The Rent-to-Rent Phenomenon: Illegal, Immoral or a handy solution to the ‘housing crisis?

Desperate times call for desperate measures, so they say. House prices in urban centres like London continue to rise, seemingly exponentially, unemployment is high and wages are static. First time buyers are struggling more than ever to get on the property ladder or, in fact, even leave home.

Nevertheless, a cunning solution has been devised by a new breed of rent-to-renters that seeks to fill properties to the brim and make a fast buck in the process. A debate rages around the subject however as, although the perpetrators aren’t directly breaking the law, there are certainly victims.

The rent-to-renters sign a letting agreement with a, frequently unsuspecting, landlord and become conventional tenants. They pay their deposit and their rent each month as agreed, as well as fulfilling any other obligations, like repairs and maintenance works, under the lease. Instead of moving in though, they separate the house into as many lettable rooms as they can manage and rent each of them out as soon as they can. Some vet their sub-tenants and try to get a harmonious mix – most do not.

The result is a small house filled with people occupying a single room each and any shared areas (kitchen, bathroom). The rent-to-renters charge extortionate rates that far outweigh their own rent liability to the landlord and, without much effort at all, take away a sizeable ‘passive profit’.

Unfortunately, this is not without its issues and the liability for problems typically falls not with the tenant, but with the unsuspecting landlord. David Smith of Anthony Gold Solicitors explains one such issue:

“If the landlord lets to a rent-to-renter they are creating a commercial tenancy which is subject to different laws than a residential tenancy,” he explains. “At the end of the tenancy the sub-tenants have the right to demand a new tenancy under a law designed to protect commercial tenants such as shop owners. Landlords can lose control of their property this way.”

Furthermore, subtenants that occupy a room as their only residence are protected under the Housing Act 1988. Regaining possession from ensconced subtenants can be a very tricky business for the Landlord, with matters like privity of contract and the issuance of a S. 21 order for possession to contend with.

What’s more, many rent-to-renters will sublet the property without the Landlord even knowing. A property owner looking for a quiet income from their house could therefore end up with five or more residents without maintaining liabilities living there and causing substantial damage.

Some of the worst offenders don’t ever pay rent to the landlord, delaying as long as they can before jumping ship. Rose Chimuka, for example, was recently jailed for four years following a fraudulent subletting scam that netted her £100,000.

If the house becomes classified by the Council as a House in Multiple Occupation (HMO) it will require a licence and there are strict penalties against landlords that fail to procure it. Landlords caught off-guard can pay a heavy price.

It’s not all bad though, with some operators of the scheme seeking to help people out:

Francis Dolley explained:

“We seek out, in the main, distressed landlords who have owned their student let HMO’s for some time and have now become tired and jaded. Their properties are dated and proving difficult to let.  We offer them a guaranteed rent, no voids, a light refurb and a long contract. To many we are their ‘knights in shining armour’. We then rent out the rooms on an individual basis. Our profit is the difference between what the tenants pay us and what we pay the landlord minus the utility bills. Our best payer is £917 net PCM.”

Anecdotal evidence indicates that this is not the norm and, certainly, there are many that abuse the system. Vanessa Warwick, founder of propertytribe.co.uk, says sublet scams produce three sets of victims – the landlord, the sub-tenants, and the wider landlord community, which ends up getting the blame.

“To some people, subletting seems like easy money for little effort, but it is fraught with pitfalls that usually end up costing the landlord, not the subletter.

“I have seen a newbie fresh off a rent-to-rent course ask on a forum: ‘I’ve let a property but haven’t been able to sublet any of the rooms yet. Can anyone give me advice on how to avoid paying the landlord rent until I have let the rooms?’.”

Much juggling of contracts and covenants is required for a successful rent-to-rent scheme and we will undoubtedly hear more on the legal side, as landlords seek recompense for abuses. In the meantime, could this and should this new trend take off?

Rent-to-renters can be difficult to spot and very disruptive to honest landlords. If you fear abuse by a tenant, ensure you get appropriate legal advice and negate any ability to sublet in the tenancy agreement. In particular, avoid accepting deposits worth three months or more rent – which typically creates a premium tenancy in which you will have no power to prevent assigning of the lease.

If you have any questions on property matters, or require a survey for your new investment, don’t hesitate to contact a qualified Chartered Surveyor on the link below:

www.PropertySurveying.co.uk

SRJ/LCB                                                                                                                         02/07/2013

Comment on this article