Rent-To-Rent Contracts May
Breach Mortgage Agreements
National newspapers are claiming that the Rent-To-Rent strategy for maximising profits from rental properties is immoral and illegal
Private rental sector landlords who utilise a rent-to-rent strategy, by which a property investor agrees to rent a property from the owner with the intention of sub-letting it to tenants for a profit, are being urged to check with their mortgage lenders that the practice will be allowed.
The warning was printed in The Sunday Times and follows last week’s news published by The Guardian newspaper and landlord news portal LandlordToday.co.uk, on the rent-to-rent phenomenon, which drew a mixed reaction.
Some lenders will not allow sub-letting, including The Mortgage Works (TMW), although BM Solutions does permit sub-letting.
There are also concerns that a standard Assured Shorthold Tenancy Agreement (AST) is not the right document for a rent-to-rent arrangement, while concerns have also been raised about the situation regarding tenancy deposits.
Last weekend, the Sunday Times ran a story under the headline “Tenants hit by new rent rip-off scandal”, and the content drew attention to the latest big property get-rich-quick scheme, with landlords being defrauded and letting agents accused of taking ‘bungs’.
There have been claims that property investors are raking in fortunes by renting properties, sub-dividing them, and then letting them out to sub-tenants, without the landlord, agent or neighbours ever spotting a thing.
The Guardian also claim to have found one 25-year-old who is allegedly making £35,000 a month using the Rent-To-Rent strategy after renting 200 properties and then sub-letting them out to tenants.
The press want investors to be wary of the vocabulary used in get rich quick schemes, such as: passive income, multi-let cashflow, armchair investing, turbo-charged cashflow, and ‘ethical’.
These terms are often used by property investors who are just trying to make an honest living, they are not out to defraud anyone and the press are attempting to use poor examples to justify any property investment strategy that they dont understand.
David Smith of Anthony Gold Solicitors warns that rent-to-rent is a legal “fiasco”, and says that not only tenants but landlords can be seriously affected.He said “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.”
Another issue is that renting out individual rooms could mean the property is classed by the council as a House in Multiple Occupation. HMOs need a licence and there are strict penalties for the landlord if they are caught renting out an HMO without one.
The Rent-To-Rent strategy is considered by the national press to be just on the borderline of legality and claim that landlords are happy to go along with it, partly because they hadn’t realised that their three-bedroom, two reception rental property could be turned into five bedsits that could potentially generate a larger income from multiple tenants and are more than happy to have someone else managing their property in return for receiving an agreed rent.
Presumably, these landlords have never heard of Houses Of Multiple Occupation – HMO’s, which have to be mandatorily regulated by local authorities in many parts of the country.
In theory there are several ways to legally sublet a property, usually involving commercial or corporate tenancies, management agreements, leases or guaranteed rent schemes. These can be attractive to landlords who want a hands-off investment.
But whether multi-let subletting is legal isn’t really the point – any tenant who has struggled to find a decent property at a decent rent will question the ethics of the new middlemen. The success of rent-to-rent appears to depend on cramming the most people you can into a property and charging them the maximum possible.
In other reported cases, rent-to-rent is being done illegally without any knowledge on the part of the landlord. The middleman apparently poses as a normal tenant, never moves in, and lets out all the rooms, taking the rent, a practice that the law states is illegal.
The newspapers claim that Rent-To-Rent is dodgy, partly because it risks over-crowding tenants in unlicensed HMOs, and partly because the landlord risks being in breach of their mortgage and insurance terms.
Are you an investor who utilises the Rent-To-Rent strategy?
Tell us what you think of these claims in the press, please leave a comment below
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