Rent Repayment Orders and Superior Landlords

30th July 2021 Commercial Litigation

There has been a concern ongoing for some time within rent to rent circles about what should happen if the intermediate landlord does not have proper licences. Rent to Rent (R2R for short) is a system whereby a landlord will rent their property to an intermediate who will then sub-let the property. The landlord will get the benefit of a relatively secure rent over the long term and will usually not have to pay agency fees. The intermediate will usually rent the property out on a room by room basis either as an HMO or on the short let market and will make a profit on the difference between the money earned by room lets and the rate paid to the ultimate owner. This has been popularised as a strategy by various “gurus” as a means of earning money without the need for capital to buy a property. During Covid many of the practitioners of this have found themselves in some difficulty as they have been unable to rent rooms or their tenants have failed to pay rent.

However, one of the interesting questions has been what will happen if the intermediary fails to get an HMO licence. Many of them are largely ignorant of the law or consider it an unjustifiable expense and obstacle to their plans and so do not bother seeking HMO licences. Tenants in England (but not Wales) can of course seek direct Rent Repayment Orders (RROs) against landlords who do not have HMO licences even if the local authority does not prosecute the landlord themselves. This is usually pretty pointless as a tactic against an intermediary. They tend to disappear or have no actual assets with which they can pay the sum awarded on the RRO.

As a solution to this tenants of R2R properties have tried seeking RROs, not against the intermediary, but against the superior landlord, the actual owner of the property. This was on the basis that the RRO wording was changed in England by the Housing and Planning Act 2016 to say that a claim could be made against any landlord who owned the property not just against the individual tenants own immediate landlord. This was being argued because the wording used in the 2016 Act had been changed from the original 2004 Act to talk about “a landlord” and not “the landlord”. Ultimately both the First Tier Tribunal and the Upper Tribunal had agreed that this allowed claims against any landlord up the chain and not just against the tenant’s immediate landlord. This had placed landlords who were letting to intermediaries in a difficult position with them need to police their intermediaries licensing status. Interestingly, nobody had yet pursued the logical consequence of this position by seeking a RRO against the freehold owner of a block of flats on the basis that a flat leaseholder was not licensed.

However, none of this is now relevant. In a unanimous decision which was turned around in just seven days (perhaps reflecting how simple the Court of Appeal found this issue) the Court of Appeal has overturned the ruling in both the First Tier and Upper Tribunals and held that superior landlords are not liable in rent repayment orders for the failures of landlords below them in the chain. In other words, if a R2R intermediary is not properly licensed that is not the fault of the landlord who let to them in the first place. The Court of Appeal was not persuaded that a change of wording from “the landlord” to “a landlord” was intended to represent a change in thinking and found that the more natural reading was that tenants could only seek RROs against their immediate landlords. They did not feel the need to say that imposing such a penalty on landlords would require rather more clear language on the part of Parliament although they did allude to it.

This has immediate consequences. There will be RRO claims that will now immediately collapse as they have been taken against the superior landlord who is now the wrong party. Safer Renting had intervened in this case in support of RROs being made against superior landlords, motivated partly by a desire to stamp out what they saw as the scourge of R2R. That campaign has failed and, as the Court of Appeal made clear, if that is what they desire they will need to ask Parliament to change the law. As an aside though, landlords who wish to insulate themselves from the risk of RROs now have a mechanism to do so. If they rent to a company with no assets and then sub-let from there then an RRO can only be sought against that company which will have no assets to pay it. There may be tax benefits to such an arrangement as well but anyone considering this should seek the advice of a tax specialist.

R2R does need controlling as the behaviour of some operators in this space is out of hand. There are plenty of good R2R providers but there are a few who are, bluntly, cowboys. Regulation of Property Agents is however likely to be the best mechanism to deal with this as it is intended to cover R2R operators. In the shot term we will need to carry on as we are and local authorities should look to target these operators for prosecution and financial penalties.

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David Smith is a Partner located in Londonin our Commercial Litigation department

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