Rent to Rent tenancies have grown significantly in popularity in recent years. The process of landlords letting out their properties to professional companies who would then sub-let to their own tenants looks attractive as a prospect. Greater security whilst also offering less administration. One of the main drawbacks was the level of liability that the superior landlord may have to the sub-tenant if their tenant company acts unlawfully. We have previously looked at this in our Rent to Rent blog and in the context of that liability in our blog of Rent Repayment orders
Now we have some greater clarity following the Supreme Court’s decision in Rakusen v Jepsen and others (2023). This has been a long-awaited case which has wide ranging ramifications to all parties involved, either intentionally or not, in rent-to-rent tenancies.
Mr Rakusen was the leaseholder of a flat in North London. In 2016 he granted a tenancy of the flat to Kensington Property Investment Group Ltd. KPIG then entered into agreements with the sub-tenants granting them each possession of one room of the flat. As a result of increased occupation, the property required licensing as a House in Multiple Occupation, but KPIG did not do so. As such the occupiers made an application for a Rent Repayment Order against Mr Rakusen as the superior landlord.
The case has been through many stages with the Upper Tribunal holding that that a Rent Repayment Order can be made against a superior landlord of an applicant. Subsequently following permission to appeal given by the Upper Tribunal judge, the Court of Appeal overturned the decision holding that a Rent Repayment Order could not be made against a superior landlord. The occupiers then appealed to the Supreme Court leading to this particular case.
Mr Rakusen’s argument centred on him not having any direct relationship with the occupiers. He did not enter into an agreement with them and as such was not the party in control of the house in multiple occupation. The occupiers’ claim should be against their direct landlord being KPIG. The Occupiers countered saying that this is the only logical construction of the provisions of the Housing Act 2004 regarding Rent Repayment orders. The alternative would be that shell companies could be created to hide the person actually in control from any personal liability.
The Tribunal ended up agreeing with the Court of Appeal in deciding that the claim cannot be made against the superior landlord. The remedy being a rent repayment order, it makes logical sense that the remedy is from the person to whom rent was paid. Whilst the court commented that there would be a risk of shell companies being used to obscure liability from the actual wrongdoer, for instance a rogue landlord, this would be for parliament to account for with an amendment to s 40(2) Housing and Planning Act 2016, not for the court to create precedent to cover for this potential risk.
This is clearly welcome news for Landlords and for those considering using Rent to Rent arrangements. The decision going the other way could have resulted in significant liability for something that they themselves had no/little control over. Whilst the risks of a Rent-to-Rent scheme are not extinguished entirely by this decision (again refer to our earlier blog for more detail), it does remove one of the key remaining questions that was lingering.
Whilst the Supreme Court’s decision brings about an end to this particular case, this is unlikely to be the end of the issue. Rent to Rent schemes are more and more popular and following the comments by the judges of a gap needing to be filled with legislation, there will likely be further movement on this although I would not expect such action imminently. Until this has been addressed, tenants would be well advised to look into the landlord that they are contracting with. Are they the owner? has the company just been sent up? Are there any assets in the company? Failing to do so in most circumstances will not lead to any adverse situations but there will be occasions where tenants may be vulnerable to unscrupulous who want to hide behind a patsy tenant whilst being the party giving taking all the benefit from the tenancy.
Whenever anyone is presented with a situation that does not add up, early advice is always recommended. Once the contract has been entered into or tenant has moved in, there are significantly less options available.