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In this article, we take a detailed look at the things to look out for when considering a rent to rent. Some of the outline topics covered included:
Rent to rent is a different method of operating rented property to the typical agency arrangement where a commission will be taken based on rent collected. With rent to rent, the property would be rented from the owner and then sub-let to tenants by the renter. Where an agent is operating in this way, the agent is no longer an agent but is both a landlord and a tenant.
It gets complicated because there are effectively two (or more) landlords – the owner and the person renting the property. Although each party will be a landlord or tenant (or both at the same time), the following terms will be used throughout this article to make it easier to follow which person is being discussed at the time:
An agent might be approached by a property owner wishing to rent their property. The agent may decide to become the tenant of the owner and rent the property from the owner and guarantee the rent. The rent offered would generally be below market rent. The agent (now the renter) would then let the property to some tenant or tenants totalling a higher rent than what the renter is paying the owner. In theory, when the property is fully let, the renter should be receiving more rent than what s/he is paying to the owner.
When the owner of property approaches an agent, the agent is under the highest duty of care to the owner. This is known as the fiduciary duty and has been defined as:
… one party in a position of vulnerability
[the landlord], places their trust in another party. It is the very highest form of care in equity or in law and requires the agent to act in the sole benefit and interest of the landlord in every single decision …
When an owner approaches an agent, the agent must act in the sole interests of the owner client. This would include (amongst other things) the requirement to accurately value the rental property at best possible rent for the owner and not value the rent at what is best for the agent.
Immediately an agent discusses with an owner the possibility of renting the property from them at a lower than market value rent; the agent may breach the fiduciary duty.
To comply, the agent must express the rental valuation and ensure two valuations are provided: one for the market value if the agent were taking a commission in the usual way and one valuation that the agent would be willing to pay on a rent to rent scheme. As long as these two valuations are expressly stipulated to the owner and agreed upon in writing, there is nothing wrong with the agent renting the property from the owner. After all, the advantage of the lower rent to the owner is that the rent is guaranteed by the agent and may also include certain repairs or maintenance (for which see later).
With a rent-to-rent scheme, there will be two tenancies in place—one between the owner and the renter and then another between the renter and the occupiers.
But what are the correct types of tenancy to use?
The tenancy between the owner and the renter is complex. It can never be an assured shorthold tenancy because the renter will never occupy the property as their only or principal home.
The rent-to-rent tenancy between the owner and the renter will be a hybrid of a commercial lease (generally used for shops and offices) and a contractual tenancy (customarily used when granting a residential tenancy which cannot be an AST).
It should be noted that the contractual tenancy we provide is not suitable for rent to rent.
Depending on the individual circumstances of each letting, it may be that the rules applying to business tenancies will apply to a rent-to-rent tenancy of which owners need to be aware. If not done a certain way, the renter will have much protection, including the right to a renewal tenancy at the end of the term.
Whether the business rules apply under the Landlord and Tenant Act 1954 will depend if there is “occupation” of the property for a business by the renter:
Subject to the provisions of this Act, this Part of this Act applies to any tenancy where the property comprised in the tenancy is or includes premises which are occupied by the tenant and are so occupied for the purposes of a business carried on by him or for those and other purposes (see Section 23(1) Landlord and Tenant Act 1954).
In Graysim Ltd v P&O Property Holdings Ltd [1995] 4 AII E.R. 831 HL, the tenant of a market hall who then sub-let market stalls to stall holders, the House of Lords held that the tenant was not in occupation for the Landlord and Tenant Act 1954 (and therefore did not have the protection of the Act) because the stall holders had exclusive possession of their stalls.
the very nature of some businesses involves the owner parting with the occupation of his land. Graysims business was such a business. It sublet parts of the market hall. The use of the parts retained by Graysim was ancillary to the traders use of the sublet units, providing access and other facilities for the traders and their potential customers. Part II of the 1954 Act is concerned to protect tenants in their occupation of property for the purposes of their business. But Graysim itself did nothing on the units. Graysim did not itself carry on business in the units. It let the units for others to do business there. Its income from Wallasey Market consisted solely of rentals from those lettings. The Act is not concerned to give protection to tenants in respect of such income. The Act looks through to the occupying tenants, here the traders, and affords them statutory protection, not their landlord. Intermediate landlords, not themselves in occupation are not within the class of persons the Act was seeking to protect (Lord Nicholas of Birkenhead at 842e.)
