In the recent case of Kumar v Kolev & Others (2024) UKUT 255 (LC), the Upper Tribunal decided that a head landlord could not be subject to a rent repayment order (RRO) in cases where the head landlord does not directly receive rent from the subtenants.
This case provides interesting insight into the intricacies of rent repayment orders in rent-to-rent arrangements.
Mr Kumar owned the freehold of a two-storey house. He had leased the whole house to a company, Like Minded Living Ltd (LML) under a rent-to-rent agreement. The headlease between Mr Kumar and LML specified that the house was only to be sublet as a whole. However, in breach of the headlease, LML granted subtenancies of individual rooms of the house. Crucially, this led to the house being occupied by five individuals, making it a House of Multiple Occupancy (HMO). Under Part 2 of the Housing Act 2004, an HMO requires a licence, which LML failed to obtain.
The failure to obtain an HMO licence led the subtenants to make a claim for a RRO in the First-tier Tribunal (FTT) against Mr Kumar. Under the relevant legislation, a successful applicant can reclaim up to a maximum of 12 months pre-paid rent from their landlord for controlling and managing an unlicenced HMO.
The FTT’s decision
At first instance, the FTT were persuaded to make a RRO against the head landlord, Mr Kumar on the basis that LML had granted subtenancies longer than the headlease granted to it by Mr Kumar.
The FTT affirmed that it is a long-established principle of English property law that where a tenant grants an underlease for a term equal to or longer than the remaining term of its own lease the grant takes effect as an assignment, by operation of law. Consequently, there is no landlord and tenant relationship created between the head tenant and subtenant and the subtenant becomes a direct tenant of the head landlord.
By virtue of this principle, the FTT decided that there was a sufficient and direct relationship between Mr Kumar and the subtenants to permit an RRO being made against him.
The upper tribunal’s decision
Mr Kumar brought an Upper Tribunal (UT) appeal against the FTT’s findings on four grounds. Most notably, for the purposes of this article, Mr Kumar’s appeal on ground 1 was on the following basis:
- The subtenants had paid their rent to LML and not Mr Kumar;
- Despite the assignment of the subtenancies to Mr Kumar the contractual obligation to pay rent was still ongoing between LML and the subtenants; and
- The payments of rack rent by LML to Mr Kumar created an implied periodic tenancy so that the subtenants remained the direct tenants of LML.
Applying the Supreme Court’s decision in Rakusen v Jepsen, the UT decided that a head landlord cannot be ordered to repay rent which they did not directly receive. Since Mr Kumar did not receive any rent from the subtenants because they paid LML directly, he could not be held liable for repayment.
The UT also stated that in any case, the subtenants’ continued payment to LML acted as an acknowledgement of LML’s authority. This, partnered with the irregularities between the sublease and the headlease was consistent with the subtenants recognising LML as its landlord and not Mr Kumar. Mr Kumar was found to have no direct relationship with the subtenants as their landlord and his appeal succeeded.
Conclusion
This case again demonstrates the complexities of relationships in rent-to-rent arrangements and the law set out in Rakusen v Jepsen does currently appear to provide superior landlords with some protection from RROs in such circumstances.
However, with the upcoming Renters Rights Bill rapidly making its way into law, which will ultimately overturn the Rakusen v Jepsen decision, property owners will need to take care when considering such rent-to-rent set ups in the future or else risk becoming potentially liable for RROs from their subtenants.
Jessica Waters