20 November 2018, 13:09
Have you considered taking a lodger and renting out a room or multiple rooms in your house? There is an unprecedented demand for shared accommodation in the UK and renting can provide a lucrative form of passive income. Many people live happily in shared accommodation for a number of years - indeed some prefer it to living alone - so it can provide long-term income. However, it is not as simple as handing over the keys...
A Room Rental Agreement
This is an agreement that allows you as the landlord to rent out rooms in a property you own but do not live in. You will also need a room rental agreement if you wish to rent out your property to multiple tenants.
As the landlord, you have two main ways of approaching room rental agreements, depending on how many rooms you wish to rent out and specific circumstances.
One is to get all of your tenants to sign the same tenancy agreements on what is called a joint or several basis, or you give each tenant their own individual tenancy agreement for their own room.
I would recommend the second option for the following reasons:
- If one of your tenants has to vacate the property for any given reason and a new tenant takes his/her place, there is no requirement for the remaining tenants to sign a new tenancy agreement.
- The tenant’s rental agreement covers just their own room and although they have the right to exclude you from it, they can’t exclude you from “common areas” that are shared with the other tenants, such as the kitchen, living room and bathroom.
- There is often the option to charge a higher amount of rent per room based on its size/amenities etc.
A Lodger Agreement
Alternatively, if you are looking to rent a room out as a live in landlord you can adopt a lodger agreement.
The difference with this (apart from the name), is that you are the resident landlord which means that you are letting out a part of your property which is your only or main home.
If so, you’ll have certain rights and responsibilities:
- you’re responsible for keeping the property safe and in good repair
- a tenant or lodger doesn’t have the right to challenge the agreed rent
- you may be able to earn £7,500 per year tax-free under the Rent and Room Scheme
- you can give less notice to end a letting than if you rented out the property as a whole
Ask potential tenants or lodgers for references and follow them up before signing any agreement.
What to look out for in Rental Agreements
A rental agreement is a form of Consumer Contract and must not contain any terms which could be deemed to be “unfair” (i.e. puting either you as the landlord or your tenant in an unfairly advantageous position). An unfair term is not valid in law and can’t be enforced.
An example of this could be where a contract enables one party to change terms unilaterally or irrevocably bind you to terms which you don’t understand.
So, what are the top things to look out for?
1. The amount payable for the room
The amount chargeable by you as the landlord can be set at any level up to £100,000 per year in England and will understandably be influenced by prices in the surrounding area.
The agreement must state how much rent is due and at what date.
The agreement must also set out the arrangements for payment of utilities. Many landlords let out this type of property on an all inclusive basis. In which case you need to protect your position if the bills are needlessly run up by tenants.
2. An inventory
An inventory is a detailed list of all of the items in the property that the tenant can use. An inventory should always be made as it can be used to prevent disputes at a later time about the condition of items.
Photographs of the condition of furniture and decoration is always a good idea. Wear and tear is to be expected, but if things are broken then these should be paid for. Each party should hold a copy of these photos, most easily sent by email so they are date registered.
If there is no inventory you will find it very difficult to justify any deductions from the deposit in any arbitration.
3. Any deposit required
You as the landlord have the option to ask for a deposit to cover the cost of any breakages or damage to the property or its contents. If, when the tenant leaves, there is no damage or rent due, the money is returned. By law, all deposits must be placed in a Government Authorised Tenancy Deposit Scheme within 30 days of receiving the deposit.
4. Ending the room rental agreement
Some tenancy agreements will include a break clause. This must be a balanced clause allowing the landlord and the tenant the same rights to terminate the agreement if it proves unsatisfactory. A clause which allows a landlord to end the tenancy early, but doesn’t extend this same right to the tenant would contravene the provisions of the Unfair Terms in Consumer Contracts Regulations 1999.
Normally, the break clause will come with certain conditions. The tenant or landlord may be required to give additional notice or to pay certain specified fees in order to exercise this clause.
Room Rental Agreements for 3 or more People
There can be no more than three tenants (who are unrelated) living at the property. If there are more than three, the property may be classified as a House in Multiple Occupation (HMO).
Where a property is a HMO, this will bring into play HMO management regulations and you may need to acquire a license from the Local Authority.
William Trim is the Co-Founder and Director of Deposited and a property professional. William established Deposited with the aim of enhancing fluidity within the rental market by offering low APR credit to tenants who require assistance covering the cost of the security deposit on their anticipated rental property.