Despite increased popularity over the last few years, we continue to see badly structured Rent-to-Rent arrangements which result in significant financial losses for landlords. Common mistakes include setting up the structure using the wrong documents, such as issuing management agreements instead of leases, and relying on sham licenses. Getting this wrong is even costlier when a licensing regime applies because a criminal offence may be committed.

In a recent decision of Cabo v Dezotti the Court of Appeal upheld a Rent Repayment Order (RRO) made against a landlord who claimed that she was not liable because she rented via a limited company. Ms Cabo attempted to rely on the well-known Supreme Court decision in Rakusen v Jepson in which liability for RROs is limited to the direct landlord only.

However, the First-tier Tribunal, the Upper Tribunal and the Court of Appeal all agreed that Ms Cabo’s claimed use of a limited company as an intermediary landlord to sub-let her property did not protect her from personal liability. The company’s role was found to be artificial and the occupation licences issued by it were “something of a sham”.

Ms Cabo’s case was that she received no benefit from the letting of the property and that the rent was received in full by the limited company, which was owned and controlled by her estranged husband. Aside from evidence being presented which challenged whether Ms Cabo was truly estranged from her husband, the FTT found it to be unrealistic that Ms Cabo would pay the mortgage, council tax and insurance for the property whilst receiving no financial benefit in return. Having found that the “management agreement” between Ms Cabo and the limited company was unreliable and did not provide a credible account of what actually happened in practice, the Court of Appeal ultimately held that the FTT had been correct to find that the company had acted as an agent on behalf of Ms Cabo and that it had the requisite authority. There was nothing in the agreement with the tenant to protect Ms Cabo from liability.

This is an example of a poorly structured Rent-to-Rent arrangement and Ms Cabo, her estranged husband and the company have all been fined and ordered to pay costs.

A good Rent to Rent structure will involve a well-drafted Rent-to-Rent and tenancy agreements which accurately reflect the true relationships between the parties in real life. The Tribunal and the Courts can and do see through artificial and sham arrangements, and look at the reality of what happens in practice, and will not limit their examination to what a contract says on its face.

This will all soon become even more important with the expansion of RROs and the increase of civil penalties and enforcement powers in the Renters’ Rights Bill (RRB), combined with provisions exposing superior landlords and company officers to direct liability. The RRB will likely see the end of Rent to Rent, and it will be harder for landlords to take a hands-off approach to letting their property. Some of the risks may be mitigated through the use of professional management agents and very comprehensive agreements setting out in detail the parties’ responsibilities, which may allow a landlord to rely on the defence of reasonable excuse. However, the Tribunal has been reluctant to allow this defence argument. It will remain to be seen whether this approach will continue post-RRB but it is difficult to see why the Tribunal would want to change course on this issue.