Rent-to-rent is a controversial property investment model now being promoted by many property investment trainers and online influencers.
Simply put, it involves would-be property investor landlords (as well as some rogue property companies) renting off a legitimate property owner / superior landlord and subletting the property to individual tenants.
There are many rules and regulations that landlords must follow when renting out a property and these arrangements often skirt by them in relation to things such as evictions, deposits, safety and overcrowding. People that enter into this kind of operation (novices as well as some rogue operators) often either are oblivious to the rules or they have no intention of complying with them.
Profits can be multiplied many times more than standard lets, by maximising the number of rooms within a property, rooms that can be let to tenants as an HMO '� house in multiple occupation.
Expensive property training courses
These schemes can be made to work in UK cities because of the excess demand for renting in the current market, but that's not always the case. Many novice investors, after attending expensive property training courses costing them thousands of pounds, have found themselves failing to fill properties that they have been enticed to rent.
Having committed to guarantee rents to the owners, these newbies inevitably get themselves into terrible financial difficulties and often not only fail to pay the owner the promised rent, they let down their own tenants.
What's more, many of these properties are hastily divided up into multiple rooms, sometimes without the owner's knowledge or consent, and very often without the necessary HMO licence, or meeting current safety standards. HMOs, under the regulations applying to houses in multiple occupation in England, must operate to higher safety standard than single lets.
These rent-to-rent schemes offer an enticing way to make money quickly without the need for any capital outlay. No money down as would be the case with a traditional property investment. They are a godsend to the property gurus, who often promote the idea to novices after taking big course fees, only to have most of them fail when they try to put the idea into practice.
What's more, some of the promoters have moved on from the training rooms to online Zoom courses and the so call 'property influencers'� are now promoting rent-to-rent on social media platforms.
Horror stories abound where tenants have been squeezed into multi-occupied properties with undersized bedrooms and with as many as ten or twelve tenants piled into one property. Overcrowding is rife with limited access to facilities like bathrooms and kitchens.
Unsuspecting superior landlords
Unsuspecting owners / superior landlords are finding themselves the target of legal action because their properties have been operating as licensable HMOs without their knowledge.
Some have been left high and dry with claims for rent repayment orders from tenants, or they can't remove tenants in their properties when the under-landlord absconds leaving a trail of destruction, with much expensive damage inside the property from unauthorised alterations.
These schemes, often more accurately described as 'scams'�, are coming to the attention of local authorities and central government in greater numbers. Pressure is now mounting for greater regulation of the practice, with laws needed to protect tenants and owners from these novice operators as well as rogue landlords. They often operate rent-to-rent properties while evading prosecution.
Rent-to-rent or subletting is not a new practice. There are some genuine companies in the field who have done this sort of thing successfully and responsibly for many years. They rent off owners, let the property in a legal way, guarantee the owner their rent and return the property in a tenantable state. Some of these operators are local authorities who need rentals for homeless people.
But this latest craze, which has snowballed into a torrent of rent-to-rent schemes in London, letting out rooms often in substandard and illegal conditions, either as long-term room lets or Airbnb style short-term tourist lettings.
Rogue operators abound
The rogue operators in this field pay scant regard to the letting regulations, while making a small fortune by packing tenants into a single property '� a large terrace house in London with 10 of 12 people inside (not unheard of) could be returning upwards of �8,000 per month (�416,000 per annum). No wonder the temptation is there.
Agents are being inundated with enquiries from would be rent-to-rent operators, most of whom have been on courses costing thousands, run by so called 'property gurus'�, self-promoted property experts with a large social media presence.
Novices are being told they can be financially free within 12 months, able to give up their day job in a matter of months, if only they will pay a large course fee to get some expert training to be come a rent-to-rent operator, no need for any money to get started!
Few manage to realise their dreams when it comes to putting these ideas into practice. The people to gain mostly are the snake oil salespeople offering the training. On the other side of the coin the property owners are finding themselves in serious trouble, when rogue operators and novices alike leaving them in the lurch with illegally let HMO rentals.
Hard on tenants and owners
When the preverbal does hit the fan, tenants are usually served with eviction notices because the property is unsafe and the owner is served with a summons to attend court for a licencing offence and perhaps a rent repayment order, the rent-to-rent operator nowhere to be found.
Often rogue rent-to-rent operators use companies, but when things go wrong the tenants can't pursue these companies for rent repayment orders (RROs) because it would be a waste of time, money and effort, these companies have no assets '� all earnings are withdrawn as soon as they are made.
The tenants could sue the rightful owners if they can find who they are, often they can't. However, a recent supreme court ruling has somewhat eased the owner / superior landlords' position.
Rent Repayment Orders
Tenants of rent-to-rents can pursue landlords in court when they break the letting rules and they can use a legal procedure known as a 'rent repayment order'�. Under this arrangement landlords can be forced to repay up to one year's rent.
But but if the rent-to-rent operator does it though a shell company, and the tenants had not direct connection with the owner, they have little chance of getting any recompense. In any case, the recent Supreme Court ruling has confirmed that as the law now stands the tenants can only pursue their immediate landlord '� that being the rent-to-rent company. The superior landlord being one step removed cannot be pursued.
The Supreme Court case
In the case of Rakusen v Jepsen and Others, Mr Rakusen (the Superior Landlord) granted a tenancy of his London flat to Kensington Property Investment Group. This company in turn had sublet the property to several tenants.
The number of tenants present meant the flat became licensable as a house in multiple occupation (HMO), but Kensington had failed to apply for an HMO licence. The tenants decided to pursue Kensington for a rent repayment order (RRO) because they had not complied with the law.
Unable to get any satisfaction this way, the claim was made against the superior landlord Mr Rakusen, and it eventually landed at the Supreme Court. The argument was about whether the tenants could claim the RRO against a superior landlord, or whether their only option was to claim against Kensington with whom they had a letting agreement.
The unanimous finding of the Supreme Court on 1 March 2023 was that an application for an RRO can only be made against an immediate landlord, Kensington in this case. There could be no cause of action against the superior landlord.
So, rent-to-rent companies such as Kensington, those renting from property owners and sub-letting to their own tenants are liable themselves. Many are rogue operators using shell companies with few if any assets. They often fail to abide by regulations and treat tenants appallingly, failing to maintain and carry out repairs '� they operate as 'ghost landlords'� who are very hard to contact.
Tenant charities are angry about this ruling and are hoping the reforms coming in the long awaited Renters Reform Bill will make changes to the statutory rules, making owners of properties involved in rent-to-rent arrangements liable for the condition of their properties and subject to liability for RROs.