It can look like the ideal solution – a rent guarantee scheme that will protect landlords and investors in the event HMO propertythat the tenant fails to pay the rent – but it can leave investors and landlords out of pocket by hundreds of pounds and leave them stuck with a tenant that does not pay the rent.

Traditionally, these schemes have been used by councils and housing associations, but more recently private landlords have been signing up to the schemes in the belief that their rental income will be guaranteed.

Under a guaranteed rent arrangement, the landlord is required to sign over the property to a company or letting agent for a specified period of time in return for a guaranteed monthly income.  The agent then sublets the property and manages the tenancy.  Rent guarantee firms make their money on the difference between the rent they pay the landlord and the rent they receive from the subtenant. Most schemes promise to cover any void periods and maintenance costs.

As Mish Liyanage, Managing Director of The Mistoria Group, explains, things can go wrong if the rent guarantee firms do not have the financial resources to back up the guarantee: “There are many firms out there offering guarantee rent schemes, many of them very small companies or sole traders.  The risk to landlords and investors lies in the financial security of the rent guarantee provider.  If they get into financial difficulty or go bankrupt, the landlord many not be able to recoup any monies paid to the scheme.

“What’s more, the landlord could be saddled with a tenant that is not paying the rent, despite having paid an ‘insurance’ to protect them from this.  It is also worth remembering that landlords are still liable for the property, despite handing it over to a rent guarantee firm. If the property is overcrowded, not fire safe, or becomes an unlicensed HMO property, the landlord could be fined up to £20,000 by the council.  What the landlord does not usually realise is that their property could be rented to asylum seekers or large families claiming benefits.  Subletting to housing benefit tenants for example may be in breach of the buy-to-let mortgage conditions and could result in mortgage companies insisting that loans are repaid.

“Landlords and investors who are considering using a rent guarantee scheme should read the contract very carefully. The only way they can really protect themselves is by having a commercial lease between the landlord and the company and an assured short-hold tenancy agreement (AST) for tenants. Some unprofessional rent guarantee schemes get landlords and investors to sign ASTs and then issue licences to tenants. This fails to provide any protection to the landlord or investor.

“However, it is important not to confuse rent guarantee schemes with insurance firms which offer landlords ‘guaranteed rent’ are actually selling rent guarantee insurance policies – which is very different from rent guarantees schemes. Just like any other insurance policy, there is an excess and exclusions. Some policies won’t pay out until a tenant is one month in arrears which may be an issue for some landlords.”

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