in the private sector.

Landlords approached by a R2R firm would be well advised to read Peaker’s blog, seek the advice of a solicitor and do their due diligence on the R2R company.

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