TEST CASE: Is a landlord responsible for a rent-to-rent firm’s mistakes?

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This recent case involves a leasehold flat let to a management company that operated without the requisite HMO licence, says Tom Entwistle.

Rent-to-rent, the practice of letting a property to a management company that in turn rents to tenants is a practice that has become increasingly popular.

It takes all of the hassle out of owning rented property for the landlord, offers a guaranteed rent whether the property is occupied out not, and often the property must be returned in the same condition at the end of the arrangement.

That’s the theory, and in practice it works well providing the landlord owner lets to a responsible property management company or local authority.

Unfortunately, the arrangement is fraught with difficulties and arguments between the parties, even when the management company is reasonably responsible – the legalities of the situation can be complex.

Rakusen v Jepsen

In the case of Rakusen v Jepsen (Upper Tribunal) the owners of a leasehold flat moved out and rented it to a property management company. The company let the property to three tenants who occupied individual rooms.

But eventually this turned into four tenants occupying, which meant the letting became a house in multiple occupation (HMO), subject to licencing and all the additional regulations and safety measures that that implies.

When the property management company’s tenancy came to an end, the residents, realising the letting was in breach of the HMO licencing regulations, applied to the First Tier Property Tribunal for a rent repayment order (RRO), not against the property management company but against the landlord owner – the superior landlord.

Test case

This was a test case as to the application of Section 40 Housing and Planning Act 2016 regarding situations where Rent Repayment Orders can be applied to a range of offences and without the requirement of a conviction.

In his defence Mr Rakusen argued that the offence had been committed when the management company was in charge and therefore the award must be made against them.

Rakusen’s defence argued that on the correct construction of Chapter 4 of the Housing and Planning Act, a Rent Repayment Order can only be made against the immediate Landlord to whom the tenant had paid rent and could not be brought against a superior landlord. 

Rakusen’s defence relied on the wording under Section 40(2) which refers to “repay” saying that this could only apply to the landlord who had actually received the rental payments from the tenant.  He also argued that the reference to the “the Landlord” could only be the immediate landlord under the tenancy.

Permission to appeal

However, the tribunal awarded against Mr Rakusen, but granted permission to appeal. The Tribunal was guided by an earlier Upper Tribunal decision in Goldsborough & Anor v CA Property Management Ltd (2019) in which it was determined that an RRO could be made against a superior landlord despite there being no contractual connection between him and the tenants.

Mr Rakusen appealed his case to the Upper Tribunal (UT) but the appeal was dismissed. The UT restated that an order could be made against a superior landlord who has committed an offence (not holding an HMO licence) regardless of the lack of a contractual connection.  

The decision is an important one given the popularity of Rent-to-Rent arrangements where the immediate landlord, being a property company with no repairing obligations, is unlikely to be subject to the requirements of improvement notices or to prosecution for failing to licence.

Landlords should tread very carefully when letting to a management company and only reputable companies with a track record with these lettings should be considered. Tenancy legalities can be very complicated, so the services of a proficient solicitor should be used when drawing up agreements. Often management companies are poor targets for claims if they lack assets as they will simply go into liquidation if a claim is brought.

These tribunal decisions give a useful steer, but the case is now subject to an application to the Court of Appeal.

Read more: ‘My rent-to-rent horror story’.

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