The Court of Appeal held in Bagettes Ltd v GP Estates Co Ltd [1956] 1 AII E.R. 729 (which was approved in Graysim v P&O Property Holdings Ltd at 838j) that where there was subletting of unfurnished residential flats, the tenancy of the whole building was not a business tenancy.
Although only County Court, in Smith v Titanate [2005] 20, E.G. 262, the property was divided into six flats, and the tenant (in our words, renter) ran a business of renting the apartments.
The court found all the lettings to be tenancies, and the occupiers had exclusive possession of the flats (a number were on standard assured shorthold tenancies).
The court held that the renter was not in occupation for a business as defined by the Landlord and Tenant Act 1954 and, therefore, no protection (following Graysim).
The judge suggested three situations which might arise in light of Graysim:
Occupation does not need to be physical, and “whether there is “occupation” of any property is a matter of fact and degree” (Pointon York Group Plc v Poulton. [2006] EWCA Civ 1001).
Below are some typical examples of arrangements between owner, renter and occupiers. The views expressed in these examples are that of the author only and should NOT be relied upon as being a statement of fact.
You should seek professional advice before any tenancy is entered into as to whether it should be a business tenancy or not (also see later).
It might be advisable for owners to play it safe and always assume that a business tenancy would be created. In this case, the provisions of the landlord and tenant Act 1954 allowing a renewal at the end of the term can be excluded by way of a particular procedure, including by section 38A Landlord and Tenant Act 1954 and schedule 2 of The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003.
A prescribed notice may be served by the owner on the renter (Found in schedule 1, The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003).
If the notice is given not less than 14 days before the renter enters into the tenancy to which the notice applies or (if earlier) becomes contractually bound to do so, a simple declaration (See schedule 2 The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003) can be signed by the renter acknowledging the notice and confirming they understand there will be no protection.
But, if the notice is given less than14 days of the tenancy, a statutory declaration by the renter must be declared in front of a solicitor (or another commissioner of the oath) for the exclusion to apply.
In addition to the prescribed notices and declaration, the tenancy itself must contain provisions excluding sections 24 to 28 Landlord and Tenant Act 1954 and reference the appropriate notice and declaration. The owner and renter should seek professional advice to ensure the proper notices, declarations and provisions are met, and if an owner fails to do this, they could find the renter will have the complete protection of the 1954 Act, including the right to a renewal of the tenancy unless there are exceptional grounds for the court not to order one.
Obviously, amongst the usual terms (to pay the rent, not to damage etc.), the tenancy will need to allow the property to be sub-let by the renter. The length of the term must be long enough to allow the renter to sub-let.
Any tenancy for greater than three years must be made as a deed which means it must make it clear on its face that it is intended to be a deed by the person making it (whether by describing itself as a deed or expressing itself to be executed or signed as a deed or otherwise). He must sign it in the presence of a witness who attests to the signature or, at his direction, in his presence and the presence of two witnesses who each attest to the signature (Section 2 Law of Property (Miscellaneous Provisions) Act 1989).
For the owner to avoid being liable for repairing obligations under section 11 Landlord and Tenant Act 1985, the tenancy would need to be for a term of seven years or more (Section 13 Landlord and Tenant Act 1985). If a lease is granted for that length, but the renter can end the tenancy sooner (a break clause), the tenancy will be treated as being for less than seven years.
Once the tenancy between the owner and the renter has been completed, the usual rules will apply to the renter and the tenancy being used for the occupiers.
In the vast majority of cases, the occupier will be an individual and will occupy as their only or principal home. In which case, an assured shorthold tenancy will be granted by the renter to the occupier. If the occupier is to be a company or perhaps it’s not going to be the occupiers only or principal home, a contractual tenancy will need to be used.
