Like for like?

There are many reasons why a tenant may look to sub-let their rental, but whatever the reason the landlord needs to be advised – and so does their insurer.

As tenants look to head off on extended holidays, return ‘home’ for the summer break or seek some help to cover the rent, the issue of ‘sub-letting’ a rental property frequently rears its head. And while many think this is just a matter between landlord and tenant, it’s important for the landlord’s insurer to be in the loop too – as generally sub-letting is not covered.

Sub-letting is the practice where a tenant privately organises for someone to pay for use of the home they themselves are renting – it is when they transfer part (not all – as this is assignment[1]) of their interest under the lease to another person. The person or people named on the lease are the head tenants and those renting from them are sub-tenants. The agreement between them is a sub-lease. The sub-lease may be for part of the premises (e.g. a room) or for a period of the head tenant’s tenancy (the head tenant may or may not live in the property at the same time as the sub-tenant). The sub-lease can be for a fixed term or periodic.

If a tenant wishes to sub-let the rental, they must obtain the owner/landlord’s written permission to do so, or risk being in breach of the terms of the lease and be served with a notice to vacate. Requirements may differ between states and territories, so check local tenancy legislation. In many jurisdictions, the landlord cannot unreasonably withhold their consent when a tenant proposes to sub-let to someone else and the original tenant (the one named on the lease) will continue to live in the premises. However, landlords can refuse consent if the original tenant proposes a sub-let for the whole tenancy or the whole premises.

Unlike in a co-tenancy, a sub-tenant’s name may not appear on the lease. And this poses legal issues if problems arise. Most insurers would caution landlords to insist that all occupants of the home be named on the lease (with the exception being a family situation).

In a sub-tenancy, the head tenant takes on the full legal responsibility of a landlord, which means they must comply with tenancy legislation including regarding matters about bonds and payments, notices to vacate/evictions, maintenance and repairs, and safety and security. At the same time, the owner/landlord still has a duty to the head tenant.

Importantly, the head tenant – as they are the one named on the lease – is actually the one who is totally responsible for any loss or damage to the home, or for rental arrears. This means the head tenant can be held responsible for any loss that the landlord suffers because of the actions of the sub-tenant. For example, if a sub-tenant caused damage to the property, the landlord could claim compensation from the head tenant, who would have to try and recover the money from the sub-tenant. It is also the head tenant who is responsible for paying the rent to the landlord, regardless of any sub-let arrangement, so if the sub-tenant fails to pay, the head tenant will need to pay up or risk breaching their tenancy agreement.

If that isn’t murky enough – cover for sub-letting is generally excluded in landlord insurance policies.

Sub-letting dramatically increases the risk of damage to a property and also blurs the lines of responsibility for that damage. For these reasons, landlord insurers are reluctant to take on the risk of offering cover for properties being sub-let as their right of subrogation (i.e. their ability to recover costs) is restricted when multiple people share a property and/or it can’t be proven who caused damage etc.

If a sub-letting arrangement has been agreed between landlord and head tenant, the landlord or agent should contact their insurer to discuss options for cover. The insurer may agree to extend cover (and may state that certain sections of the policy will not apply) or insist on separate policies being taken out to cover the individual risks of each tenancy agreement (landlord policies generally only cover one lease at a time). Or simply decline to extend cover.

At RentCover, we will consider the situation on an individual risk basis. Landlords or their agents should contact our customer service team to discuss any sub-letting arrangements and the implications for the landlord’s insurance cover.

[1]Assignment is when a tenant transfers their whole interest in the property to another person (e.g. if a tenant signed a 12-month lease but then decided to leave after six months and they got another person to move in and take over the lease, then the original tenant’s interest in the property would pass to the new tenant). The new tenant takes the place of the original tenant, pays rent directly to the landlord and has all the rights and responsibilities of the original tenant. Heads up: Although the original tenant’s interest in the property has passed to the new tenant, the original tenant has sometimes been held legally responsible for loss or damage caused by the new tenant.