In this article we take a detailed look at the things to look out for when considering a rent to rent. Some of the outline topics covered included:
- what is rent to rent?
- conflict of interest of agents and their fiduciary duty to landlord clients
- permissions required
- the types of tenancy to be used – between owner and renter and between renter and occupiers – including length of terms
- repairing obligations
- licensing (both Housing Act 2004 and Rent Smart Wales)
- right to rent considerations
- deposit protection
- council tax considerations
- gas and electrical safety
- water notification
What is Rent to Rent?
Rent to rent is a different method of operating rented property to the normal agency arrangement where a commission will be taken based on rent collected. With rent to rent, the property would be rented from the owner and then sub-let to tenants by the renter. Where an agent is operating in this way, the agent is no longer an agent but is in fact both a landlord and a tenant.
It gets complicated because there are effectively two (or more) landlords – the owner and then the person renting the property.
Although each party will be a landlord or tenant (or both at the same time), the following terms will be used throughout this article to make it easier to follow which person is being discussed at the time:
- owner – this will technically be the superior landlord (sometimes called the head landlord) and doesn’t necessarily have to be an owner but in most cases will be. For example, where there is a flat in a block, the owner would actually be a leaseholder.
- renter – this will be the person or company who rents the property from the owner with the intention of further letting the property to occupiers normally on an assured shorthold tenancy. The renter will be the tenant of the owner.
- occupier – this will be used to define the persons in actual occupation. Normally these will be regular assured shorthold tenants. Their landlord will be the renter.
An agent might be approached by a property owner wishing to rent their property. The agent may decide to become the tenant of the owner and rent the property from the owner and guarantee the rent. The rent offered would normally be below market rent. The agent (now the renter) would then let the property to some tenant or tenants totalling a higher rent than what the renter is paying to the owner. In theory, when the property is fully let, the renter should be receiving more rent than what s/he is paying to the owner.
Conflict of interest
When the owner of a property approaches an agent, the agent is under the highest duty of care to the owner. This is known as the fiduciary duty and has been defined as:
… one party in a position of vulnerability
[the landlord], places their trust in another party. It is the very highest form of care in equity or in law and requires the agent to act in the sole benefit and interest of the landlord in every single decision …
When an owner approaches an agent, the agent must act in the sole interests of the owner client. This would include (amongst other things) the requirement to accurately value the rental property at the best possible rent for the owner and not value the rent at what is best for the agent.
Immediately an agent discusses with an owner the possibility of renting the property from them at a lower than market value rent, the agent may be in breach of the fiduciary duty.
To comply, the agent must be absolutely express about the rental valuation and ensure two valuations are provided: one for the market value if the agent were taking a commission in the normal way and one valuation that the agent would be willing to pay on a rent to rent scheme. As long as these two valuations are expressly stipulated to the owner and agreed in writing, there is nothing wrong in principle with the agent renting the property from owner. After all, the advantage of the lower rent to the owner is that the rent is guaranteed by the agent and may also include certain repairs or maintenance (for which see later).