October 2018 has seen significant changes to the rules relating to HMOs in England.
Legislative changes and a Supreme Court decision will not only affect residential landlords and tenants, but will also have implications for lenders taking security over HMOs and any receivers appointed to manage them.
Under the new regime, more buildings will be caught by the mandatory HMO licensing requirements, meaning that some properties which previously did not require a licence now do. The mandatory conditions which must be attached to HMO licences have also become stricter.
Breaches of these new rules, as well as the existing HMO legislation, can have severe consequences. Lenders and receivers will need to ensure they are not caught out by a landlord's failings.
This legal insight covers the position relating to HMOs in England only. The rules are different in other parts of the UK.
There are complex rules and several different statutory tests to determine whether or not a property is an HMO. In essence a property will generally be an HMO where:
For this purpose, a 'household' can be either a single person or married, cohabiting or related people living together (as well as limited other relationships such as a carer and a person receiving care). Unrelated friends in a house share arrangement are considered separate households.
All HMOs must be managed according to rules specified in legislation. For example, all occupiers must be provided with the HMO manager's name, address and telephone number and the HMO manager must ensure all fire escapes are clear of any obstacles and in good order and that there are adequate fire safety measures in place generally.
In addition, HMOs are required to be licensed under the mandatory licensing regime if they meet certain criteria (see "The rule changes" below). Local authorities may also impose additional or selective licensing in their areas to widen the scope of HMO licensing in a particular authority area.
Where a local authority grants an HMO licence, certain mandatory conditions are imposed which the landlord must comply with. These include obligations which relate to matters such as gas and electrical safety, smoke and carbon monoxide alarms, and providing the occupiers with a written statement of the terms of their occupation. Whilst all landlords have similar obligations, HMO landlords must achieve a higher standard in some areas (for example, whilst all landlords must install smoke alarms on every storey and ensure they are functioning at the beginning of each new tenancy, an HMO landlord has an obligation to ensure the smoke alarms are kept in working order throughout the tenancy).
Previously, HMOs were mandatorily licensable where they were occupied by five or more people forming more than one household and had three or more storeys. On 1 October 2018, the Licensing of Houses in Multiple Occupation (Prescribed Description) (England) Order 2018 came into force, which removed the number of storeys from the mandatory licensing requirements. Therefore, mandatory licensing now extends to HMOs occupied by five or more people forming more than one household, regardless of the number of storeys. It is estimated that over 160,000 additional properties become subject to mandatory licensing as a result of this change.
The Licensing of Houses in Multiple Occupation (Mandatory Conditions of Licences) (England) Regulations 2018, which also came into force on 1 October 2018, have added new mandatory conditions which local authorities must impose when granting an HMO licence. Landlords are now additionally required:
Separately from these rule changes, on 10 October 2018, the Supreme Court issued its decision in this case, in which the Court confirmed that conditions in an HMO licence limiting the class of persons (in this case students) for whom the HMO is suitable are lawful. This illustrates the flexibility that local authorities have when imposing conditions to HMO licences. They are by no means limited to the mandatory conditions outlined in this insight.
The government is aiming to improve living conditions in shared housing and crack down on rogue landlords. The changes to the HMO regime are merely part of the increased regulation we are seeing in the residential lettings sector. This is combined with an apparent push to pursue prosecutions and other enforcement action against landlords who fail to comply with the rules.
The consequences of a breach of the HMO rules can be very severe. It is a criminal offence to let a licensable HMO without obtaining a licence, or to fail to comply with any of the conditions of a licence. Moreover, where no licence is in place, a rent repayment order could be made, obliging the landlord to return any rent received from HMO occupiers and compromising the landlord's income stream which was intended to meet loan repayments to its lender. Additionally, a section 21 notice to recover possession from the tenants cannot be served for as long as a licensable HMO does not have a licence, meaning a lender or receiver may be unable to recover vacant possession of a property if the need arises.
As the compliance burden for landlords increases, lenders taking security over residential property should be on their guard to ensure their security is not compromised by a landlord's failings.
Most lenders will already have specific HMO products and will include a prohibition in their standard buy to let products which prevents the security property being used as an HMO. They should also consider reviewing the terms and conditions of their HMO products to ensure that they are comprehensive and require the borrower landlord to comply with its obligations. Specific conditions requiring compliance with the HMO rules could also be attached to mortgage offers.
Receivers appointed over residential property also need to be aware of the HMO rules. They will need to verify that the landlord has a licence in place, if required, and that there are no breaches of the licence conditions or any other rule relating to the management of the HMO.
The complexities and fast moving nature of this and other areas of regulation of the private rented sector make seeking expert advice at an early stage essential. TLT is experienced in all aspects of mortgage enforcement and has a dedicated residential property team. Please get in touch to find out how we can help you.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.