16:05 PM, 17th March 2016, About 9 years ago 7
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Rising rents and a shortage of affordable housing has led to a buoyant but illegal subletting market which makes victims of both landlords and subtenants. This is what landlords need to know.
There are many different circumstances in which subletting scams occur. But on the whole, they all involve a person(s) abusing a tenancy to profit from it by unlawfully subletting to someone else.
Most commonly, a person takes out a tenancy with a landlord or letting agent in the normal fashion, but never actually moves in. That person then re-lets the property to another subtenant (for more money) or even multiple occupants, without the landlord’s permission, in order to make a profit.
Subletting scams and unauthorised sublets are rife in the UK’s private rented sector (PRS). Direct Line for Business research estimated 3.3 million people live as unofficial tenants in 2014 – that is as many as 1 in every 10 rental homes.
Often, subletting scammers appear to the real landlord or agent as respectable tenants who intend to live in the property for years. They may even be able to pass all the necessary checks to an untrained eye by using false references.
Once a tenancy agreement is in place, they either move in to the property themselves for a short time to avoid arousing any suspicion, or don’t move, in but wait a month or so before subletting.
The tenant will then typically draw up tenancy agreements for individual rooms and let them out separately – as if they were the real landlord. In other cases, tenants have let rooms on a nightly/weekend basis using holiday/room let websites.
One of the most notorious cases Landlord Action was ever instructed to work on was that of Rose Chimuka, the serial illegal subletting scammer. Ms Chimuka took leases on family homes across south London. Once in the property, she would change the locks and then divide the properties into bedsits and sublet them to dozens of desperate tenants. She would collect the rent but never pass it over to the landlords.
Ms Chimuka used fake identification to convince unsuspecting landlords she was a suitable tenant. Each time she was found out, she would disappear and start again elsewhere.
The most common signs to identify subletting scams are:
– If a single person is looking to rent a property much larger than they need based on who is on the tenancy agreement, alarm bells should ring straight away
– If a tenant is insistent on offering six months’ rent upfront
– If a landlord or agent receives a complaint from a neighbour, the council or the freeholder of the building with regards to the number of people coming and going from the property or excessive noise
– Tenants making excuses as to why a landlord can’t visit the property and making it difficult for them to do so
– Tenants will be hiding evidence of extra subtenants. During routine property inspections landlords should look for additional clothing and shoes, excessive rubbish for the number of registered tenants; additional bedding like sleeping bags and pillows; and suitcases, rucksacks and extra toothbrushes.
In some circumstances it’s acceptable to sublet a property, but tenants need their landlord’s permission. Landlords can take legal action against tenants if they sublet their property unlawfully. Unlawful subletting includes if a tenant:
In these circumstances, a tenant will most likely have broken a term in their tenancy agreement. On that basis, landlords can take action to evict the tenant.
Certain social housing tenants may also commit a criminal offence if they unlawfully sublet their home and could be prosecuted under criminal law.
Subletting a property could also be a breach of the terms and conditions of a landlord’s mortgage and insurance conditions. It may also turn the property into a licensable HMO (House in Multiple Occupation).
An HMO is a property rented out by at least three people who are not from one ‘household’ (e.g. a family) but share facilities like the bathroom and kitchen. If a property is rented to five or more people, is at least three stories high, and tenants do share such facilities, the landlord must have an HMO license. HMO landlords have additional responsibilities under the fire safety regulations and penalties for renting out an unlicensed HMO are up to £20,000.
“Rent to rent” is a simple concept which emerged only a few years ago. It involves someone renting a property and then subletting the rooms to subtenants to make a profit. Unlike unauthorised subletting, the landlord is part of the scheme.
The idea behind how it works involves a tenant (or “renter”) offering a landlord a guaranteed amount of rent for a set period, say three years. This amount is likely to be less than its actual market value. But the landlord benefits from guaranteed rent with no void periods and no tenant issues for the foreseeable future.
The tenant agrees to look after the property, take care of maintenance issues and in some cases, even carry out a refurbishment on the property. Then, the tenant sub-lets individual rooms to subtenants willing to be part of a house share. The “renter” then makes a profit on the difference between the rent he/she is paying the owner/landlord and the rent coming in from the subtenants due to the multi-let.
