One of the questions sometimes raised about landlords insurance is whether it offers the landlord any protection against probably the biggest risk he or she faces – the unreliability of tenants in paying their rent as and when it falls due.
Standard landlords’ insurance, of course, typically offers no such protection. Loss or damage to the landlord’s principal business asset, the property itself, is invariably covered by landlord or buy to let insurance. So, too, are the contents owned by the landlord (if required).
Buy to let insurance also typically can include a provision for landlord liability indemnity insurance and compensation for loss of rental income following a serious insured event which leaves the property temporarily uninhabitable and unlettable.
Compensation for any arrears or non-payment of rent, or help in its recovery, is not part and parcel of landlords’ insurance policies.
Guaranteed rent schemes
Guaranteed rent schemes are designed to fill this apparent gap by offering the landlord a seemingly unbeatable solution – guaranteed rental income.
A blog published on the Home Made website on the 9th of March 2021 explains that guaranteed rent schemes are also known as rent to rent schemes and involve the owner of let property signing it over to a company, individual, or letting agent who offers to pay the landlord a guaranteed monthly income for an agreed period of time – irrespective of the let property being let to tenants or the tenants paying the rent on time.
In signing over the property, the landlord agrees to the individual or company offering the guaranteed rent the right to sublet the property and to manage tenancies as though they were the principal landlord. Indeed, the tenants themselves will have no idea of the guaranteed rent arrangement and will deal with the individual or company granted such rights as though they were the principal landlord.
Benefits to the landlord
This arrangement might seem like an ideal solution for the landlord content to maintain a mostly “hands-off” approach to the buy to let business yet still have the reassurance of a guaranteed rental income.
The landlord is relieved of the time-consuming hassle of chasing up arrears or of pursuing eviction proceedings. Neither does he face the expense of management, letting, or renewal fees.
Since most individuals and companies – who might simply be called “renters” – also have the responsibility of returning the property to the landlord in the same condition as when they took it, the landlord also avoids having to conduct repairs and maintenance, explains the Property Redress Scheme (PRS).
“Renters” acting as these middlemen between landlords and tenants are often local authorities – in need of affordable housing for vulnerable tenants – and, as public bodies, might be viewed as one of the most reliable sources of rental income for the principal landlord.
Although the promise of a guaranteed rental income – without the hassle of dealing with recalcitrant tenants and tenancies – is likely to appeal to practically any landlord, there remain a number of potential drawbacks.
If there is a mortgage on your let property, for instance, you will need to be sure to secure the lender’s permission for an arrangement that involved the effective subletting of your property. Not all lenders will grant that permission and those that do are likely to insist on your maintaining certain terms and conditions with respect to the type of tenancies granted.
Similarly, you will want to avoid invalidating your landlord insurance policy. Insurers may take the view that any rent to rent or guaranteed rent scheme places the property under greater risk of loss or damage – and a higher than normal cost of settling claims for loss or damage. If your insurer grants permission, therefore, you might expect to pay a higher premium.
For all the apparent distance created by your effectively handing over your let property to a main “renter”, you are still the owner and primary landlord. Following any breaches of the housing laws and regulations, therefore, you may still be held responsible for any infractions.
Before considering any guaranteed rent scheme, therefore, you need to be perfectly clear in your own mind exactly how much rental income you are guaranteed, for how long, and the terms under which the arrangement might be renewed or terminated. You will also want to be certain who is responsible for the repairs, maintenance and upkeep of your let property, and the responsibilities shared and retained for compliance with the relevant housing regulations.
In short, the solution offered by any guaranteed rent scheme must be examined very carefully before you consider signing over your let property to a middleman “renter”.