If a landlord commits certain offences – which include illegal eviction, letting without a required licence and failing to comply with an improvement notice - they may be issued with a Rent Repayment Order (RRO) by a Tribunal, requiring them to repay up to 12 months’ rent to their tenants.
When a landlord is letting a property they own, it’s clear that they will be liable for payment of any RRO. However, if a property is sub-let or in a legal ‘rent-to-rent’ agreement, there are effectively two landlords - the immediate landlord that’s letting directly to tenants, and the owner of the property, known as the superior landlord – and that raises the question of where the liability for an RRO ends.
This question was answered in a recent case where a property in London had been let by an individual landlord to a property investment group, which had then let it as an HMO to three tenants. The investment group had failed to license the property and the tenants subsequently applied to a First-tier Tribunal for an RRO against the individual landlord, rather than the investment group, in the amount of £26,140.
The individual landlord challenged the order and, although the Upper Tribunal dismissed his appeal, the judges in the Supreme Court then unanimously agreed that an RRO can only be made against the immediate landlord of a tenancy, not the superior landlord. In its ruling, the Supreme Court stated: “It would strain the language to say that a superior landlord is "repaying" rent to a tenant from whom it had never received any rent.”
What does this ruling mean for landlords who engage in rent-to-rent?
While the Supreme Court’s ruling does create a legal precedent, that doesn’t mean it’s become a firm law that only immediate landlords of a tenancy can be pursued for repayment of rent.
One concern with rent-to-rent is that some landlords may set up ‘front companies’ through which their property is then let. They could then allow the company to go bust, in order to avoid paying penalties that fall to the immediate landlord. As such, it’s possible that the Renters Reform Bill, which is currently being drafted by the Department for Levelling Up, Housing and Communities, could be amended to ensure this ‘loophole’ is no longer available to rogue landlords.
However, as the NRLA argued in relation to the above case, there are already a range of penalties that can be imposed on any landlord that breaks the law. So to amend legislation to allow all superior landlords to be pursued for RROs would only punish decent landlords, who have no control over how another individual or company they engage in a rent-to-rent arrangement with might operate. Property lawyer David Smith has suggested that one way the law could be changed to help eliminate the practice of rogues simply using front companies, is by making company directors personally liable for RROs. Whether that might be put forward in parliament remains to be seen.
Landlord loses in first RRO case since Supreme Court ruling
A landlord of an unlicensed HMO who had a RRO made against him, tried to argue that he was not liable for the order. He claimed he was living in the property himself and his tenants were only lodgers who paid their rent to a property management company, therefore that company was the immediate landlord – and he cited the Rakusen vs Jepsen case to argue that only the person or company receiving the rent could be liable for the RRO.
However, as there was no evidence that the management company was either the owner or the lessee of the property, the First-Tier Tribunal ruled that the respondent was managing the property himself and was clearly the immediate landlord – adding that he must have entered into an agreement with the management company to receive the rent on his behalf.
This appears to be a clear case of a landlord attempting to use a front company to avoid liability for RROs and it is encouraging that the Tribunal took his “poor conduct” into account and increased the amount of the order from 60% of the possible maximum to 70%.
Meanwhile, if you choose to let your property via a rent-to-rent arrangement with another landlord, we’d recommend that you reference check them as you would any direct tenant. If it’s an individual, have a credit check carried out, and if it’s a company, look it up on the Companies House register, where you can see how long the company has been in business, access any filed accounts and find details of the company Officers.
If you have any questions about rent-to-rent or Rent Repayment Orders, the team in your local Reeds Rains branch will be happy to help.
The Reeds Rains Content Marketing Team