This is a mushrooming phenomenon has led to some claiming people can generate tens of thousands of pounds with virtually no out-lay. In my opinion, it all sounds too good to be true, and on the whole, it is.
Currently, demand for rental properties has pushed rental inflation well beyond the levels at which tenants’ wages have risen. As such, there is concern that the “rent to rent” strategy simply encourages over-crowding and unethical practice. Far from creating more affordable housing, in many cases it offers tenants even less at an over-inflated price.
There are reputable ‘rent to rent’ landlords/companies following best practise with solid business models. But there will always be those who cut corners, leaving the landlord at risk of losing control of their property, which is where the problems begin.
Some landlords may willingly enter into rent-to-rent, but the promotion and growth of this strategy could cause a rise in landlords becoming victims of subletting scams; where, far from being aware of what is happening in their property, tenants start to sublet rooms without the landlord’s permission.
A landlord can’t report a tenant for subletting unless he/she is receiving housing benefit, in which case a landlord can report them to the council.
However, if a landlord is the victim of a subletting scam where numerous individuals are living in the property, making it an HMO (house of multiple occupation), it is worth informing the council. This will make them aware of the situation and avoid the landlord receiving a fine for having an unlicensed HMO.
If there is criminal activity at the property, landlords can then report this to the police. Or if the tenant is in breach of ‘Right to Rent’ regulations, landlords must report them to the Home Office.
Landlords who suspect their property has been sublet should first try to contact their original tenant. This may not be easy, particularly if the landlord cannot track them down. In which case, it’s a good idea to speak to the subtenants who may have more current contact information.
Most tenancy agreements have a clause that prevents subletting. If this is the case, landlords should notify their original tenant of his or her breach of their tenancy agreement. This notice should state what the landlord plans to do if the situation is not rectified. It should also provide the tenant a specific period of time, such as 30 days, to fix the problem.
Assuming the tenant is in breach of contract, the landlord can end the tenancy without the major restrictions imposed on ending a statutory Assured Shorthold Tenancy (AST). In this instance, landlords can take immediate court action against their tenant for breach of contract and for eviction of the subtenant, if required.
Landlords must end the tenancy legally before either agreeing a new tenancy with the subtenant, or proceeding to evict them.
This is where thorough tenant referencing is paramount. There are three reasons for referencing a tenant:
Information collected on the tenancy application can be used to trace them, should they abscond, or leave owing money. Plus, should the applicant make false statements, this document provides evidence for eviction.
Thorough tenant referencing will include checks such as:
– Credit check
– Affordability check (based on income)
– Residential check – ensure they live at the address they say they do
– Public Information – look for CCJs or bankruptcy filing
– Previous landlord reference
– Employer reference
Extra precautions, such as asking for three months’ bank statements can help catch out potential fraudulent tenants. Landlords or agents should take time to compare addresses shown on the application with those shown on the ID documents and any utility and or telephone bills supplied.
Landlords should also be prepared to carry out regular property inspections during the tenancy to look out for tell-tale signs of subletting.
Landlords should always consider using a professional tenant referencing service, either through their letting agent, or if self-managing, using an independent tenant referencing service.
Inexperienced landlords may not know what to look out for and using a professional service reduces the risks when letting to a new tenant. A tenant verification service will run all necessary checks provide a background history and credit reports, to help a landlord avoid letting to the wrong person.
Landlords should remember that in many cases, those who fall victim to subletting scams have not failed to carry out thorough referencing checks beforehand.
As well as landlords, subtenants also become the victim of these scams. In many cases, they aren’t aware who the real landlord is, that their deposit has been pocketed by an unauthorised ‘subletter’, or that they could be at risk of being evicted.
Inevitably, illegal subletting leads to issues of overcrowding and often unsanitary conditions where the risk of damage to the property is dramatically accelerated. Landlords should do all they can to protect themselves and their property, and never be tempted to cut corners on thorough tenant referencing.
Specialists in tenant eviction and debt collection. Regulated by The Law Society.
