Property

Property regulation – Important changes to HMO legislation

The Government has announced significant changes to the rules relating to the licensing of Houses in Multiple Occupation (‘HMOs’), which will take effect from 1 October 2018.

The changes to the legislation ultimately mean that more properties are captured under the HMO scheme in an era of increased prosecutions; obtaining specialist advice at an early stage is therefore paramount.

What is the current law?

Under the Housing Act 2005 (“the Act”), a building, or part of a building is an HMO if any of the following applies:

It meets the standard test (section 254(2) the Act);
It meets the self-contained flat test (section 254(2) of the Act);
It meets the converted building test (section 254(4) the Act);
An HMO declaration is in force (section 254(3) the Act) or
It is a converted block of flats to which section 257 of the Act applies (a “section 257 HMO”).

Under section 55(2) of the Act and Article 3, the Licensing of Houses in Multiple Occupation (Prescribed Descriptions) (England) Order 2006, local authorities have a duty to license an HMO (save for section 257 HMOs) that:

Is occupied by five or more individuals; and
Is occupied by individuals living in two or more households; and
Comprises three stories or more, whether the entirety or part of an HMO.

This is known as “mandatory licensing”.

A ‘household’ can consist of a single person or any members of the same family. It covers people who are married or living together, as well as unrelated occupiers living with a family, such as a carer. However, friends occupying a house on a shared tenancy basis are viewed as multiple households.

In addition to mandatory licensing, local authorities have a discretion to extend the licensing regime to other HMOs who do not fall subject to mandatory licensing – known as “additional licensing”. This could include, for example section 257 HMOs or properties of less than 3 stories.

Section 80 of the Act also allows a local authority to require properties that fall within a district or area to be subject to selective licensing. The decision could be made, for example, because the area suffers with significant and persistent problems caused by anti-social behaviour by tenants whose private landlords are not taking action to improve the situation.

You can read more about selective licensing in our previous blogs:

What changes are being made?

On 1 October 2018, The Licensing of Houses in Multiple Occupation (England) Order 2018 will revoke the previous 2006 Order. This will have the effect of extending the scope of section 55 (2)(a) of the Act, making mandatory HMO licensing applicable to smaller HMO properties which are only one or two storeys high.

This effectively removes the storey requirement within the current 2006 Order. Therefore, under the new rules, mandatory licensing will include all HMOs with five or more people who form two or more separate households regardless of the number of storeys where the HMO meets the either the “standard test”, “the converted building test” or “the self-contained flat” save for purpose built flats in blocks comprising three or more self-contained flats.

The Licensing of Houses in Multiple Occupation (Mandatory Conditions of Licences) (England) Regulations 2018 (“the Regulations”) also come into force on 1 October 2018. These regulations will introduce minimum bedroom sizes and waste disposal provision requirements in licensable HMOs.

The mandatory minimum bedroom size for individuals sleeping in an HMO will be:

4.64 sq. m for one person under the age of 10;
6.51sq. m size for one person aged 10 and over;
10.22sq.m for two people aged 10 and over.

If a room is smaller than the specified size, it must not be used as sleeping accommodation.

Additionally, the new licence conditions permit the local authority to specify the maximum number (if any) of individuals aged 10 or over, alternatively under 10, who may occupy specified rooms provided in HMOs for sleeping accommodation.

The Regulations can be read in full here.

If a license holder fails to comply with the sleeping room standards by letting a room to or permitting it to be occupied by more individuals than permitted with the condition of the licence, they will commit an offence. If convicted, they are at risk of an unlimited fine. As an alternative to prosecution, the local housing authority also has the power to impose a financial penalty of up to £30,000,

Similarly, failure to hold the relevant license under the mandatory or additional licensing regimes is a criminal offence under section 72(1) of the Act and under section 95(1) of the Act in respect of a selective licensing regime.

In addition to facing an unlimited fine, the proceeds of any rental income derived from the let can be seized by way of a Rent Repayment Order or a Confiscation Order.

Next steps for landlords and local housing authorities

Landlords or landlord’s agents who manage HMOs must ensure that they apply for an appropriate licence and abide by all licensing conditions.

This can be a confusing and fast-moving area of law and expert advice should be sought at an early stage to avoid falling foul of an increasingly complex regulatory regime applicable to private lets.

Commentary

The private rented sector comprises 4.7 million households in England, of which approximately 500,000 are HMOs. It is estimated that at least a further 160,000 properties will fall within the new mandatory licensing rules.

Whilst the changes in the law will assist the Government in its aim of raising safety standards within the private rental sector, it will undoubtedly place private landlords under increasing pressure.

There has been a real effort to crack down on rogue landlords in recent years with the local authority prosecution of landlords steadily on the increase. For example, 18 landlords were prosecuted in Sheffield alone between 2016 and 2017 for various property offences, and were fined a combined total of around £40,000. They were also forced to pay a total of over £72,000 in legal costs. The offences included that of failing to licence a HMO and poor management of HMOs.

Furthermore, there has been a steady increase in the levels of fines being imposed and the number of prosecutions by local authorities, greater use of Rent Repayment Orders and the effective use of the Proceeds of Crime Act 2002 to confiscate rental income.

Given the potential consequences of failing to licence and appropriately manage an HMO coupled with the increase of criminal prosecutions, private landlords and their agents need to ensure they understand and comply with their obligations under the new rules.

Co-authored by Camilla Whitehouse and Shannett Thompson & Christina Orthodoxou of Kingsley Napley

Skirting The Clink: A Landlord’s Tale

Camilla recently represented a multi-millionaire property landlord who had previously pleaded guilty to an offence under Section 189 of The Town and Country Planning Act 1990, namely a failure to comply with a Council’s Enforcement Notice that he return a four unit property to a single dwelling family home.