The tenancy length between the renter and the occupiers must be kept well within any term remaining between the renter and the owner. If the renter gives a term to an occupier that was equal to or beyond the term remaining that the renter holds from the owner, the effect would be an assignment of the renter's tenancy to the occupiers. The occupiers would then, in fact, be the owner's tenants.
‘In accordance with a very old and established rule, where a lessee, by a document in the form of a sub-lease, divests himself of everything that he has got (which he must necessarily do if he is transferring to his so-called sub-lessee an estate as great as, or purporting to be greater than, his own) he from that moment is a stranger to the land, in the sense that the relationship of landlord and tenant, in respect of tenure, cannot any longer exist between him and the so called sub-lessee.’ (Lord Green MR Milmo V Carreras
[1946]KB 306)
Furthermore, where the occupiers are assured shorthold tenants and are either in term or holding over when the tenancy between renter and owner ends, the occupiers will automatically become the tenants of the owner, and the renter will cease to be their landlord. This results in the renter no longer being entitled to receive rents in respect of the property and all the rents should be paid by the occupiers to the owner directly.
Section 18 Housing Act 1988: If at any time— (a) a dwelling-house is for the time being lawfully let on an assured tenancy, and (b) the landlord under the assured tenancy is himself a tenant under a superior tenancy; and (c)the superior tenancy comes to an end, then, subject to subsection (2) below, the assured tenancy shall continue in existence as a tenancy held of the person whose interest would, apart from the continuance of the assured tenancy, entitle him to actual possession of the dwelling-house at that time.
Where a business tenancy is created without excluding the protection afforded by the Landlord and Tenant Act 1954, the tenancy will continue until terminated in accordance with the appropriate provisions (but that is only where the tenancy is a business tenancy).
However, where sections 24 to 28 have been appropriately contracted out, the tenancy will end upon its expiry of the term. If the tenancy is not one to which the Landlord and Tenant Act 1954 affords protection, the tenancy will end automatically at the end of the term. Including a continuation clause in the tenancy between owner and renter may be possible to avoid this happening, and specialist advice should be sought.
Alternatively, a renewal of the tenancy should be sought by the renter from the owner ample time before the tenancy ends. If the property is going to be let to persons on holiday (such as Airbnb lettings, for example), a suitable holiday letting tenancy would be necessary for the occupiers.
The owner will need several permissions before having a tenancy with a renter. Firstly, if the property is mortgaged, conditions will generally require the only tenancy allowed to be an assured shorthold tenancy.
As the tenancy between owner and renter can never be an assured shorthold tenancy, permission will need to be sought from the mortgage company first. A failure to do so could result in the mortgage company calling the debt in and seeking full and immediate mortgage payment. Most buildings/contents insurance will require the tenancy to be direct with an occupier and may even stipulate an assured shorthold tenancy.
Like the mortgage permission, the insurance will need approval before granting a tenancy with the renter. Where the owner is a leaseholder with a long lease with the freeholder of the building, permission to sub-let may first be required from the freeholder.
Generally, the permission to sub-let will be on condition that the letting is only on an assured shorthold tenancy resulting in a rent-to-rent arrangement not being possible.
The lease terms between owner and freeholder should be consulted before any tenancy is finalised. A breach of the lease by sub-letting without prior consent could result in the property being repossessed by the freeholder.
If the property is in an area affected by the Greater London Council (General Powers) Act 1973, and the letting is temporary (less than 90 nights in a year), planning permission will be required as it is regarded as a change of use (See section 44 Deregulation Act 2015).
A house in multiple occupation (HMO) has some definitions. For the purposes of this article, we will concentrate on the most common situation where three or more people share a facility (toilet, cooking facilities or washing facilities) and they are not all related to one another. This covers a typical bedsit scenario where three or more individuals are sharing a property. This is common for renters to do to maximise rental income.
Planning permission is required if the property is to be let to more than six people who do not form a single household. The local authority can issue a direction in their area, not permitting up to six people to share a property. It would have the effect that any HMO (3 or more unrelated sharers) would require planning permission.
There are two persons defined in respect of a licence: the “person in control” and the “person managing”.
