An agents guarantee for rent.
David, a loyal Landlord Law Blog reader, told me yesterday about an unusual agency agreement he had learned of. Apparantly the agent had guaranteed a rent of £650 to the landlord of a property.
However the property was actually let at a rent of £1,100 and the agent kept the difference of £450 presumably as his fee.
In view of the substantial difference between the actual rent and that paid to the landlord, which is far in excess of the cost of rent guarantee insurance, how, asked David, does this fit in with an agents duty to act in the best interests of his principal?
An agents duty of good faith
How indeed? I suppose if it is crucial for the landlord to have his £650 pm and impossible to find a tenant who insurers would accept for a rent guarantee policy AND the agent had discussed the options available to the landlord with him in detail, such an arrangement might be just about be acceptable.
However even so, 40% of the rent seems excessive to me. Particularly as, in this time of property shortages, it cannot be hard to find a decent tenant who would satisfy insurers.
If the agent has failed to advise the landlord about the true cost of rent guarantee insurance then it is arguable that this sort of arrangement would be in breach of the agents duty of good faith. In which case the landlord would probably be entitled to end the agency agreement and claim back the £450 difference retained by the agent per month less the cost of rent guarantee insurance.
A common situation?
David indicated that this sort of arrangement is not uncommon between landlords and agents, although generally with a smaller proportion of the rent retained by the agent. What do readers think of this?
Can this sort of arrangement ever be compatible with an agents duty to act in the best interests of his principal, and not take advantage of his position to obtain an advantage for himself? And if it can, where do you draw the line?
Sounds to me like the landlord is letting the property to the agent on a commercial tenancy and the agent is then subletting for whatever he can get on an AST. Two separate contracts at 2 different amounts. If this is the case (and the landlord has misunderstood the situation – after all, it’s a 2nd hand story) then both deals have been done at a rate that both parties have agreed to.
Hi Tessa. I came across a similar situation yesterday. Someone was offering to sublet my property and rent the rooms out, guaranteeing me a pre-agreed price. They would tenant and maintain the house keeping the difference between our pre-agreed price and the price they actually achieved. I’ll bet they charge the tenants a fortune to reference them, etc. Whilst I’m sure it’s legal, it sounds like a rip off and I can only believe the tenants come off worse. However, I may just get one of my tenants to contact them and find out the charges!
I would be interested to hear how common this is and I wonder if the current high rents coming through agents arent partly because of this arrangement.
Back in March I saw a property up for £1,000 a month and 2 weeks later it was marketed at £1,200. I wonder how much of that got back to the landlord?
This is an interesting issue. There are some very reputable agents such as Northwood Uk who guarantee rents by renting the property directly and then renting to tenants. The landlord wins by negating void periods and arrears. This is a service which offers peace of mind.However, their scheme is completely transparent.
Renting a property to someone who then sublets rooms is very risky and should be avoided as usually these tenants will not be one household and HMO regs may come into play. Remember – its the landlords responsibility to be licensed. It also impacts on wear and tear and its hard to keep track of who is actually living their as such tenants are usually transient. This may prove an issue if the agent ceases trading and you require possession. Further, it may impact on your insurance and any lease.
The key issue is the relationship with the agent. They have a duty of care to seek the best possible price for their client and provide best advice. The terms of their contract with you is important. In this case, the agent should have offered the client best advice on how to generate the best rent. It would be interesting to see what the average market rent was for the property so as gauge whether the agent has undervalued or simply exploited an opportunity.
Whichever proves to be the case – 40% seems unbelievable. Usually the sum of the rooms rented separately rarely exceeds the total rent as one property by more than 10-15%.
If the property was indeed undervalued – then I suspect its a matter for trading standards however in my experience – landlords usually have a pretty good idea of values and I suspect this agent is profiteering from an ‘angle’ or has found a very gullible tenant! Nevertheless, the client should benefit – not the agent.
Northwood, the national franchise agency chain, are quite well-known for offering guaranteed rent. The figures I have seen suggested the level was about 20% under market rent. The advantage to the landlord is that they can forget voids & arrears (assuming agent solvent!) but over the long-term they will make a bit less income. I think as long as the reduction on market rent isn’t too large then this is a very valuable service for many landlords
Imagine a landlord who is an accountant or other professional – they do not have the time to learn the rules, and just want a secure income they can track against the asset. I think for landlords like that these fixed-rent schemes can work very well indeed as they put responsibility for getting the rent paid onto the agent (where it belongs).
However I am inclined to agree with Tessa that in a situation where the gap between the market rent and the guaranteed rent is very large, and the agent has not properly advised the landlord of what the typical achievable market rent for the property is, that sounds like an abuse of trust and a failure of the agent to act in the interests of their client. I think, as a landlord, it is reasonable to expect an agent to give a reasonable assessment of what typical market rent is for the property, and then any guaranteed-rent scheme can be measured against it. That said all landlords should know roughly what their properties should rent for, to protect themselves.
I should mention that I know of agents who operate schemes like this where they pay the landlord 10-20% below market rent (guaranteed), but then rent out the rooms individually, perhaps to students or benefit claimants, so they could then achieve a higher level of income, in a way that the landlord might not (because it takes more management effort to manage HMOs etc)
If that £1,100 is actually combined rent on a per-room basis, then actually market rent as a single-residence may be less, and so the reality may be rather different from the picture painted.
I also wonder what the contractual arrangement is – is the agent acting as agent, or as tenant? I am aware some agents actually take a form of tenancy, and then sublet, although again it is critical the landlord know what market rent is.
Ah that explains why I’m seeing so many contracts lately where agent is listed as landlord and I have seen Northwoods claim and wondered how they made it work.
