9 HMO Questions Every Landlord Wants To Ask

With the lettings industry going through some considerable turmoil in recent years, traditional letting models have become less profitable for both agents and landlords. The reduction in mortgage tax relief and elevated Stamp Duty Land Tax mean that landlords have higher costs to bear. On top of that, the tenant fee ban has shifted some of the cost of agency services from the tenant to the landlord.

Typically considered a more lucrative letting model, HMOs (Houses in Multiple Occupation) have become more and more popular amongst landlords.

HMOs are typically associated with higher yields. Despite considerable barriers to entry, HMOs can prove an excellent investment and a great way to diversify and expand a traditional Buy-to-Let portfolio. It is important to remember that as with any investment, there are risks that need to be mitigated. When it comes to managing HMOs, compliance is paramount as mistakes can lead to very serious consequences and fines.

1. What is a HMO?
2. Are there different types of Licensing for HMOs?
3. What is a Mandatory HMO?
4. What is Additional HMO Licensing?
5. What is Selective Licensing?
6. Other than getting a license is there anything else I need to consider before becoming an HMO landlord?
7. How much is an HMO license and are there any other costs?
8. What happens if I let a property that needs a license without applying for one?
9. Who is responsible for HMO compliance?

1. What is a HMO?

House in Multiple Occupation (HMO) is defined in section 254 of the Housing Act 2004. This definition is detailed and complex, but in the majority of cases, a HMO is a property occupied by more than two people as their main residence, who are not members of the same household, sharing basic amenities.

2. Are there different types of Licensing for HMOs?

There are three types. These are Mandatory, Additional and Selective Licensing. Mandatory and Additional Licensing relate to HMOs but Selective Licensing can, in theory, apply to any type of tenure.

3. What is a Mandatory HMO?

Until recently, properties with less than three storeys did not require a mandatory HMO licence, but from October 2018, this exemption was scrapped.

HMOs that meet the three tests defined in Section 254 of the Act are mandatory HMOs. These are the standard test, the self-contained flat test and the converted building test. If a property in multiple occupation does not meet any of these tests, a mandatory licence is not required.

All properties occupied by five or more persons (who are not members of the same household) are now likely to require a licence, irrespective of where in England they are located. As the tests above can be quite confusing, you are advised to speak to the local authority and obtain written confirmation that an exemption applies to your property.

4. What is Additional HMO Licensing?

In 2010 local authorities have been given powers to introduce additional licensing schemes that would require non-mandatory HMOs to now be licensed. These are becoming more and more common amongst local authorities, who can choose to enforce licensing requirements for much smaller properties. For example, a one-bedroom property can be a licensable HMO if it is occupied by a couple and a friend sharing a kitchen and using the lounge as a bedroom.

Local authorities set their own standards which can significantly differ from borough to borough. For example, in Finchley, there is a road which is split between the borough of Barnet and Haringey. An identical property occupied by three sharers will require a licence in the borough of Haringey whilst the one in Barnet would not.

To make matters even more complicated, there are some interesting nuances even in the same boroughs. In one of the north London boroughs, ground floor flats are exempt from additional licensing. A ground floor flat in a purpose- built block (which is exempt from mandatory licensing) could be occupied by six households without the need for the landlord to obtain a licence.

Additional licensing often poses the highest risk to landlords and tenants as one has to proactively monitor consultations and local authority notice boards to remain compliant. As with mandatory HMOs, for the belt and braces approach, one should get confirmation from the local authority on whether or not a licence is required.

5. What is Selective Licensing?

This is the most recent addition to property licensing and can apply to any property if there are concerns over the social or economic environment of that particular area. This type of licensing is less common, however, non-compliance is enforced in a similar way to other types of licensing breaches.

 

6. Other than getting a licence is there anything else I need to consider before becoming an HMO landlord?

Yes. Most mortgage lenders have restrictions in their terms prohibiting HMO letting. A landlord should consult their mortgage lender first because, in some cases, they could have to change their mortgage product entirely.

Another consideration is planning consent. Article 4 directions (Town and Country Planning) can require planning change from a C3 class (which is a single household dwelling) to a C4 class, which is what most mandatory HMOs and additional licensable HMOs would fall under. Any HMO occupied by more than 6 people will be in a class of their own, also known as Sui Generis.

Minimum sleeping room sizes are set as 6.51 sqm for a single occupant, 10.22 sqm for a couple and 4.64 sqm for a child under 10 years old. Whilst local authorities cannot impose lower standards, they can decide that the sizes above are not fit for their borough and impose higher standards instead.

7. How much is an HMO licence and are there any other costs?

Licence fees vary but they tend to be somewhere in the region of £1,000. There are councils that charge considerably more than this, however, the intention is that the cost should not exceed the cost of processing the licence application. In the case Peter Gaskin v LB Richmond Upon Thames (2018) , the High Court ruled that a licence fee of£1799 was unlawful because the charge was not limited to the cost of processing the licence application.

There are also likely to be costs associated with bringing the property to the required standard in terms of health and safety. Some of these are electrical installations, certification and fire safety assessments.

8. What happens if I let a property that needs a licence without applying for one?

This is probably the worst decision that a landlord can make. Not only would they likely face a fixed penalty notice issued by the council, but they could end up with a criminal record, an unlimited fine and banning orders.

You should think ahead and apply for a licence before the tenancy starts. Tenants are often incentivised to report Housing Act breaches as they could have all the rent refunded to them. There have been instances where councils would collaborate with tenants and build criminal cases. These have led to successful prosecutions of both landlords and agents involved.

A typical fine for a first offence of operating a licensable HMO without a licence is in the region of £5,000. A repeat offender could be fined up to £30,000 by the council as an alternative to criminal prosecution and an unlimited fine.

9. Who is responsible for  HMO  compliance?

The legislation is worded in a way where anyone responsible or complicit in an HMO breach could be prosecuted. One of the most common offences is when a person having control of or managing an HMO that requires a licence but the property is not so licensed. Section 72 of the Housing Act defines the breach and Section 263 defines “person having control of” and “person managing”.

The biggest risk for agents is posed from the misinterpretation of what “rack-rent” is. The Act states that if a person receiving rent which is not less than two-thirds of the full net annual value of the premises, that person will be considered as having control of the premises. Therefore, they could be committing an offence under the Act if the property is not licensed. In recent cases heard by the tribunal and small claims courts, local authorities are choosing to interpret the net annual value as market rent instead. They are looking at the amount that the property concerned could earn in rent over a year. For this reason, even if the agent is merely hired by the landlord to perform a “tenant find only” service, the agent could end up paying a significant fine for a Section 72 breach if they collect the first month’s rent from the tenant. Although this interpretation has not been challenged in higher courts yet, the fact that agents are choosing not to question it, speaks volumes and is only reassuring councils that this interpretation is correct.

The act allows local councils to prosecute both landlords and agents for the same offence. For example, although the agent collected the first rent payment, any rent paid directly to the landlord afterwards would make the landlord a person having control and/or managing the property at that point. Also, there are other offences under the Act that both landlords and agents need to be aware of before venturing into the complex business of letting and managing HMOs.

 

Conclusion

There are a huge number of considerations that landlords and agents need to be aware of before they can let or manage an HMO property. With consultations for new selective licensing schemes taking place up and down the country, we can expect more changes to property licensing requirements across the UK. As a first step, landlords and agents should regularly and proactively update themselves of the current licensing requirements in their borough.