Landlords warned of 'rental guarantee' pitfalls
Things can go wrong in "guaranteed rent" schemes if the middleman doesn't have the financial resources, or inclination, to back up the guarantee
Student property letting
It sounds the perfect solution for landlords who don't want the hassle of finding or managing tenants - but "guaranteed rent" schemes can turn into a nightmare if it all goes wrong Photo: Alamy
By Emma Lunn
The eye-catching adverts are certainly compelling: "Attention landlords: Guaranteed rent for five to 10 years. No voids or maintenance costs."
It sounds the perfect solution for landlords who don't want the hassle of finding or managing tenants - but "guaranteed rent" schemes can turn into a nightmare if it all goes wrong.
Under a guaranteed rent arrangement, the landlord signs over the property to a company or letting agent for a specified period of time in return for a guaranteed monthly income.
The agent then sublets the property and manages the tenancy. They make their money on the difference between the rent they pay the landlord and the rent they receive from the subtenant. Most schemes promise to cover any void periods and maintenance costs.
Traditionally, guaranteed rent schemes were offered by local authorities, but an increasing number of letting agents and property investors are becoming involved. Socalled "rent-to-rent" schemes work in a similar way but usually with the middleman letting out properties on a per-room basis.
Things can go wrong in these set-ups if the middleman doesn't have the financial resources, or inclination, to back up the guarantee. In the worst case scenario landlords can be stuck with tenants in their property but no rent.
Paul Shamplina of eviction specialists Landlord Action said if a guaranteed rent arrangement goes wrong, or the company offering the guarantee goes bust, it can be very difficult for landlords to get their property back.
"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," he said. "If the company goes into administration like London Housing Solutions (below) 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."
If a situation occurs where the guaranteed rent company receives rent from tenants but doesn't pass it on to the landlord, the landlord will need to take legal action against the company.
Giles Peaker, housing solicitor at Anthony Gold Solicitors, said guaranteed rent and rent-to-rent schemes can be "messy" and it's important any landlord considering it reads the contract carefully.
"The only proper way of doing it is a commercial lease between the landlord and the company, and an assured short-hold tenancy agreement (AST) for tenants. But some companies get landlords to sign ASTs and then issue licences to tenants - this is wrong," he said.
Mr Peaker also pointed out that landlords can't escape their responsibilities by handing over their property to a guaranteed rent firm. If the property is overcrowded, not fire safe, or becomes an unlicensed HMO (house in multiple occupation), the landlord could be fined up to £20,000 by the council.
Vanessa Warwick, cofounder of Property Tribes, said that guaranteed rent schemes can work if operated by a company with robust financial health and with the correct systems in place.
"The problem is that companies have limited liability, and many of the operators are one-manbands with little financial back up," she said. "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."
It's also wise to find out in advance the kind of tenants the provider is planning to place in your property. Some agencies specialise in benefits tenants, emergency housing, professional sharers - or students (pictured).
One company Ms Warwick recommended is Northwood, which has been offering guaranteed rent schemes since 1995. It has 85 franchises around the UK.
Managing director Eric Walker said some guaranteed rent companies take on too much risk and don't have the resources to back up their guarantee.
"People think offering guaranteed rent is easy but it's actually not," he said. "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."
Mr Walker pointed out that a lot of companies offering "guaranteed rent" are actually selling rent guarantee insurance policies - something completely different.
"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," he said.
£400,000 MISSING - AND NO RENT FOR LANDLORDS
Mystery surrounds a "missing £400,000" paid to London Housing Solutions based in Catford, south east London.
London Housing Solutions offered a guaranteed rent scheme to landlords and then let properties to tenants on benefits. Tenants' housing benefit was paid direct to the company.
But Channel 4 News reported last week that £400,000 in housing benefit paid to the company by various local authorities, including Bexley council, had gone "missing" and landlords have gone unpaid.
It's a complicated tale to unravel but a row between directors of the firm and those of a related firm, Local Housing Solutions, seems to be the key.
Until March 2013 the two companies shared offices and staff and worked "in partnership" but with separate bank accounts.
Back then Kirsty Sullivan was a director of London Housing Solutions, alongside Andrew Jeffrey. Keith MacGregor was Jeffrey's "business partner". MacGregor's son James owns Local Housing Solutions.
A disagreement led to Sullivan resigning as director of London Housing Solutions in April 2013 and she now works for Local Housing Solutions.
London Housing Solutions was sold to Darren Saunders in November 2013 who put it into administration. As it's a limited company it's legally possible for the directors to walk away with no liability for the company's debts. The parties offer conflicting accounts of where the missing £400,000 is.
But one thing's for sure - the landlords have not received their "guaranteed rent".