This also gives me an idea about a couple of our local rogue agents, who I’ll bet aren’t being as transparent with their landlords as you guys
Surely all council public sector leasing schemes are like this. The council guarantee rent for five years at a set rate which is much less than can be achieved directly but with zero voids and management fees (so technically it’s factored in) over five years at a fixed rate then this can be attractive to both parties. As long as it’s transparent what’s wrong with letting agents offering this service? I think one of my properties has a very similar structure to the offering above.
I thought the same thing Phil as long as everyone is transparent about it, which may not be the case with the original post.
I think councils go a step further too in that they also indemnify againt damage. If the tenants smash the place up the council fix it.
If I had a few spare properties I would whack them out to PSL too, far less hassle than being a landlord
Northwood act as an agent, whereas with a PSL the council will often lease the property via a commercial lease (often not allowed by standard buy-to-let mortgage terms) and then sublet it.
Another difference is that with a PSL the council is acting as a prospective tenant, whereas Northwood are acting as agent (and charging fees for this). It’s reasonable to expect the agent to detail typical market rents, whereas with a PSL the landlord needs to take responsibility for that.
A downside of fixed rent schemes though is that, if say you have a house with market rent of £1,000, and you agree to a fixed rent of £800, you are losing £200 a month (assuming you manage it yourself otherwise) but ALSO any uplift in rent due to general inflation, or inflation in local rents, over the period of the lease. Say inflation averages 4% over the next five years, that’s another £220 a month you’re losing in year 5, so you’d be down £420 a month. Say your loan is £700 a month then instead of £420 a month left after the loan is paid you get £100.
The difference is a) a lot less hassle, but b) a lot less income. It can work very well, but that bit less income could potentially be very significant.
Another point that’s been missed is the choice of agreement used. Mary Latham made a good point that councils use licence agreements (as do some HMO landlords) often to expedite the eviction process. Clearly when challenged in court they would revert to AST’s. As the council/agent is acting in the capacity of agent who would go to prison for illegal eviction? Tessa perhaps you could clarify please. We thought the naive Landlord would?
Phil
So far as the civil law is concerned the principal (landlord) is legally liable for the actions of his agent, not the agent (save in certain specified areas such as tenancy deposits).
I’m not so sure how this works out in the criminal side of things as I do not do criminal / Magistrates court work. To be convicted of a crime there generally needs to be some sort of guilty knowledge, what lawyers call ‘mens rea’. So that would not fit in with landlords being liable for prosecution for things done by their agents.
Ben – what do you think here? You do prosecutions.
By the way I need to pick you up on the license point. If a landlord gives a tenant a ‘license agreement’ to sign in circumstances where the letting is actually an AST, it will ALWAYS have been an AST (per Street v. Mountford). It won’t be a license that reverts to being an AST when challenged at court.
Although the parties might not find this out until the Judge picks up on it in possession proceedings.
I don’t think there would be any illegal eviction if the Agent went to court. But you’re correct in that the court would define this as an AST so the claim would be kicked out for not having served appropriate s8 or s21 notices.
What about subtenant’s deposits – they’ll be caught by the TDS provisions
One other issue here is what happens at the end of the Agency tenancy. It’s not protected by either Housing Act or Landlord & Tenant Act. You’ll often find that one rf more of the sub tenants might still be in situ at the end of the term and Agent is taking possession proceedings to get them out. If the Landlord is cannny and either includes the correct wording in the tenancy agreement or serves the appropriate notice before the end of the term he could engineer a situation where he’s entitled to double rent after the term ends
Section 1 of the Protection from Eviction Act 1977 says any person, can be guilty of harassment and illegal eviction, not just a landlord or even an agent.
Section 7 of the Act defines an agent as a person named as such in a rent book or similar document or a person who receives rent on behalf of a landlord.
The chief difference being that for a landlord or agent to be found guilty you only have to prove that their action were “Likely” to interfere with peace or comfort etc, whereas for another “Person” to be guilty you have to prove the ‘Intent’ behind their actions. That’s why we never use the pFEA for neighbour disputes because it is legally difficult to prove a person’s ‘intent’.
When the Act first came in you had to prove a landlord or agents intent too so nobody ever got done, thats why they amended with the 85 Housing Act
Maybe I am missing something here. The agent might be acting in one of two different capacities. As an agent there is the <> duty and they will take a fee for acting as agent. On the other hand, they act as a tenant in their own right and the terms of the tenancy agreement gives them the right to sublet. They are no longer an agent and therefore their best interests duty goes. This is not underhand if both parties know what is happening and enter into the relevant contract knowing what they are doing. So the question for the landlord is <<would I rather rent at £650 to a reliable corporate entity, when I can be sure I will receive the full rent for the year on time and allow subletting (with potential commensurate issues like transient occupation)? OR Will I rent for the maximum monthly income but have the standard risks of non-payment and voids? Only the landlord can do the calculation based on their appetite for risks?
Oops. Words in bracket disappeared. Should say ..best interests..
Interesting to watch the comments in this flow. Sorry talking at a conference yesterday so not watching live.
To answer a couple of points, the landlord approached the agent “as agent” and was offered the guaranteed rent scheme. In this scheme the “agent” took on a tenancy and then sublet the property to a single family (no renting by the room).
Yes the agent is liable for voids, but the question hinges around “if approached as a letting agent (not a tenant) do you have a duty as an “agent” to look out for the clients interests and, at the very least, ensure the landlord is fully aware of the other options, such as full rent less commission and our average voids are less than 3%.
This system is common and used behind many “guaranteed rents”. One trick with it says that even without the guarantee, if your commission would be £100, plus VAT, Total £120. Then if you charge commission the landlord pays £120 and the agent gets £100. If the same is applied through two lettings the rent is vat free and the landlord still pays £120 but now the agent gets £120.