R2R challenges?

Hi Richard,

Point 3. I don't think there is any such thing as a 'solid' R2R agreement, but we have got as close as we can.

Please see >> https://www.property118.com/guaranteed-rent-to-rent-lease-contract-template-download/

If you do decide to download this and feel it is not suitable for you I will always refund the cost.

Hi Richard
In my opinion:
1. The owner landlord should own the property mortgage free, or have obtained the appropriate consent from the lender.
2. The owner landlord should have obtained the correct insurance for the type of lease arrangement they are entering into. This is likely to cost more than a conventional BTL insurance policy.
3. I think that the "R2R agreement" would normally? be a lease, whereby the R2R company becomes the leaseholder tenant of the freehold owner landlord. This is what I use for my R2R lease agreements, and within that the owner landlord has to sign to confirm that he has obtained all necessary legal consents, and has appropriate comprehensive insurance. - I am aware that some R2R operators claim to have a type of management arrangement with the owner, rather than a lease, but as this is not what I do, I cannot comment on the legality or status of such arrangements.
4. I believe that the "owner" is the property owner (head landlord), however, the R2R company could be the legal entity that receives the rent so could be held responsible for some aspects (as could the directors of the R2R company), BUT the property owner could also be held responsible for some actions or aspects of the tenancy and sub-tenancies.
As to whether the R2R company is an agent or a tenant, this may perhaps depend on the specific agreements in place (as per the answer to Q.3.)
There are lots of variables within the R2R sector, so my comments are perhaps not much use to you, but they hopefully give you an indication of some of the possible issues that could arise.

Yes, there are some work arounds as has explained in some of the comments above here to deal with the insurance issue and the mortgage lender.

But what really worries me more is the risk that the company doing the rent to rent and guaranteeing the income goes bust.

Yep, occasionally companies go bust! even big, supposedly secure banks on Wall Street have been known to go bust too (Lehmnan), so it often amazes me that owners will enter into a Rent to Rent deal with supposedly "guaranteed" rent without thinking of the consequences should the company guaranteeing the rent go bust.

I wrote about this blog post back in 2014, just after a C4 programme was aired featuring people who has found out the risks the hard way.
https://www.lettingfocus.com/blogs/2014/03/rent-to-rent-guaranteed-rent-and-housing-benefit/

Tread very carefully.
BTW I'm still highly sceptical there can be much money in this for the operator, but folks do tell me it can work in some areas.

David Lawrenson
http://www.LettingFocus.com
Consulting Advice in the Private Rented Sector

R2R has many pitfalls, as mentioned by Neil and Robert. The R2R company will want to know that the landlord has no mortgage or that the mortgagee has consented to the lease. You have rightly identified numerous issues such as insurance and who is to be the licensed person of the HMO.
Like you, I get letters every week telling me how much of a problem my HMOs are and offering to "guarantee" me a stress-free life by handing over management to them. A few minutes checking at Companies House usually discloses that the person I will be contracting with is a shell company with no assets and no trading history. I would not touch such a company with a bargepole. You want to see (a) that the individual(s) you are dealing with have several years' experience, are licensed property managers (ideally in your area) already and that they personally are on the lease or guarantee the tenant's obligations fully. You need indemnities in case they screw up and the Council come after you.
Watch out also for hidden costs. The R2Rers will not want to spend too much of their own money on repairs and maintenance. You don't want to allow them to just pay for stuff (e.g. a new washing machine) and deduct the cost from the rent they pass on to you. Even if you can control that aspect you may find that, especially towards the end of the initial period, repair and maintenance is not done thoroughly because unless you renew the tenancy it is just dead money for them.
There are other issues to consider such as ensuring that the R2Rer has protected deposits properly and served Prescribed Information forms correctly, that the tenants have been given copies of the How to Rent booklet, that gas safety certificates were obtained and served on tenants before they took occupation, etc., etc. Do you trust a shell company with no assets to perform and what redress will you have if they don't?

I have just seen David's post and endorse what he says with one qualification. R2R can be very profitable for the R2Rer if they know what they are doing. I know people who do so successfully but they have many years' experience and have their own HMOs as well.

For the R2R insurance solution we recommend please see https://www.property118.com/rent-to-rent-insurance/

Thanks all for your comments and advice! If I might try to summarise and comment:

Neil:
I have purchased that comprehensive agreement and it seems to cover all bases, except perhaps R2R of an HMO, which is the model I am most interested in. The "underlease" and the "undertenant" seem to be for single under-lets only. Have I missed something?

The agreement also assumes that the owner is a individual (ours are all in the beneficial ownership of a Ltd Co), and on freehold (we have one HMO on Leasehold, another in coming months), so it would be good to know how those circumstances could change the agreement.

I didn’t see it mention anywhere if the property is returned with vacant possession or continuing occupants or a mix (this has been raised today in another thread today).

Calling it a Commercial Lease might also trigger sneezing if not severe allergic reactions with lenders. Does anyone reading this have good experiences with “normal” BTL lenders accepting Commercial Leases?

Robert:
It would be nice to be mortgage-free, but that’s not our circumstance. I accept and agree with all your other cautions.

Mark:
Thanks, that insurance supplier could satisfy the lender, if they cover HMOs (I have started an enquiry for this).

David:
I agree with this caution too and my way to manage it would be to have only few properties with any one R2Rer, maybe just two each.

Ian:
Yes, the (lack of) maintenance (among other issues) also applies to commercial leases for offices etc. and could be a headache at the end of the term. I would try to manage this by having my own periodic inspections, ether personally or by a trusted third party, although I realise that could detract from the hands-off benefits of R2R.

Summary:
The key barriers for my R2RHMO scenario could be the mortgage lenders allowing it, having an insurer who allows that too, then managing risks.

A quick Update: somehow when I placed the order for the agreement, a doc file opened which I thought was the current R2R agreement, but later I was taken to another page with links to two different R2R docs (one for the Owner to take on most of the maintenance, the other for the R2Rer to do that). I will go through these and see if I need to add to, or amend, any of my earlier comments. 🙂

Spoiler alert: as it stated, the only difference between those two is that one has the Owner doing maintenance. The first one that I had was identical to the other one.
It would be helpful to have a HMO version, also to allow for ownership by Ltd-Cos, and to allow for leasehold.

Reply to the comment left by Richard Peeters at 09/01/2020 - 16:36
My understanding is that both versions are applicable for HMO's and include conditions in regards to maximum occupancy.

I think you have already identified the biggest problem though, which is that you would be in breach of your mortgage lenders T&C's if you were to agree for your properties to be sublet.

Reply to the comment left by Richard Peeters at 09/01/2020 - 16:36
Hi Richard

Are you the property owner wanting to lease to a R2R company? or
Are you a R2R company wanting to lease from a landlord?

If you are the property owner, then the R2R company would usually offer to lease from you and would provide the R2R agreement, which you then get checked by your solicitor and make sure you are happy with it.