Keystone Asset Management Ltd – Voluntary Administration

Mark.

That's how almost all commercial investment properties are insured and my understanding is these R2R agreements are basically commercial leases.

Reply to the comment left by "Mark Alexander" at "26/01/2015 - 22:21":

The owner should declare the nature of the letting to their insurer, otherwise they may not be covered. This is a bit like insuring a car, i.e. if it is for your 17 year old son to drive all the time then this should be declared, otherwise the insurance may be void, yes it will cost more than if you said it was for yourself to drive, but it is better to declare the situation correctly so that you are covered by the insurance policy. The same principle applies to buildings insurance (or even boiler insurance), if you are a landlord then you need a landlord policy (not a homeowner policy), and you must provide truthful replies to the insurance questions.

Reply to the comment left by "Neal Craven" at "26/01/2015 - 22:35":

Yes, I agree with you Neal, these leases are commercial agreements between businesses,and should be insured as such.

I guess pub landlords who lease from the pub chain are in a similar situation, but if a pub customer drops a cigarette and the pub catches fire, it would still be covered by the insurance policy.

Reply to the comment left by "Robert Mellors" at "26/01/2015 - 22:53":

Hi Robert

The reason I ask the question is that I know a lot of people fall foul of this particular issue. However, I agree that it is not insurmountable.

As you will be aware, we have a JV with solicitor Justin Selig at The Law Department and we sell his Rent to Rent Commercial Lease Template via this website for £97. It has done rather well and sold several hundred copies. Just before Xmas a user of the template reported that her landlord had run into problems and could not obtain insurance. Justin posted a comment suggesting that she contacted a specialist insurer in Manchester called Reich. The lady in question subsequently posted that she had been able to arrange insure with a 50% loading on the premium.

If there is a cheaper option I would like to be able to refer the purchasers of the R2R Commercial Lease Template to it. I also suspect that landlords renting their properties to Housing Association also run into the same issues.

The only other problem I've come across is that letting on an R2R basis is considered a breach of T&C's. I conclude from that that properties rented in this way are either free of mortgage or that the owner is 'taking a flyer', either knowingly or in ignorance.

I think there is a need for some regulation in this area whereby R2R operators should be able to prove that they have advised owners of the issues regarding insurance and mortgages before contracts are entered into.

What are your thoughts?
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Reply to the comment left by "Mark Alexander" at "27/01/2015 - 09:21":

Hi Mark

Yes it does seem to be a bit of a grey area. In my opinion, leasing to an organisation (be it a private landlord, private landlord company, or a housing association) is a much safer option for the owner than letting direct to tenants, particularly if the lease ensures that the company puts right any damage done by its tenants (as my leases do). You only have to read some of the horror stories on here to know what damage some tenants do, (or watch the "tenants from hell" TV program, or the "Can't Pay, We'll Take it Away" TV program, or similar), let alone the problems of getting them out, and lost rent, etc. As such, the risks by leasing to a company are massively reduced so the insurance SHOULD be less, but because it is not a standard "run of the mill" arrangement, insurance companies are very wary and (in my view) unfairly load the cost of insuring properties leased in this way.

I have not seen your lease agreements, and while I realise that the legal cost of getting them drawn up needs to be covered, £97 seems a bit steep in order to compare notes, i.e. see how yours compare with mine (or vice versa), and mine have served me well so far. Perhaps I should start marketing my lease agreements for sale? and my licence agreements for HMO residents (now accepted as "licences" (not tenancies) by the court)? - anyone wanting to buy a copy of either (or both)?

I can understand why a mortgage lender may not want someone to lease to a company on a Rent to Rent basis, as it makes it much more difficult for the mortgage lender to gain possession if the owner defaults on the mortgage, BUT, if the arrangement helps to ensure a steady stream of income with reduced risks of costs being incurred by the owner, then that gives the owner more money with which to pay the mortgage lender and thus avoid defaulting in the first place! There are some serious advantages to the owner, (and thus also the mortgage lenders) but as yet the mortgage lenders don't seem to have recognised this.

I know that some of the properties I lease are free of mortgage, as for others, I advise owners, but then leave it up to them to do the right thing because it is their responsibility and I have no contractual relationship with their mortgage lenders.

As for should there be more regulation in this area, I think there's enough "regulation" already, but what is definitely needed is some clarity as to how the current regulation applies to the R2R situation, AND some open mindedness to this concept by both the insurance companies and the mortgage lenders. At the moment some people are doing R2R covertly, when there should be no need for this, and I think it is these types of operators that bring R2R into disrepute. Let's bring it out into the open and recognise it as a valid business model, and tailor services (insurance, mortgages, etc) for this market.

Mark - We have a commercial broker who deals with a mixed block policy for us, I don’t want to flout any rules but I am happy to put anyone in contact with him.

Robert - I appreciate what you say i.e. “I can understand why a mortgage lender may not want someone to lease to a company on a Rent to Rent basis, as it makes it much more difficult for the mortgage lender to gain possession if the owner defaults on the mortgage” However in the commercial world lenders are looking for secure tenants generally the longer the term the better.

Reply to the comment left by "Robert Mellors" at "27/01/2015 - 10:12":

Hi Robert

Thank you for your long response.

As you have probably gathered I have been using this thread to play devils advocate despite the fact that I have massive respect you you. If you don't mind I will continue to play devils advocate a bit more.

The reasons that I've been given for insurance of R2R properties costing more is that the owner has little if any control or even knowledge of the occupiers. HMO insurance generally costs more simply because more people live in a property and use risk based facilities (e.g. cookers) independently. Similarly, benefits claimants are also considered to be higher risk based on statistics. With R2R the insurer has for factor in that the middleman could let the property to an arsonist who has just come out of prison. Therefore, I can fully appreciate the increased insurance risk. From my lending days it is this additional insurance risk which impacts the lending risk, e.g. property burs down, insurers fail to pay out, borrower defaults, lender takes possession of a burned out wreck. I appreciate this could also be the case if an amateur landlord lets to a cannabis farmer but apparently the insurers underwriter stats see this as a lower risk and I have no basis to argue with that.

It is for the above reasons that so many mortgage lenders (but not all) shy away from lending on HMO's and why all lenders that I know make it a condition of their mortgage offers that the property can only be let directly to tenants by the owner on AST's. Also many lenders state in their T&C's that letting to a person on benefits would be treated as a default (again not all).
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Reply to the comment left by "Robert Mellors" at "27/01/2015 - 10:12":

Hi Robert

There is another issue which I failed to pick up on in my last post.

Where a property owner rents his property to an R2R operator the security of income and any guarantees offered in respect of the preservation of the property are only as good as the R2R operators financial ability to back those promises.

Sadly, there are a LOT of sharks in the business and there numbers are growing de to Wealth Creation guru's teaching wannabes who have no money other than their credit card limits to get into the business. These are the people who fail to mention proper insurance and mortgage conditions to property owners and have earned R2R an awful reputation.

Surely if there was some regulation in place this would benefit the serious operators by closing down the wannabes?
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Mark – Am I right in thinking some insurers have managed to avoid paying out on cannabis farm related claims.

I also note what you say regarding lenders, do you find this primarily a factor with residential providers or have you found the same with commercial facilities.

Mark - Landlords DD