The person in control is defined as the person who receives a rent which is not less than two-thirds of the full net annual value of the premises or who would receive it if the premises were let at a market rent.
The person managing is the person who, being an owner or lessee of the premises, receives (whether directly or through an agent or trustee) rents or other payments from persons who are in occupation (amongst other things) (Section 263 Housing Act 2004).
The Housing Act 2004 doesn’t say who must apply for a licence – simply that an HMO property satisfying the conditions must have a licence. However, to grant the licence, the local authority must be confident that a manager is in place (who may also be the licence holder).
The proposed manager must be:
… either the person having control of the house, or a person who is an agent or employee of the person having control of the house (Section 64(3) Housing Act 2004)
In theory, either renter or owner could be the person in control (as they both may receive a market rent), but the renter is neither the owner's agent nor employee, so that the owner couldn’t be the manager. As a result, although the local authority can determine the appropriate licence holder, in most cases, the renter will be the person in control and managing and the relevant licence holder under the legislation.
There are further considerations that the local authority must be satisfied with, including (See section 64 Housing Act 2004 for all conditions):
If the property is located in an area which has been designated for additional licensing by the local authority, any HMO (irrespective of storeys and number of occupiers) would require a licence. A check should be made with the local authority before any tenancy is entered.
The same rules about the licence holder and person managing would apply to the additional licence.
Suppose the property is located in an area designated by the local authority for selective licensing. Any rented property requires a licence regardless of occupiers and size (including non-HMOs).
The same rules in respect of the licence holder and manager apply.
The Management of Houses in Multiple Occupation (England) Regulations 2006 require the manager of an HMO to carry out many duties. These include things like:
The list of duties is extensive, and the legislation should be consulted for complete details. As the manager has these duties under regulations, it will generally be for the renter to ensure full compliance.
The penalties are severe for any failure.
The terms of any tenancy between owner and renter should consider these duties and perhaps have some mechanism for costs incurred to be recoverable from the owner – significantly if the property is enhanced by compliance with any duties.
Under the right to rent legislation, it falls on the person who grants a right of occupation for premises for residential use to comply with the right to rent provisions (checking and copying ID etc.).
The statutory guidance provides in paragraph 1.5:
‘landlord’ means a person who lets accommodation for use by one or more adults as their only or main home. This includes people who take in lodgers and tenants who are sub-letting.
The duty, therefore, falls on the renter to comply with the legislation. To avoid any doubt, the tenancy between owner and renter should make it clear that the renter is responsible for the right to rent duties.
As the property will nevertheless be a dwelling-house despite being on a hybrid business tenancy, council tax will be payable and not business rates (non-domestic rates).
Assuming the term between owner and renter is more than six months, the renter will have the material interest in the property, so if the property is unoccupied at any time, the renter will be liable for council tax.
Where the property is let in parts by the renter (such as bedsit type lettings with a tenancy on each bedroom), the renter will always be liable for council tax even when the property is occupied.
As there are effectively two landlords as far as the occupier is concerned (owner and renter), repairing the property can become complex.
As discussed earlier, if the tenancy between owner and renter is for less than seven years, both the owner and the renter will be liable for repairs under section 11.
The renter will be liable to the occupier, and the owner will be liable to the renter.
It is impossible to contract out of section 11 repairing obligations where the term is less than seven years. So any term attempting to make the renter solely liable for all repairs will have no effect.
However, the owner can make the renter liable for certain repairs or maintenance not governed by section 11. The occupier will no doubt contact the renter in the first instance (it’s unlikely the occupier will even be aware of the owner), and the renter will be liable to the occupier to keep the property in repair.
However, it might then be possible for the renter to go to the owner to get the works carried out. If the owner delays getting repairs done (for example, if the roof needs repair), the renter may nevertheless be liable to the occupier for any compensation if the works are not carried out with reasonable expedition.
The tenancy between owner and renter needs to be clear who does what repairs and the penalty for failures of either party (but don’t forget, the tenancy can’t contract the owner out of repairing obligations unless it’s for seven years or more).
