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Industry News August 8, 2019

Rent in Advance – the Pitfalls

A new rental product is set to launch on 28th August 2019, and it will enable letting agents and landlords to receive annual rent upfront. The rental product know as Advance Rent Option will be open to debate at the London launch. The panel debate will include some high-profile names from the property industry. 

Ahead of the launch Keats Lettings in Haslemere have taken time to consider the concept of advanced rent and they highlight their concerns:

We welcome any innovation which will give landlords added confidence and encourage them to invest in the private rental sector. However, as experienced letting agents will recognise there are some issues which need to be considered when taking large sums of rent in advance. 

In our experience, at the present time around a quarter of all tenants are required to pay the rent for the entire term in advance – the most usual reasons being a poor credit history or having been self-employed without three years of accounts. 

When a bulk payment is made the funds are not legally due to the landlord until the relevant rent due dates. That is to say, if a tenancy starts on the 1st of March for 12 months it will comprise of 12 rent due dates with each being the first day of each month and until those rent dates occur the money still belongs to the tenant and not the landlord and the agent should hold it as a stakeholder.

Paying all the advance payment to the landlord at the start of the tenancy could mean that the agent not only acts without care and due diligence to the tenant but also potentially puts the agent at financial risk

For example, what if the landlord fell into arrears with their mortgage – a good letting agent will always ‘drip’ the rent due to the landlord on a monthly basis.  If the tenant has made the initial payment to the agent, the agent is then jointly responsible for making a refund should the landlord default and the tenant becomes homeless.

A ‘float’ would also need to be retained to cover the cost of any essential maintenance, being repairs that a landlord is required to undertake by law, and any unforeseen emergency works during the tenancy term. It is the risk of ‘emergencies’ which could cause a problem for all parties.

Say for example, the property is struck by lightning and the damage is too extensive for the tenant to continue living there. Current law directs that if they can’t use the property as a home then they are not legally bound to pay rent.

One of the aspects of the proposed new scheme causes alarm bells to ring. There seems to be an implication that receiving a rent in advance payment would allow the landlord to re-invest the money back into the private rental sector and increase their portfolio. Considering the ‘risks’ mentioned in this blog that would seem to be inappropriate advice.

Guaranteed rent schemes have been available over the past 10 years, but most have been withdrawn for a variety of reasons. Hopefully this new product will meet regulatory standards and fall within the remit of the Financial Ombudsman Service. We believe the industry needs to find a new way of supporting landlords.

However, some are welcoming the launch and their comments can be viewed in a report from Letting Agent Today HERE.


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