Also called Rent to Rent, guaranteed rent is where a third party (usually an individual, Council, or letting agency) enters into a contract with a landlord to control and manage his/her property and pay a fixed rental income over a definite period. This third party or the ‘renter’ finds tenants for the property and sub-lets to them.
Landlords who find managing their property, finding tenants, collecting rent, etc., a time-consuming and stressful affair find guaranteed rent a welcome choice. They get a guaranteed rental income from the renter each month on their nominated day (as mentioned in the contract), irrespective of whether the property is empty or the tenants staying in it have paid rent on time. Additionally, the renter manages the property and even fixes issues or damages that have occurred since they need to give the property back to the landlord in the same condition as when it was rented to them.
For renters, guaranteed rent lets them find their preferable category of tenants and keep the rent they receive. The renters could even opt for more flexible arrangements with their tenants, say finding single tenants for each of the rooms of a property with some common shared areas or facilities.
The recent popularity of guaranteed rent
Between 2016-2018, several government-led regulations like 3% additional stamp duty on buying a second home (April 2016), the introduction of more challenging affordability stress tests on BTL mortgages (January 2017), and Bank of England’s interest rate hike (to 0.5% from 0.25% for the first time in 10 years) all have reduced the revenue of BTL (Buy-To-Let) landlords. The pinch has been felt harder with the scrapping of mortgage interest rate relief since April 2020. All of these factors have made BTL landlords focus on and embrace guaranteed rent.
Types of guaranteed rent
Council guaranteed rent. Several councils work with landlords (the private sector) to provide social housing to people like teachers, healthcare staff, those with special needs, single parents, etc.
Since tenants in these cases could belong to high-risk categories like those who’re unemployed, have alcohol, and drug problems, are asylum seekers, economic migrants, and ex-offenders, It is essential to know whether you or the Council exercises control on choosing the tenants, who pays the repair bills, and who handles the daily management tasks.
Pros:
- Security of regular monthly income.
- Hassle-free property management by the Council though it’ll depend on what’s the arrangement between the landlord and the Council.
- Guaranteed income from properties located in low growth or less desirable areas.
- Perks given by the Council like exemption from council fees and free accreditation.
- Playing your part as a socially responsible citizen.
Cons:
- Monthly income not as much as other schemes.
- Based on what the arrangement is, landlords may have limited say concerning the choice of the tenants.
- Set-up can take some time.
- Private landlords and council staff rarely concur.
Guaranteed rent insurance
Usually, guaranteed rent insurance policies last the period of individual tenancies at a premium varying from 6 to 12% of the monthly rent. As such policies are essentially reactive, landlords will have to wait for arrears to materialise before commencing a claim. As per the Ministry of Justice, the waiting period could be from 8 weeks to pay rent in arrears to an average of 41 weeks to repossession claims.
Those who aren’t dependent on a property’s income to pay their mortgages and won’t mind waiting for long periods can enjoy peace of mind by opting for guaranteed rent insurance. But it may not be feasible for others as the long wait times could be damaging for their financial planning.
Pros:
- Peace of mind as the landlord is covered even when a tenant fails to pay.
- Exercise control over who the tenants are and the property’s upkeep.
- Relatively low premium.
Cons:
- Strict restrictions and conditions are applicable.
- Landlords will need a healthy cash flow to ride out arrears as claim processing times are lengthy.
- Chances of a landlord’s court appearance in case there’s a claim.
- Void periods offer no coverage.
Guaranteed rent schemes
This is where a landlord rents out his/her property to a letting agency at a fixed market value for a specific period (which could be from 3 to 10 years). The agents are confident of using their expertise to get rent above the market value and earn a reasonable profit even after their monthly payout to the landlord has been made. This makes the entire arrangement beneficial to the renters.
This is great as long as the letting agency pays the rent on time. Landlords should ideally check the letting agency’s credit and financial history at Companies House before signing an agreement. It’s also essential to consider probable problematic scenarios. For instance, when the letting agency runs into administration, problems may crop up where they forfeit on debt and aren’t lawfully obliged to pay. Again, fines imposed due to breach of regulations (like the new HMO changes) could be payable by the landlord unless it’s agreed otherwise.
Pros:
- Steady monthly income that covers even the void periods.
- Greater peace of mind and the ideal choice when looking to outsource property management.
- Hassle-free as letting agents typically handle repairs and administration.
- Both the parties are on the same page, and the letting agency understands the landlords’ time-sensitivity.
Cons:
- The property needs to be in a good location to meet rental demands.
- Based on what the arrangements are, the property could get locked for lengthy contract periods.
- Limited control over tenants or maintenance.
- In case the letting agency fails, or there’s a breach of regulations, the landlord will retain the risks.
Legal issues to consider
Since the landlord-renter agreement is commercial, they should sign a property lease agreement for the period the renter will be paying the landlord the guaranteed rent. The parties involved should have clear and explicit terms regarding the amount the renter will pay the landlord and their responsibilities in terms of the property’s management and the landlord’s compliance with different legislation applicable to renting property.
Importance of joining a consumer redress scheme
Renters act as ‘middlemen’ as they have a relationship with both the tenants and the landlords. They usually agree to handle property maintenance and repair tasks on behalf of the landlord and also find the tenants. Thus, their work is closely related to the definitions of both property management and lettings, even when the guaranteed rent model doesn’t fit the traditional definition of either. Thus, it’s recommended for all guaranteed rent operators to join a consumer redress scheme.
Since the renter is offering a service to both the tenants and the landlords, both these parties are consumers. In case a dispute arises regarding the service provided or the terms of the service, the consumers would be able to take their concerns to an independent body.
Since the renters are required to let the property professionally and correctly, not doing so could make them liable to suffer a penalty, which means they too are legally needed to join a redress scheme.
