The lettings market is evolving very fast and with extensive experience in the sector, Martin & Co MD Eric Walker – who is also a Property Redress Scheme Advisory Council member, explains why landlords who are offered ‘guaranteed rent’ schemes must be careful.
Often also labelled as ‘rent to rent’ schemes, the landscape is changing, and landlords need to be aware of these changes and risks.
First off, there are some excellent agents providing what is a great, worry free product particularly suited to risk adverse, non-professional landlords or those living overseas.
The basis of this business model is where the letting agent rents the property under a commercial agreement from the owner at a below market rent and lets it to a tenant under an assured shorthold tenancy agreement (AST).
The agent becomes the landlord and makes a profit on the rent but typically doesn’t charge the landlord any other fees or commission.
But there are other models where agents pay the full market rent and instead earn a management fee from a local authority or housing association.
Another is where an agent rents the property from the owner and then sublets to multiple tenants to maximise rental income, which they keep. This creates a raft of issues such as HMO licencing, increased wear and tear and even planning consent.
Before entering into an agreement, which may be binding for up to five years, a landlord should exercise due diligence and check that the company has the resources to meet their obligations. Companies House is a good place to start as are customer review sites.
Next, ensure the agent has the appropriate professional indemnity insurance where they are covered in the capacity of landlord, not just letting agent or property manager.
This is crucial in case a tenant brings an action against the agent where they are named as the landlord. An owner landlord cannot transfer their statutory obligations on to a letting agent.
You need to consider that Government is determined to abolish so-called no-fault evictions; Section 21 of the 1988 Housing Act. This means that if you need your property back before the end of the guaranteed rent contract you may not have the mechanism to do so.
In Scotland, we saw a similar change allowing landlords to gain possession, where there was no breach of the tenancy agreement, only if the owner wanted to reoccupy a property which was formerly their principal home, sell the property or undertake significant building works.
The issue is that as the agent is not the legal owner, but named as landlord, they will not be able to rely on these grounds.
There is a solution which is to ensure there is a surrender clause in the guaranteed rent agreement with the agent which simply allows the tenancy to revert to the owner landlord who can then serve notice. However, a word of caution.
There may be a clause allowing the letting agent to claim their lost profit for the remainder of the agreed term.
It is essential that before entering in to such an agreement, you check all clauses thoroughly and ideally seek independent legal advice to ensure there are no surprises.
For example, at the end of the guaranteed rent term, if the tenant wishes to stay, the agent may seek a fee for the effective introduction of ‘their’ tenant.
Unregulated and misunderstood
Rent to Rent is a hugely unregulated and misunderstood discipline however there are some excellent, professional agents providing a risk-free way of letting your property and dealing with the increasingly complex regulatory framework.
The key is ‘do your homework’ before signing your property over to them.
More information is available via the Property Redress Scheme’s guides on rent to rent.