Guaranteed Rent or Guaranteed Trouble?

“Guaranteed Rent” or “Rent to Rent” agreements are a seemingly attractive offer: all of the money of letting out to tenants, but none of the hassle, risk, or uncertainty.

The way that most of these agreements work, is that a property owner will enter into a contract with a guaranteed rent company to rent a property for 2-3 years and it is then down to the company to find occupiers. The rent is paid to the property owner regardless of whether the property is occupied, and the owner has no direct contractual relationship with the occupiers. The company makes its profit from the difference between the rent it pays to the property owner and the rent it can charge occupiers.

This type of agreement guarantees to the property owner a steady flow of income, with minimal time investment. However, when things go wrong, they can go wrong spectacularly.

Pitfalls of Guaranteed Rent Agreements

Common pitfalls involve: not investigating the track record of the company, not understanding that both the property owner and company can be prosecuted for not having an HMO Licence, not checking the guaranteed rent agreement complies with the property owner’s mortgage conditions, not checking the guaranteed rent agreement complies with the property owner’s home insurance, and not being clear who is responsible for landlord obligations (e.g. gas safety checks, smoke alarms, electrical wiring etc).

However, the main issue is what happens if you want to get your property back. Often you will have no idea who is physically occupying the property or on what basis. We frequently see that guaranteed rent companies will enter into a separate agreement with a local authority to house vulnerable people. This creates two further levels of property rights which you do not have any idea about and results in occupiers who the local authority are reluctant to re-house.

With a traditional Assured Shorthold Tenancy agreement, the notice period and process to obtain vacant possession is clear. Give the tenants two months’ notice with a section 21 notice, or two weeks’ notice with a section 8 notice, potentially followed by court proceedings. However, with a guaranteed rent agreement, you will need to comply with the notice period in the agreement, followed by identifying and serving sequential notices on all the other parties the company has contracted with, potentially followed by court proceedings.

Therefore, the property owner may be left in a situation where:

• the property is occupied with many unknown people (especially if the property is used as an HMO).
• it will likely take more time to obtain vacant possession, as before issuing possession proceedings, notices seeking possession will need to be served sequentially on the company, the local authority, and then the occupiers.
• there will be difficulty in recovering any rent arrears as the person paying rent will not be the same as the people in occupation. A separate money claim will need to be brought against the company or local authority. This will incur further legal costs and involves the property owner in two sets of legal proceedings.
• any rent recovered may be different to the amount under the contract. Local Authorities tend to pay rent at below the open market value. There may also be a difference in the amount of rent being paid by different London Local Authorities (even for the same housing stock).
• until vacant possession has been achieved, the property owner cannot let the property to other tenants and so may suffer a rental void.

For more information

Lisa Eastwood and Oliver-James Topping have recently been instructed in guaranteed rent disputes involving the London Boroughs of Newham and Barking & Dagenham. In these instructions, identifying the framework at the outset and pursuing the matter logically was key to their successful resolution.