A new wave of property transactions are taking place across the country currently to skirt around the issue of not being able to find enough deposits or obtain mortgages to buy property, and these are called Management Contracts or being commonly referred to as “sub letting” or “multi letting”.
The correct procedure for a Management Contract, is where an “experienced” landlord hires a “competent” property Manager to let and manage his rental property for a period of say 3 years. The advantage to the Owner is seen as a “guaranteed” fixed monthly amount coming in and the hassle of dealing with tenants taken away. The problem lies with the fact that the Landlord/owner remains fully legally liable for the terms of his mortgage, property & tenancy even though he has passed on the management of the property to someone else. Therefore the landlord needs to have the experience to “manage” the “property manager” to ensure that he is carrying out all the health and safety issues and legal aspects correctly. Unfortunately this is where many of the problems are arising as the Landlord/owners are generally inexperienced and naive.
Although this seems quite an innocent transaction and not that different to employing a letting agent (but for a longer more definite period with more authority given to the property manager) unfortunately these arrangements have mutated into something quite different indeed and positively dangerous with many potential hazards for the inexperienced landlords who may not be aware of their duties, which could lead to huge financial penalties or in extreme cases imprisonment.
Where things get tricky, and i am seeing this time and time again, is where people are letting their property to a property manager and using a form of “tenancy agreement” as a contract, giving consent to “sublet”. This is not the correct way to do this and does not impose the correct responsibilities on each party and will not lay out what is required by each party. But more importantly, if there is a mortgage on the property then this will normally violate the terms of the mortgage for the owner and leave him in big trouble with the lender. Most mortgage companies, (buy to let or standard homeowner mortgages) will not allow landlords to allow “subletting” in their agreements, as they need to be sure they know who are residing in the property at any time so that they may repossess the property if they need to as allowed for under section 101 of the Law of property act 1925.
Secondly another area i have noticed that people are becoming unstuck, is where landlords are creating these agreements with property managers and the managers are letting the properties on “room by room” basis, or “multi letting” to create higher cash flow. There are a few issues with this.
Firstly, the landlord/owner needs consent from their mortgage company to let their property as a HMO (house in multiple occupation), if there are to be 3 or more non related individuals living in the property. This is very difficult to get on a standard buy to let mortgage, but virtually impossible on a standard home owner mortgage. But if the owner does manage to cross that hurdle then they have to also ensure that the property is set up a fully compliant HMO according to the regulations of the local council. Failure to ensure that the property is up to regulations i.e. correct sized rooms, heating, smoke alarms and emergency lighting, number of bathroom, sinks and cookers, thumb latches on doors etc. could result in heavy fines and rectification orders from the council. If there is over 5 people and 3 stories of property utilised (loft space or basement for example) then the property may have to be licensed. If this is the case and neither the property manager or the owner has got the property licensed then the fines can be up to £20,000 plus further fines for each case of negligence.
So generally, unless the property is already a HMO, set up and regulated as one, mortgaged as one and licensed if applicable, i would strongly recommend against letting a property manager put in multi occupiers into a property.
So what should you do when an apparent dream opportunity seems to appear on your doorstep, offering you a fixed rent for 3 years or so.
Firstly consider if you have the experience to manage such a contract, then ensure that the “management contract” is correctly drawn up by a knowledgeable solicitor and that the contract ensures that the “property manager is responsible to carry out things like the Gas safety certificate, electrical certificate and any other essential checks or maintenance on the landlords behalf, also that the correct “legal” tenancy agreements are used with the tenant, with you stated as Landlord.
Check up on your Property Manager regularly, you are still responsible for anything that is not done, legally or safety wise, so check up on the Gas and Electrical safety, the number of occupants in your property and the property maintenance being carried out, visit your tenants and inspect your property regularly to make sure. Failure to carry out gas safety certificate, could result in penalties of up to £5000 or 6 months in jail, per offence. If the property is going to be multi let, ensure that your mortgage company are happy with this and that your property is compliant to all current HMO regulations within your district.