‘Rent-to-rent’ or ‘guaranteed rent’ became a popular business strategy for landlords and letting agents around UK. In a rent-to-rent arrangement, the landlord leases the property to an individual or company, usually for 2-3 years. Then that person needs to find tenants who will occupy the property on a short term basis.
This is not the same as using a managing agent because the landlord should be paid a fixed rent regardless of occupancy for the whole of the terms by the ‘middle tenant’ and the landlord has no direct contractual relationship with the tenants.
This takes away some of the unpredictable situations that landlords face using a managing agent.
There are common mistakes we are facing very often, so here are our tips for how not to do your HMO rent-to-rent:
1. To Use an AST Agreement
An assured Shorthold Tenancy (“AST”) is a type of tenancy that has a strict legal specification. You can have an AST only in the case where the tenant is actually living in the property. It is completely wrong to use the AST agreement between the landlord and the middle tenant – probably the agreement will not have all the terms you need and it will definitely contain lots of inappropriate clauses.
2. To Use a Standard Company Let.
This is slightly better than using an AST but if you download a standard company let agreement that was not created especially for rent-to-rent it’s not going to cover the issues that are concrete to rent-to-rent. Some company lets will prohibit the tenant from granting their own sub-tenancies – if the middle tenant wants to do this, your company let agreement is not appropriate.
3. Not carrying about HMO licenses.
The head landlord and the middle tenant may both expect that the other is responsible for HMO licensing and they will not be punished for failing to hold a license. That is not correct – and the council will probably punish both of you!
4. To Assign the Whole Lease
This can be a trap for the middle tenant to fall into – if you assign the whole of the term of your tenancy to the tenants, you won’t have any interest in the property anymore. Now the landlord can claim rent directly from the sub-tenants, and there goes your profit! The sub-tenancies must be for a day less than the superior tenancy with the HMO owner.
5. To Break Mortgage Terms and Conditions
Even if you have permission to rent your property, this might be the permission only to grant guaranteed shorthold rent for no more than one year. If you break your mortgage terms, the lender can take ownership of the property.
6. To Invalidate Insurance
Just because you have landlord insurance does not really mean that you are covered for rent-to-rent arrangements. Be careful when checking your policy.
7. To Breach your Lease
As a leaseholder, you will be a subject for a restriction on short-letting in your property.
HMO Regulations & Requirements 2020
Keeping on top of the legal requirements & regulations is a challenge for HMO landlords as they are changing regularly. Failure to comply with certain HMO rules could result in prosecution so here we have compiled an exhaustive list of regulations… read more
8. To Ignore Planning Permission
If your property will be let for short term or just as a bedsit accommodation, this may be a change of use. You need to check what regulations are in force in your area.
9. To not Discuss Who is Responsible for Repairs and Safety Certificates
Who has the responsibility to carry out repairs, and who will be doing them? If you will not check your tenancy agreement attentively you will never know what you are signing up for.
10. To not Worry About the Right to Rent
Mostly, the landlord is responsible right to rent checks for their own tenants, and then that tenant is responsible for right to rent checks for their subtenants. So in rent to tent arrangement, the middle tenant will be a subject for checking the occupier’s status. But this can also be varied by written agreement. If you get this wrong it could make you a subject for a fine or even criminal persuasion.
11. To Serve a Section 21 Notice
You will not be able to finish your guaranteed rent agreement by serving a section 21 notice as this is only used to guaranteed shorthold tenancies. At the end of the fixed term, the tenancy will simply end unless rent keeps on to be accepted in the property in which case notice will be needed.
12. To Get into Rent-To-Rent by Mistake
If you are buying a property with a tenant already living there, check the tenancy agreement first and find out who are your tenants. If you won’t check properly you could find yourself in a rent-to-rent situation by accident. This can be very difficult and expensive to fix afterward.
13. Not to Read the Agreement Attentively
As these agreements are primarily contractual in nature the terms in them are significant. Landlords can find themselves caught out by agreements that the middle tenant can keep changing or which makes it very difficult to expel the middle tenant if they aren’t paying the rent. Rent to rent agreements should be checked attentively by someone who understands the regulations before they are signed.
14. To not Verify Out the Middle Tenant
The middle tenant has an important control over your HMO. They should be referenced and recommended by current clients. It also makes sense to search for their company name on the internet and try to find out if they had any difficulties working with others.