The Supreme Court Ruling about rent to rent
What does the Rakusen v Jepsen judgement mean for rent to rent in the UK?

The Supreme Court judgement was published on 1 March 2023 and so many people are asking what it means for rent to rent businesses and for property owners letting to rent to rent companies.

So here it is for you in summary version…

Summary

Three former tenants of a property managed by a rent to rent business, brought a claim for a Rent Repayment Order (RRO) of £26k against the property owner on the basis that the property did not have an HMO Licence when it should have.

On 1 March 2023 the Supreme Court ruled on whether the RRO claim could be made against the owner, as the ‘superior landlord’, or whether it could only be brought against the ‘immediate landlord’ the rent to rent business.

Below I summarise the background of the case and the implications for rent to rent businesses and property owners who use them.

Background

The owner of a flat in North London, Mr Martin Rakusen, let it to a rent to rent company, Kensington Property Investment Group Ltd (KPIG), in May 2016 for a period of 3 years at a rent of £2,643 per month.

The flat was rented out by the room as an HMO (house in multiple occupation) so should have had an HMO licence but it was never licenced.

The three tenants who brought the claim for an RRO were paying a total of £2,297 per month. It is thought that the KPIG was not making a loss as there was at least one other person living at the property who was not involved in the claim for a RRO.

In September 2019, the former tenants, Mikkel Jepsen, Ronan Murphy and Stuart McArthur, applied for a Rent Repayment Order of £26,140 against Mr Rakusen on the basis that he had committed the offence of “being a person having control of or managing an HMO which was not licenced as required”.

Under Section 41 of the Housing and Planning Act 2016 tenants can apply for up to one year’s rent repayment where they paid rent to live in a property which is not licenced, when it should be.

Mr Rakusen asked the The First-tier Tribunal to ‘strike out’ the former tenants’ application.

The Tribunal refused, stating that “Mr Rakusen was “a” landlord of the flat, albeit not “the” landlord of the Appellants. The Tribunal refused to strike out the application for an RRO because it was bound by the earlier decision of the Upper Tribunal in Goldsbrough v CA Property Management Ltd [2019] UKUT 311 (LC), [2020] HLR 18 in which Judge Elizabeth Cooke had decided that a RRO could be made against a superior landlord as well as the immediate landlord.

Mr Rakusen appealed to The Upper Tribunal with permission of the tribunal judge on the basis that a Rent Repayment Order can only be made against the immediate landlord of the person making the application.

The Upper Tribunal dismissed Mr Rakusen’s appeal, stating that that a Rent Repayment Order can be made against a superior landlord of an applicant as not to allow this “provides a route for avoidance of RROs”. The Upper Tribunal judge granted permission to appeal to the Court of Appeal.

The Court of Appeal allowed Mr Rakusen’s appeal, holding that a Rent Repayment Order could not be made against a superior landlord. The tenants then appealled to the Supreme Court.

Yesterday the Supreme Court ruled that “An RRO cannot be made against a superior landlord. The appeal is therefore dismissed.”

Translation: Tenants cannot apply for a Rent Repayment Order against a ‘superior landlord’, in this case the property owner. Tenants may only apply for an RRO against the ‘immediate landlord’, in this case the rent to rent company.

The Supreme Court ruling is final and binding.
There is no recourse to further appeal.

What does this mean for rent to rent business owners?

This means that a person or business operating as a landlord could be subject to a Rent Repayment Order.
This is no change from the position before the ruling

As rent to rent business owners, ensuring the right compliance is simply part of operating a legal and ethical business.
It does not require any new course of action for us.

What does this mean for property owners using, or thinking of using, a rent to rent business for property management?

For property owners renting properties to a rent to rent business it means you will not be liable for any Rent Repayment Orders.

When you self-manage or use a commission-based letting agent, you will be liable for Rent Repayment Orders because you will be the ‘immediate landlord’.

Will property owners seek to ‘avoid’ Rent Repayment Orders by using a rent to rent company?

The idea was put forward that property owners may try to avoid RRO liability by using rent to rent companies. It’s important to remember that property owners aka ‘superior landlords’ would still be liable under criminal law and civil law if their property were managed counter to the law.

Thus as the NRLA pointed out in its written submission “It might be thought that [the] prospect of a property owner entering into such an arrangement solely to evade a potential RRO, while simultaneously leaving themselves open to prosecution for criminal offences, is a little far-fetched.”

