Using A Guaranteed Rent Company Could Leave Medway’s Landlords With Significant Compliance Risk

Hello readers,

It’s been a busy couple of weeks, and I’m delighted to announce that I have recently passed my final ARLA Level 3 Qualification Award in Residential Letting & Property Management and will soon be starting the level four qualification for company directors.

This is a great achievement and something I’m immensely proud of as I continue to drive forward the quality of service Home Share Lettings provides!

If you are a regular reader of my blogs, you will be more than aware of how I strongly advise against using a guaranteed rent scheme either to let your property via, or as a strategy in and of itself.

Not only does it leave landlords at risk of losing control of their property with potentially no rent coming in (should the rent-to-rent operator not source a tenant), but for the operator itself, there is no capital appreciation and squeezed profit margins. Often billed as a no money down scheme, it’s just not sustainable in the long term!

There has, however, been an interesting development where landlords could now find themselves liable for rent repayment orders in the event that the rent-to-rent operator fails to meet their obligations. This will undoubtedly send shivers down the spine of any property owner who uses one of these schemes. Let’s look at the details.

Rakusen v Jepsen Test Case

Back in May 2016, Martin Rakusen granted a tenancy of his flat within Mandeville Mansion on Finchley Road in London to Kensington Property Investment Group (KPIG) under a guaranteed rent arrangement and KPIG then proceeded to enter into separate written agreements with four tenants (Rakusen was introduced to KPIG by agents Hamptons).

Initially, KPIG let the property to three tenants who occupied individual rooms, but this then increased to four tenants which meant that the property became an HMO and required a license to operate. This property required additional licensing and this is an area for HMO investors to be very much aware of!

In November 2018 Hamptons informed Rakusen that KPIG wanted to apply for an HMO license, however there was no evidence that an application was made and six months later, in May 2019, Rakusen did not renew KPIG’s tenancy.

Following this, when KPIG’s tenancy came to an end and they realised that the property was in breach of regulations, the tenants applied for a rent repayment order against Rakusen who had taken back management of the property. This totalled a not insignificant sum of £26,140 and the court initially upheld this order.

As the breach was made under KPIG’s tenancy (and presumably being dealt with following the termination), Rakusen went to the Court of Appeal where the claim was struck off on the basis that the correct interpretation of the law should only relate to the immediate landlord (KPIG).

The supreme court has now granted an appeal for this to proceed to a test case in order to gain clarity as to what the correct interpretation should be (ie: whether the immediate or superior landlord). A date for this appeal is not yet set but will be in late 2022 or early 2023.

This is an interesting case, and you can read the full July 2021 Court of Appeal Judgement here.

What Will This Mean For Landlords?

We will certainly have to see what the outcome will be, but for landlords using a guaranteed rent scheme, there will be a significant increase in risk. Not only will it make these kinds of schemes increasingly unattractive, but I also don’t doubt that landlords will take an enhanced interest in their property, particularly in relation to compliance and management.

If the appeal is upheld and the correct interpretation ends up being confirmed to be that responsibility is the immediate landlord, it will certainly be another point to highlight the importance of compliance (and costs that come with that).

If the appeal is overturned and it’s decided that the superior landlord should be responsible, that will definitely be headline news – particularly given that letting a property to your local council is also a rent-to-rent arrangement where you are the superior landlord!

I’d be interested to hear your experience when it comes to guaranteed rent and whether you have any options on this landmark case. As usual, do contact me via LinkedIn with your comments!

Hasan

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