Landlord News

Landlords Cautioned of Rent Guarantee Pitfalls

Em Morley - March 26, 2014

Adverts for guaranteed rent are attracting landlords who suffer void periods and high maintenance costs.

It could also be a solution to landlords who do not want the stress of finding or managing tenants. However guaranteed rent schemes can go wrong and landlords have been cautioned of rent guarantee pitfalls.

Through a guaranteed rent plan, landlords sign over their properties to a company or letting agent for a specific timeframe, in return for an assured monthly income.

The agent will then sublet the home and manage the tenancy. They earn their money on the difference between the rent they receive from the subtenant, and the rent they pay the landlord. Most schemes will also promise to cover any void periods and maintenance costs.

In the past, guaranteed rent schemes were provided by local authorities, however, there is a rising number of letting agents and property investors who are involving themselves in the sector. Rent-to-rent schemes also work in a similar manner, although the middleman rents out a property on a per-room basis.

Nevertheless, things can go wrong with these schemes if the company does not have the financial security, or inclination, to fulfil the guarantee. Landlords could find they have tenants in their property, but no rent.

Landlords Cautioned of Rent Guarantee Pitfalls

Landlords Cautioned of Rent Guarantee Pitfalls

Eviction specialists Landlord Action’s Paul Shamplina explains that if a guaranteed rent scheme goes wrong, or the company providing the arrangement goes bust, it can be tough for landlords to get their property back.1

Shamplina says: “The process varies depending on whether the company has gone into liquidation or administration. In liquidation the tenancy contract becomes void and the landlord can issue eviction proceedings against the subtenants.

“If the company goes into administration like London Housing Solutions, then it is still trading and you might have to go to court to evict the subtenant. In turn, the subtenant might then claim for relief of forfeiture if they want to stay in the property.

“The difficulty landlords have is they have no direct relationship with the subtenant.”1

Other issues can also occur, such as the guaranteed rent company receiving rent from tenants, but not giving it to the landlord. In this case, a landlord will have to take legal action against the company.

Housing solicitor at Anthony Gold Solicitors, Giles Peaker, says that these schemes can be “messy”1 and it is vital for landlord’s to thoroughly read the contract.

He says: “The only proper way of doing it is a commercial lease between the landlord and the company, and an assured shorthold tenancy agreement [AST] for tenants. But some companies get landlords to sign ASTs and then issue licences to tenants; this is wrong.”1

Landlords are also responsible for their properties, despite handing it over to the company. If the property becomes overcrowded, is not fire safe, or becomes an unlicenced House in Multiple Occupation (HMO), then the council could fine the landlord up to £20,000.

Vanessa Warwick is the cofounder of Property Tribes, and says that guaranteed rent schemes could work if a company that has secure finances and the right systems in place offers them.

Warwick says: “The problem is that companies have limited liability, and many of the operators are one-man bands with little financial back up.

“If a landlord wants to opt for a rent-to-rent or guaranteed rent service, they must understand the credentials of the guarantee. Has the company a track record of running this scheme? What is their financial health?

“This can be ascertained free of charge from a site like DueDil.com. They should also look for an agent with an Ombudsman service membership and one that has recognised client money protection in place.”1

Landlords are also advised to discover in advance what type of tenants the company plans to let the property to. Some agencies prefer benefits tenants, emergency housing, professional sharers, or students.

Warwick recommends Northwood, who have been providing guaranteed rent schemes since 1995. They have 85 franchises across the UK.

Northwood’s Managing Director, Eric Walker, says that some companies do not have the resources to back up their guarantee.

He says: “People think offering guaranteed rent is easy but it’s actually not.

“We’re extremely selective about both the properties and tenants we take on, although we do let to some benefit tenants.

“We have the liquidity to both guarantee the rent and pay the legal fees if we need to evict a tenant.”1

He also says that many companies offering the guarantee are actually selling rent guarantee insurance policies, which is something entirely different.

Walker says: “Like any insurance policy, there will be an excess and exclusions. Some policies won’t pay out until a tenant is one month in arrears but that can be enough to create a serious problem for many landlords.”1

1 http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/10718950/Landlords-warned-of-rental-guarantee-pitfalls.html