Other maintenance issues not governed by section 11 would generally be the responsibility of the renter as far as the occupiers are concerned.
The terms of the tenancy could reflect who would be liable for what.
Under regulation 36 of The Gas Safety (Installation and Use) Regulations 1998, the landlord must check any relevant gas fitting and appliance for safety at least every 12 months.
The meaning of landlord includes:
where the relevant premises are occupied
[for residential purposes] under a lease [for a term of less than 7 years], the person for the time being entitled to the reversion expectant on that lease or who, apart from any statutory tenancy, would be entitled to possession of the premises.
The renter does not occupy the property for residential purposes, and as such, the owner would not be responsible to the renter for a gas safety record being produced annually.
Because the renter is granting tenancies to the occupiers for occupation for residential use, the renter is the landlord for the regulations and must produce the annual gas safety record.
Since 1 June 2020, The Electrical Safety Standards in the Private Rented Sector (England) Regulations 2020 apply to a new specified tenancy from 1 July 2020 and all existing specified tenancies from 1 April 2021.
The regulations require an electrical safety report every five years or less if the report contains an earlier date. The rules also require works to be completed if any are found after the inspection.
The regulations apply to any tenancy which:
As this only applies to a tenancy granting the right to occupy as their only or principal home, it will not apply between owner and renter because that agreement does not provide their home and will apply to the renter.
Under the Electrical Equipment (Safety) Regulations 2016 (and the 1994 regulations for appliances purchased earlier), all electrical appliances must be provided safely on the day of supply.
The owner will need to ensure all appliances are safe for when the tenancy between owner and renter begins. Then, when the renter grants tenancies to the occupiers, the renter must ensure that the electrical appliances are safe at each letting.
If the owner wants possession of the property, the tenancy between the owner and the renter must first be brought to an end. If the tenancy has come to an end and no renewal has been sought, nor has it continued, the tenancy will be at an end, and the occupiers will have become the tenants of the owner (assuming they were assured, shorthold tenants).
If there is some breach of the tenancy, it will depend on the terms of the tenancy, but it might be possible for the owner to bring the tenancy to an end by forfeiture. This is complex, and advice needs to be sought.
Once the tenancy has been brought to an end, the occupiers become the tenants of the owner (where the occupiers are on an AST), and the owner can seek possession from the tenants by the usual route of a section 21 notice and possibly section 8 if there are rent arrears or some breach by the occupiers.
The action the owner will be able to take against the occupiers will very much depend on the individual circumstances of the tenancies in place. Whatever the situation, a court order will be required before the occupiers will have to vacate.
The renter will be liable for protecting the occupiers' deposits because the renter will be their landlord and the one who receives the money.
However, it is worthy of comment that because when the tenancy between owner and renter comes to an end and where the occupiers are on AST, those occupiers become the tenants of the owner, provision in the agreement between owner and renter needs to be made that any deposits received from the occupiers be transferred on the ending of the tenancy to the owner.
If those deposits are unprotected during the transfer, the owner will be obliged to re-protect the deposits within a strict timescale.
It is always recommended that all utilities and council tax departments be notified upon a change of occupier.
It is imperative to notify Welsh Water or Dee Valley Water (if supplied by them) within 21 days of a change. The information to be provided to the water authority under regulations is the occupiers' names, dates of birth and start date of the occupancy. A failure to provide the information allows the owner to be jointly and severally liable for the occupiers' water bill. Owner is defined by section 219(1) Water Industry Act 1991:
“owner”, in relation to any premises, means the person who— (a) is for the time being receiving the rack-rent of the premises, …; or (b) would receive the rack-rent if the premises were let at a rack-rent, and cognate expressions shall be construed accordingly;
“Rack-rent” is rent equal to or nearly equal to the total annual value of a property (Source: Dictionary.com). As the renter in our context is likely receiving closest to market value rent (or could do so if fully let), it is most likely the renter who will be regarded as the owner of the water notification regulations. However, to be safe, the tenancy between owner and renter should consider the possibility that the owner is held liable for the occupiers' water bills and in such an event, the renter will reimburse the owner an equal amount upon demand.