Rent-to-rent schemes are gaining popularity among property investors looking for quick profits without significant upfront costs. However, these arrangements carry risks for property owners, tenants and operators. Understanding the legal framework and potential pitfalls is essential for anyone involved in rental property management.
What is rent-to-rent?
Rent-to-rent involves a person or company renting a property from the owner (superior landlord) and then subletting it, often as a house in multiple occupation (HMO). Operators typically increase income by maximising occupancy, sometimes housing ten to twelve tenants in one property.
While some rent-to-rent arrangements are legitimate and serve important purposes—such as providing housing through local authorities—many attract inexperienced or rogue operators pursuing quick profits.
The Rakusen case: what happened?
The Supreme Court case Rakusen v Jepsen and others clarified a key legal point about rent repayment orders (RROs). In March 2023, the court ruled that tenants can only seek RROs against their immediate landlord, not the superior landlord.
The case involved Mr Rakusen, who rented his flat to Kensington Property Investment Group in 2016. Kensington sublet the flat, turning it into an unlicensed HMO. When tenants sought a rent repayment order of £26,140, they initially pursued Kensington but eventually tried to claim against Mr Rakusen as the superior landlord. The court concluded that only immediate landlords—Kensington in this case—could be held liable for RROs.
Why this matters for landlords and agents
The ruling has significant implications for landlords considering rent-to-rent agreements:
- Protection for superior landlords: Superior landlords are not liable for RROs under current law, reducing legal risks if rent-to-rent operators fail to comply with regulations.
- Due diligence is essential: Superior landlords may still face consequences if their properties operate as unlicensed HMOs, even if they are not directly responsible. See the GOV.UK HMO regulations guidance.
- Tenant vulnerability: The ruling highlights how tenants may struggle to seek recourse when rent-to-rent operators use shell companies with no assets. For more on rent repayment orders, refer to Shelter’s guide.
- Regulatory pressure: Advocacy groups continue to push for laws holding superior landlords accountable for property conditions.
Risks of rent-to-rent
Property owners face several common risks in rent-to-rent arrangements:
- Unauthorised alterations: Operators may modify properties without permission, risking costly damage and safety hazards.
- HMO licensing breaches: Properties rented to multiple unrelated tenants often require HMO licences. Unlicensed HMOs can lead to prosecution and fines (see GOV.UK HMO licensing).
- Overcrowding and safety issues: Some operators house too many tenants in inadequate conditions, creating unsafe environments.
- Financial exposure: If operators fail to pay rent or abandon properties, landlords may face financial losses and challenges in removing tenants.
- Regulatory action: Local authorities may enforce penalties against properties breaching HMO regulations, even if the owner was unaware (see National Residential Landlords Association).
Practical steps for landlords
If you are considering a rent-to-rent agreement or managing an existing one, take these steps to mitigate risks:
1. Conduct thorough due diligence
- Verify the operator’s reputation, financial stability, and track record.
- Check company registration details and confirm their asset base via Companies House.
- Request references from past property owners they have worked with.
- Ensure they understand HMO licensing requirements.
2. Include protective clauses in agreements
- Clearly define permitted use and occupancy limits.
- Require written consent for any modifications.
- Include provisions for regular property inspections.
- Specify maintenance and repair responsibilities.
3. Monitor compliance regularly
- Inspect the property periodically.
- Confirm HMO licensing compliance.
- Check tenant numbers and living conditions.
4. Understand your obligations
- Research local HMO licensing rules.
- Determine whether your property requires licensing (HMO licence checker).
- Maintain records of all communications and inspections.
5. Get professional support
- Consult property lawyers for complex deals.
- Consider specialist insurance cover.
- Work with experienced letting agents familiar with HMO regulations.
Warning signs to watch for
Be cautious if potential rent-to-rent operators:
- Promise ‘guaranteed high returns’ or ‘no money down’ deals.
- Have little financial history or have only recently completed property training courses.
- Are vague about licensing requirements or refuse to provide references.
- Plan to significantly increase occupancy without proper facilities.
FAQs
Can superior landlords be liable for rent repayment orders?
No. The Supreme Court ruling clarified that RROs can only be made against immediate landlords, not superior landlords. See the full judgement here.
Do rent-to-rent properties always need HMO licences?
Not all do, but many do. Properties with five or more tenants from separate households typically require HMO licences. Check with your local council or use the HMO licence checker.
What happens if rent-to-rent operators abandon properties?
Owners may face challenges removing tenants who have legal occupation rights, which can lead to financial and legal difficulties. Conducting due diligence beforehand is critical.
Are rent-to-rent schemes illegal?
No. Many operators run legitimate rent-to-rent businesses, but problems arise when they ignore licensing requirements or safety standards.
Key takeaways
- The Rakusen v Jepsen ruling limits RRO liability to immediate landlords but reinforces the importance of due diligence for superior landlords.
- Rent-to-rent agreements can be profitable but carry serious risks if not properly managed.
- Protect yourself by vetting operators, setting clear agreements, and monitoring compliance.
For more insights into property management and legal compliance, explore resources like Total Landlord.
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