Why would a landlord choose a rent to rent business rather than a traditional high street letting agent?

Rent to rent is seen as riskier.

When this case has been published online.
Commentators have been talking about how rent to rent should be banned.
When high street letting agents have been involved in court cases, there isn’t the argument made that letting agents should be banned.

The private rental sector is one of the most regulated sectors.
And quite rightly so.

Rent to rent is simply HMO management.
And it can be done very well.

Most high street letting agents are not HMO specialists, they typically manage hundreds of properties and we know that many struggle to provide the type of management required for HMOs.

You only need look in any online HMO landlord community to see that many HMO owners struggle to find high-quality, consistent and long-term HMO management. And often have tried more than one high street letting agent and felt disappointed by the service.

Small, specialist rent to rent businesses can provide the kind of service that owners want. While also offering guaranteed rent, which incentivises better management in a way that commission-based arrangements do not.

While a commission-based letting agent with multiple single-let properties to let at £1200 and some rooms to let at £600 may prioritise the single let properties rather than the rooms. Thus landlords letting via high street letting agents often have higher voids (times when rooms are empty). Also because high street letting agents typically don’t organize things like kitchen plans, fortnightly house cleaning, regular pro-active maintenance, HMO properties often become more difficult to let over time. This is compounded by high maintenance fees because many agents do not monitor contractors and add hidden surcharges on to maintenance work.

Compare that with a rent to rent company which pays the property owner the same rent each month irrespective of whether the rooms are all tenanted. Rent to rent businesses have more incentive to keep the property lovely so it’s easily rentable because the cost of empty rooms is borne by us. For us having a kitchen plan, and being able to know which kitchen spaces ‘belong’ to which housemate is just a tiny part of ensuring a clean, lovely-smelling, cared-for home, that is easy to rent in the long-term.

A good rent to rent operator provides a win-win-win solution for property owners, housemates and themselves.

What should I look for in a rent to rent business?

If you are an HMO owner considering rent to rent, here are things to consider

If it sounds too good to be true; it is!

The starting point is knowing your numbers.

Most importantly, know your net rent.

What I mean by net rent is, the income you receive after all the running costs of your property which a rent to rent business would pay.

This includes the cost of letting agent management (even self-management has a cost), utility bills, minor maintenance, cleaning and gardening.

It also includes the cost of empty rooms.

It’s important to be aware of the actual rent received rather than assuming a rent received is gross rent multiplied by 12.

We meet many landlords with HMO properties managed by traditional hight letting agents which have only 3 rooms filled out of 8, or 2 rooms filled out of 7.

Yet if you ask the landlords how much rent they receive from their property, they will often share the full rent multiplied by 12, rather than the actual rent they received in the last 12 months.

Once you know your net rent you can assess any rent proposals from rent to rent companies correctly.

If for example, you know that gross rent is £3000 and net rent is £2000 (after deducting costs the rent to rent company will take on), you know that if they offer you £2500 per month, that is not an arrangement you want.

Compliance

You

Ensure that you have the correct lending (if applicable) and insurance for the use of the property, HMO in this instance.

Ensure that you have an HMO licence in place, if required.

The rent to rent company

Check the following at the start.

- Insurance

- Membership of a property redress scheme (PRS)

- Membership of the Information Commissioners Office (ICO)

- Membership of required local licencing schemes

- Protection for deposits

- Contracts (use a solicitor)

Ongoing monitoring

As you would with any letting agent ensure you arrange to monitor

- Inspections

- HMO licence

- Energy performance certification

- Annual Gas safety certification

- Electrical Inspection Condition Report and portable appliance testing

- Annual Fire safety certification

Keep up with changes in the private rental sector

It is important that all of us as property investors keep us with changes affecting the private rental sector. The NRLA is an incredible resource to do so.

Want to find out more about rent to rent?

If you are starting, or already have, a rent to rent business and want to ensure you are not only legal and compliant but also have an ethical win-win-win approach here are your next best steps.

Step 1 - Get a free copy of our #1 best-selling book

CLICK HERE for your free copy of the Rent 2 Rent Success Book

Step 2 - Get the Rent 2 Rent Success Masterclass & Guide

To find out more about how rent to rent works and our ethical 6 step system for rent to rent success, complete with case studies.

CLICK HERE for the free Rent 2 Rent Success Masterclass and Guide

Questions?
Please comment below and we’ll reply!

Best
Stephanie & Nicky xx