Upon conviction, a Confiscation Order had been made in respect to the benefit gained by the Applicant by virtue of having let four units unlawfully. The Order was to be settled within three months or the Applicant would have been forced to serve a default term of imprisonment.

Camilla successfully varied the terms of that Order to allow a further three months, thus avoiding the imminent activation of the default custodial term which would have seen her client serve time in prison.

This case highlights the financial implications of failing foul of an ever growing regulatory regime imposed on private landlords. Ignoring an Enforcement Notice does not simply lead to a conviction and fine – any rental income received from such a property in these circumstances constitutes criminal benefit for the purposes of the Proceeds of Crime Act 2002.

As such, a landlord who lets a property in breach of an Enforcement Notice or without an appropriate HMO licence, can be ordered to repay an amount equivalent to the gross rent received. Note the use of the word gross: the landlord cannot deduct any expenses, even if legitimately incurred. The regime includes any income tax paid on the rental income.

Landlords are advised to seek expert legal advice on their obligations: falling foul of the law can be expensive and even result in a prison stretch if a Confiscation Order is breached.

Corporate liability success in House in Multiple Occupation case

Camilla was instructed to defend the Managing Director of a successful property company in respect of a prosecution for a House in Multiple Occupation licensing offence for an alleged breach of section 72(1) of the Housing Act 2004. The issues in the case concerned corporate identity and his company’s vicarious liability for the acts of senior management. After advising on evidence and drafting lengthy written representations, the local authority withdrew the prosecution against Camilla’s client, despite his previous convictions for HMO licensing offences.

This case builds on Camilla’s past successes in representing companies and individuals in landlord regulation disputes. Camilla has provided lectures and training on this topic and co-authors blog articles on HMOs with Kingsley Napley.

Camilla secures £4.5 million judgment and costs in central London property dispute

Camilla was instructed to represent a bridging finance company in its possession and monetary claims against Panamanian company and its Managing Director.

As part of its Defence, the Defendants presented evidence of government energy contracts worth $416 million as well as a diverse property portfolio worth $27 million across the Middle East and the USA that could be used as collateral to satisfy the debts.

Despite the Defendant’s evidence, Camilla won the claim in full, securing immanent possession of four central London properties and judgment and costs in excess of £4,524,000.

Freezing order injunction success in the High Court

Camilla was instructed to act on behalf of two radio stations to secure an emergency ex parte freezing order in the High Court. In a time sensitive case, the applicants had discovered a suspected internal abuse of accountancy protocols resulting in funds being inappropriately diverted. The applicants were unwilling, rightly, to await a police investigation. They turned to the civil arena to ensure that there would be sufficient funds to satisfy any claim against those responsible. Within less than three hours of being instructed to advise, Ms Whitehouse had attended the High Court and secured injunctive relief preventing the dissipation of assets in the terms requested.

Selective licensing scheme – Hyndburn sees first prosecutions of private landlords

Co-authored with Shannett Thompson and Lucy Williams of Kingsley Napley.

Not to be confused with a ‘House in Multiple Occupation’ (HMO) licence, an increasing number of Local Authorities have introduced Selective Licensing for landlords. If your property is within a selective licensing zone you must hold a licence regardless of its occupation and size (as distinct from the HMO licence).

If you are found to be without a licence you may be prosecuted and prevented from renting out your property in the immediate future.

Sections 79, 80 and 81 of the Housing Act 2004 (“the Act”) provided for the introduction of the selective licensing of private landlords. The Act came into force in April 2006 and thereafter, on 27 March 2015, the Selective Licensing of Houses (Additional Conditions) (England) Order 2015 (SI 2015/977) came into force. The Order specifies additional conditions that if satisfied, enable Local Authorities to designate an area as subject to selective licensing.

As a result of the changes in legislation and increasingly successful prosecution of landlords, selective licensing is garnering increasing support with Local Authorities. It has been rolled out by some Local Authorities fairly recently, for example it was extended to Liverpool in April of this year.

Selective licensing was brought into effect to try to address the impact of poor quality private landlords and reduce levels of antisocial behaviour, by ensuring that landlords are ‘fit and proper’ to hold a licence. The legislation was primarily introduced to tackle problems in areas of low housing demand, but the Act also allows for selective licensing in other circumstances. As a private landlord, you have a responsibility to check whether any rental property you own and/or manage falls in a selective licensing zone.

If the Local Authority believes that you have breached licence conditions they can take you to Court, where you can face a fine of up to £5,000 for each offence. Equally, if you are found to be operating a property without a licence in a designated area, a fine of up to £20,000 can be made against you.

Three landlords in Hyndburn, Lancashire, have become the first to be prosecuted for failing to comply with the requirements of the Council’s Selective Licensing Scheme, which was introduced in the area in 2012. In short:

One landlord appeared at Hyndburn Magistrates’ Court on 6 August 2015 to face an offence under section 95 of the Housing Act 2004, for failing to correctly licence her rental property; and

Two landlords faced charges at Hyndburn Magistrates Court in September 2015 for failing to obtain a licence.

In addition to the aforementioned landlords, Thanet District Council took a London-based landlord to court. He had been previously fined £15,000 for failing to comply with selective licensing, and was then fined on a second occasion to the sum of £20,000 for renting out a property without a selective licence.

What do you need to do if you are a private landlord?

Check with the Council in which your rental property is based to ascertain whether a selective licensing zone is in place;
If a selective licensing zone is in place, be sure that you follow the relevant Council’s application process to obtain a licence; and
Upon being granted a licence, ensure that you and your managing agents familiarise yourself with and adhere to the conditions attached to it at all times.

It is very likely that there will be an increase in the number of prosecutions under this scheme. Now is the time for landlords to check whether they are in a selective licensing zone and, if so, take immediate action.