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David Lawrenson
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Sign Up11:28 AM, 18th March 2016, About 9 years ago
I think Rent to Rent is nearly always a bad idea for home owners and landlords
Quite a few of these companies appears to have gone bust taking all the housing benefit rent money that had been paid over by the councils with them. Oh dear!
A good example was featured on the Channel 4 news recently and involved a company called London Housing Solutions.
We used to see many of these companies at property shows extolling what they offered to landlords. The pitch to landlords was usually along the lines of, “We will take away the hassle of finding and managing tenants for you and pay you a guaranteed rent for X number of years, whether the property is occupied or not, and we will even look after all the maintenance bills, so you don’t have to worry about anything”.
Sometimes the idea behind this is called “Rent to Rent” and it has attracted many entrepreneurs attracted to the private rented sector as a good place to make fast profits on the margins from the heady and deadly cocktail of time-stressed landlords and councils whose grasp of how the private rented sector works is weak.
So, how does it work?
Well, this is my view, the LettingFocus.com view
Step One
Well, first you need the kind of landlords who think that these kinds of middlemen companies are really offering a blue chip guarantee. Check!. Yep, there are lots of the gullible and / or time constrained types of landlords out there.
Step Two
Then the middleman company need access to lots of tenants on housing benefit. Check! Yep, there is no shortage of these in London and the councils are more than happy to supply lots of them to any agency or landlord who knocks on their door.
Step Three
The middleman company / agent will sign a contract with the landlord saying it will pay an, ahem, “guaranteed rent”. The landlord will sign a document saying the middleman company is his agent, which then allows the middleman to contact the council and get lots of folk on housing benefit in to the property. In all cases, the people waiting for homes are in “housing need”, and this is crucial because it then allows the council to pay the housing benefit direct to the agent.
Often, but not always, the middleman company will pack in as many people as possible into a property, often on single room rents, to maximise their income. They then profit on the margin between what they get in from the state and what they pay the landlord.
Naturally they will target large houses for this - so if you advertise direct a larger property to let, especially if you use an online letting agent, you are going to be targeted by the Rent to Rent operators.
There is nothing illegal in a landlord doing this, of course. But it’s always a breach of the mortgage lenders terms and conditions to sublet in this way. Plus it will invalidate your insurance too. So, if you have a total loss, (say, if the property burns down), don’t expect your insurance company to pay out. They won’t!)
The council is just happy it has got some more people off their housing waiting list – and frankly often really does not care over much about the quality of the accommodation or even how many people live there, unless a complaint is made. (These days they may be too busy having their attention distracted trying to set up licensing schemes and such other nonsense!)
Of course, that is how it is supposed to work.
How the Model Fails
Where it all comes crashing down is either that the people behind the middlemen companies turn out to be fraudsters and one day skip to Brazil, or, as is more normally the case, the reality dawns on the middlemen “rent to rent” companies that the time and money costs of dealing with folk on housing benefit and Rent to Rent generally means there is actually no margin left in it for them, once they have paid the landlords.
Even with a linked maintenance company willing to do the usual letting agent trick of adding a hefty percentage to any repair bill, the model is still hard to make work. (Experienced folks know that there is a good reason why most landlords, commercial letting agents and some mortgage lenders do not deal with tenants who are on full housing benefit or house sharers / HMOs!).
When it all crashes we end up with landlords who have not been paid the “guaranteed” rent whilst councils say they paid the housing benefit to the middleman agency company in good faith. Cue much finger pointing and calls to legal teams. Meanwhile, the poor tenants face eviction (and they will, once again, end up on the councils housing waiting list).
In one of the most recent examples of this, we know for a fact that many landlords in SE London had flagged up to their local councils their concerns about the middlemen companies, (e.g. they were not being paid) – but the councils are alleged to have continued to pay out the housing benefit to the agents.
To make the whole thing work for the middlemen companies, requires local councils who refuse to hire in real expertise from people who understand the private rented sector. As councils are too often usually a little uncertain about how to connect with private landlords to get them onside to make their properties available via the councils’ own efforts, they are often forced to use the middlemen.
