What is the right contract for rent to rent?
Today we’re talking contracts.
In this podcast, we step you through everything you need to know about rent to rent contracts.
This episode is a response to questions asked in our Rent 2 Rent Success Facebook group
Quinton asked…
“Which contract do you use in R2R HMO? Is it a company let? What is the difference with other type of contracts?”
Prity asked…
“Do you always use a solicitor to draw up your management agreements?”
And I’m going to cover all that and more in this episode.
Important Note
I am not a solicitor, this is not legal advice, I am simply talking here from my own experience.
The business of contracts gets people so het up
Rent to Rent is a great strategy and it can really transform your life and help you create consistent cashflow that’s lifechanging.
There are some important things to know though.
Things that could trip you up.
Let’s turn to Quinton’s questions first.
Which contract do you use in R2R HMO?
Is it a company let? What is the difference with other type of contracts?
There are two types of rent to rent contracts which should be used between you as the rent to renter and a landlord or letting agent.
Lease agreement
Management agreement
Rent to Rent Lease Agreement
This agreement is a commercial lease and gives you the right to rent the property and rent it out to your own tenants or guests for a specified period of time.
You would use a rent to rent lease agreement when:
Your agreement is direct with the owner, and
The property is an existing HMO or commercial property or the property is unencumbered (has no mortgage)
Rent to Rent Management Agreement
This agreement gives you the right to manage the property on a specified basis (e.g HMO or serviced apartment)
You would use a rent to rent management agreement when
Your agreement is with the letting agent or the owner and the property is not an existing HMO or commercial property
It’s not a company let agreement
A company let agreement gives you the right to manage the property if you operate as a limited company or a limited liability partnership.
It would stipulate that your tenants are members of your company, whether directors, employees or guests.
Only people directly connected to your company are able to use the property.
Ensure You Do This!
With either agreement it is important to ensure that you explain to the property owner that they must ensure that:
Their mortgage lending (if there is a mortgage) allows use of the property as a house share (HMO) for the tenant type you want or permits serviced accommodation
Their insurance allows use of the property as a house share (HMO) for the tenant type you want or permits serviced accommodation
So many people who would be able to set up great businesses don’t go ahead because of concerns about mortgages or insurance.
The simple solution to this, if you’re doing HMO’s is…
Work with properties which are already HMO’s!
The owners already have the right lending and insurance in place.
Do I Need a Solicitor?
Prity asked…
Do you always use a solicitor to draw up your management agreements?
You can go to a solicitor and have your contract drawn up.
Using a solicitor is expensive and time consuming,
And you might think that you’ll get a better result and you’ll be more protected if anything goes wrong.
We thought that too…
We were surprised to find that many solicitors do not understand the business model of rent to rent, even though they say they do!
And if you have any issues and go back to the solicitor, you will find that in the contract you signed with them, you’ve agreed that with extremely few exceptions they are not liable if anything goes wrong.
It makes sense that a solicitor would write a contract that means it’s difficult for you to sue them.
To protect yourself as much as possible it’s important to use the right contract and include the right clauses.
Many people don’t realise that solicitors start with a template for each contract type,
And then rely on YOU to advise all the clauses you would like to see in the contract.
When you’re starting out you won’t know all the clauses you need.
And if they are unfamiliar with rent to rent,
which most solicitors are, your solicitor won’t know which specific clauses you need.
Over the years, we’ve had our contract revised to add new clauses.
For example, we’ve had a coronavirus clause added, so that if anything like corona happens again we now have a provision in the contract to enable us to renegotiate the guaranteed rent.
Another example, one of the things I see quite a bit is people struggling because a landlord won’t make essential repairs such as fixing a broken boiler in Winter.
Our contract states that owners must respond to emergency repairs in a specified period and agree works to be carried out.
If this doesn’t happen, we are able to carry out the works and recover the funds from rent.
We’ve never had to do this because we have great relationships with all of our landlords but the clause is there for exceptional cases to protect our tenants.
We also include a clause which states that if the law or statutory regulations change which change Council Tax or our ability to multi-let the property, we can renegotiate and/or exit the agreement.
These are just three of many important examples I could give you about clauses to be included in a rent to rent contract.
But would your solicitor know about these?
Make sure you work with someone who understands Rent to Rent and test for it, even if they say they do!
Do I Need to Go to a Solicitor for a New Property for Every Rent 2 Rent Property I Take On?
Now this might be controversial but my answer is
NO YOU DON’T!
You know who will tell you that you do?
That’s right, yes.
Solicitors!
Solicitors will say you need a new contract with them each time.
Let me ask you a question though, do letting agents go to a solicitor for a new contract each time they take on management of a new property?
Of course not!
They edit the existing management contract with the details for the specific owner, property and agreement.
Exception
The only exception to this is where you are taking a property on rent to rent with an option to buy.
Where you are contracting with a property owner to rent and then buy their property using either a lease option or an exchange with delayed completion, it is wise to have a bespoke agreement drawn up by a solicitor for each property.
Contracts are the back drop, Relationships are centre stage
For us, rent to rent, property, business and life in general is all about the win-win.
It’s good for you and it’s good for us.
It’s good for our landlords and it’s good for us.
It’s good for our tenants and it’s good for us.
Our goal is to deliver exceptional value and use our experience to help others to achieve success quicker.
We’ve made our rent to rent contracts available to buy as we saw so many people using expensive solicitors who didn’t have the expertise to deliver what is needed for a rent to rent business.
And we haven’t just included the contracts.
We’ve also included:
Both commercial lease and management agreements
GUIDE - A guide as to when to use each type of contract
UNDERSTANDING - A document explaining each clause and translating from Legalese to English!
SAMPLE - Sample completed contracts showing how to complete the contracts
TEMPLATE - A template word document for you to add your branding and details and start using
We’ve included everything you need to be successful and more!
Summary
We answered Quinton’s question,
Which contract do you use in R2R HMO?
We talked about the 2 types of agreements – lease agreements and management agreements.
Lease agreement
This agreement is a commercial lease and gives you the right to rent the property and rent it out to your own tenants or guests for a specified period of time.
Management agreement
This agreement gives you the right to manage the property on a specified basis (e.g HMO or serviced apartment).
It’s important that the owner checks with their lender (if they have one) and their insurer that they approve the type of letting and type of contract
We answered Prity’s question,
Do you always use a solicitor to draw up your management agreements?
You don’t need to go to a solicitor each property for your management or lease agreement.
The only exception is if you are buying the property too for example a lease option or exchange with delayed completion.
If you do go to a solicitor make sure you know all the clauses you might need. Solicitors start with a boiler plate template and often rely on you to know what clauses you’ll need!
Many solicitors say the understand rent to rent but they often don’t understand it well enough to advise you on the clauses.
And all of those reasons caused us to start making our solicitor drafted contracts available to you.
CLICK HERE to see the Contracts
Have you found this useful?
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And remember,
Believe Bigger, Be Bolder and Be a Gamechanger!
See you next week.
Stephanie & Nicky
xx
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