Who's liable for property compliance in a rent-to-rent contract?

The Rakusen v Jepsen Supreme Court has ruled that a rent repayment order (RRO) cannot be made against a "superior landord - i.e. the landlord that owns the property - in the rent-to-rent agreement.

The decision therefore has future implications for property-owning landlords and the middle tenant/landlord managing the property in a rent-to-rent contract. 

What is a rent-to-rent agreement?

Rent-to-rent arrangements are when a company, local council, or an individual - dubbed an “immediate” landlord - rents a property off a property owner - called the "superior" landlord.

The superior landlord's rental payments are guaranteed for an agreed period of time, whether or not the property has a tenant.

The immediate landlord will take a cut on the amount they charge the tenants, before paying the superior landlord.

What is a rent repayment order?

If a landlord commits an offence listed in section 40 of the Housing and Planning Act 2016 - such as the failure to comply with an improvement act or controlling or managing an unlicensed house in multiple occupation (HMO) - that landlord may needs to repay a specified amount of rent, through a rent repayment order.

This can be repaid to either the tenant, if they paid directly, or to the local authority, if the tenant received housing benefits to pay their rent.

The repayment amount can be up to 12 months' rent.

What was addressed in the Rakusen v Jepsen case?

The Rakusen v Jepsen Supreme Court appeal debates whether a rent repayment order can only be made against the immediate landlord or whether the property-owning, "superior" landlord in a rent-to-rent agreement is also liable.

In this case, the property under a rent-to-rent agreement required an HMO licence from the local council, which it failed to obtain.

The tenant then sought a rent repayment order against the "superior" landlord - Mr Rakusen, the landlord that owned the property but was not managing it through the rent-to-rent agreement - due to the lack of licence.

What was the final ruling in the Rakusen v Jepsen case?

The Upper Tribunal originally ruled in the former tenant's favour, to apply the RRO against the superior landlord.

Mr. Rakusen appealed to the Court of Appeal against the ruling, on the basis that the RRO can "only be made against the immediate landlord of the person making the application" - and the court ruled this time in favour of the property owner.

The former tenant then appealed against this second ruling to the Supreme Court - and this final appeal was dismissed. The court ruled that "an RRO cannot be made against a superior landlord".

What was behind the decision to dismiss the appeal?

The debate hinged on the phrasing of section 40 of the Housing and Planning Act 2016. The act highlights that it's "the landlord under a tenancy of housing" that needs to "repay" rent to the tenant.

The immediate landlord receives rent from the appealing tenant, not the superior landlord, and therefore can be categorised as a "landlord under the tenancy of housing".

The superior landlord didn't directly receive rent from the tenant and therefore can't "repay" the tenant directly.

The court also shared that there are other sanctions in place for rogue landlords, and reforming those sanctions is a matter for parliament.

The court therefore ruled that it's the RRO applies to the immediate landlord in the Rakusen v Jepsen case.

“The ruling makes clear that it is the responsibility of rent-to-rent companies acting as a landlord to ensure that relevant legal requirements are met since it is they who receive tenants’ rent," says Ben Beadle, Chief Executive of the National Residential Landlords Association.

"It is simply not right that such companies can take money from people without any responsibility for the property they are running.”

What should rent-to-rent superior landlords consider, to avoid confusion over liability?

The Property Redress Scheme advises having "clear and unambiguous terms of business", explaining how much the immediate landlord will pay in rent, as well as their responsibilities for managing the property and keeping the superior landlord compliant.

Having a clear agreement with those responsibilities explicitly defined will help avoid debate if any issues were to arise during the contract period.

You can read more about the case on the Supreme Court's website.