Some local councils have often tried to set up local letting agencies of their own, under their control to avoid the types of problems shown in the Channel 4 news item. Usually, they have failed because they simply will not engage experts who really understand the private rented sector or because they try to do it in-house.
Footnote: 1. Lawyers will be aware that where the middleman companies made representations that they were acting along with the consent or even guarantee of the councils, private landlords might have cause to look to the councils to make a claim for their losses. Cue much legal costs for the landlords though and don’t expect councils to admit responsibility readily.
2. Getting the tenants out will be a real problem, especially if the scam guaranteed rent company has not been yet declared bankrupt. (You will not have a contract with the tenants, so could be stuck with them forever, in the worst case).
You may not agree with my view.
But we think all in all Rent to Rent is not a smart idea for landlords looking to let nor for the operators looking to use it as a way of generating some income.
Paul Franklin
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Sign Up13:55 PM, 18th March 2016, About 9 years ago
"Assuming the tenant is in breach of contract, the landlord can end the tenancy without the major restrictions imposed on ending a statutory Assured Shorthold Tenancy (AST). In this instance, landlords can take immediate court action against their tenant for breach of contract and for eviction of the subtenant, if required."
I'm not sure this is accurate but it's a bit vague so I'm not quite sure what process you're talking about here to end the subletter's tenancy.
My understanding of these situation is that because the subletter tenant is not residing as his sole and principal home it cannot be an AST as per Housing Act 1988 (Section 1 I believe). However, I'm not sure this means a landlord can immediately apply to court for possession, my understanding was that the landlord would first need to serve an old fashioned valid Notice to Quit, giving at least 4 weeks notice and the required prescribed info, before applying to court for a possession order?
Robert M
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Sign Up14:09 PM, 18th March 2016, About 9 years ago
Reply to the comment left by "David Lawrenson" at "18/03/2016 - 11:28":
Hi David
This is a very good analysis of some of the problems with some legitimate Rent to Rent schemes (or people/companies operating such schemes). In particular, the reason why such schemes seem great in theory but why they fail in practice, i.e. dealing with Housing Benefit tenants (particularly in a HMO situation) is often far more costly than the middleman realises. I know this from personal experience as I have been running a Rent to Rent scheme for about 10 years now, but I have been doing this on a "not for profit" basis, (I run an independent housing association), so it can break even but there is certainly no significant "profit" in this business model.
However, where a Rent to Rent scheme does work (either through a "not for profit" organisation, or through companies letting to professionals, not DSS), then it can certainly be beneficial to the property owner as a way of reducing their risks and costs.
ray selley
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Sign Up14:41 PM, 18th March 2016, About 9 years ago
Probably one of the safest Rent to Rent schemes are operated by some Local authorities [private sector leasing ].I have 20 properties leased to my local council with guaranteed rents for 5 year terms.No voids no management fees no tenant hassle although i do have to carry out any repairs .
David Lawrenson
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Sign Up14:48 PM, 18th March 2016, About 9 years ago
Reply to the comment left by "ray selley" at "18/03/2016 - 14:41":
You are right... the government in the shape of local authorities ... and housing associations (all being underwritten by the state taxpayer) do not go bust, unlike limited companies which tend to have nasty habit of doing so!
Gary Dully
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Sign Up7:04 AM, 19th March 2016, About 9 years ago
I have 3 rent to rents and I pay the mortgage, they are correctly insured through a broker and are fully let.
They are sublet through an AST and a separate management agreement.
I also have Power of Attorney, which although flaky, appears to satisfy the letting agents.
I will do more next year, thanks to Clause 24.
Robert M
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Sign Up11:34 AM, 19th March 2016, About 9 years ago
Reply to the comment left by "Gary Dully" at "19/03/2016 - 07:04":
Hi Gary
Do you mean that you own three properties you let to a rent to rent company, or you rent three properties from other landlords which you then sublet? (I'm assuming the latter).
Is it you, or the property owner that has the insurance? Is this buildings insurance, or contents insurance (or something else)?
When you say you have Power of Attorney, what is this for and why do you think you need it?