Imminent ruling in ‘Rent to Rent’ case

Rakusen v Jepsen – Supreme Court decision

Do you rent your property to a company, giving it permission to sub-let and leaving it with the headache of complying with the multiple obligations that residential lettings bring?

If so, you will be interested in the outcome of the case of Rakusen v Jepsen and Others which concluded in the Supreme Court last week. It will be some time before we know what the Court’s decision is – but what’s it all about?

Case overview

In 2016, Mr Rakusen, the leasehold owner of a flat in London, granted a tenancy to Kensington Property Investment Group (‘Kensington’) which allowed individual rooms to be sublet within the flat. Kensington subsequently rented out individual rooms to Mr Jepsen and several others on separate tenancy agreements. This arrangement constituted a licensable House in Multiple Occupation (‘HMO’). Neither Kensington nor Mr Rakusen applied for an HMO licence. This was a breach of the Housing and Planning Act 2016 (the ‘Act’).

Pursuant to the provisions of the Act, Jepsen and the other sub-tenants applied for a Rent Repayment Order (‘RRO’) because the Landlord had failed to licence the HMO. An RRO, if made, requires a Landlord to repay rent collected over the duration of the breach.  What the Act is not clear about is the position where there is a superior landlord (a landlord who has let premises which have, in turn, been sub-let).  In this case, the sub-tenants brought their claim against the superior landlord, Mr Rakusen.  The application went to the First Tier Tribunal which decided that because Mr Rakusen was a landlord of the flat, though not the immediate landlord of the sub-tenants, an RRO could be made against him.

Mr Rakusen appealed the decision to the Upper Tribunal which agreed with the First Tier Tribunal. Mr Rakusen then appealed to the Court of Appeal. This time, the court disagreed with the Tribunal on the basis that because Mr Rakusen did not receive the rent from the sub-tenants (which was, of course, paid to Kensington), he should not be required to repay it to the sub-tenants.

It was then the sub-tenants’ turn to appeal, this time to the Supreme Court. That case concluded on 26 January 2023, and we await the Court’s judgment which is likely to be handed down in a few weeks’ time.

Why is this such an important case?

Many property owners opt for a ‘rent to rent’ arrangement whereby they rent their property to a company which, in turn, sublets the property, often renting out rooms individually. Where a housing offence is committed in the course of a letting, it is open to tenants or sub-tenants to apply for an RRO to recover rent paid for the period of the offence. This can amount to a repayment of thousands of pounds, especially in the London area where rents are much higher.  Since these companies set up specifically to rent out such properties have few assets, and are easily wound up, sub-tenants are often unsuccessful in recovering any money from their immediate landlord, even where an RRO is made. If Mr Rakusen loses in the Supreme Court, the way is left open for sub-tenants to seek RROs against the superior landlord – something which is bound to unnerve property owners who have left all of the onerous sub-letting obligations to the letting company, taking the view that the details are not their concern. If the decision favours the sub-tenants, this could make superior landlords think twice about ‘rent to rent’ letting arrangements which, in turn, may mean fewer properties being made available to rent at a time when they are already in short supply.

We will report on the Supreme Court’s decision as soon as it comes out. If you have any queries relating to this, or other aspects of letting residential property, please contact Mary Rouse, legal director or Lauren Hutchinson, associate in our Property Dispute Resolution team.