The old rules

There have been rules governing shared housing, multiply-occupied premises, bedsits, elderly conversions and buildings that ran over three or more floors that all local authorities could enforce since the enactment of the Housing Act 1985. What we are discussing in this lesson is new legislation. The Housing Act 2004 came into force in April 2006 and represent a significant change to the way in which landlords and agents let out property to all sharers.

What is a House in Multiple Occupation (HMO)
under the old rules?

Under section 345 of the Housing Act 1985, it used to be defined as ‘a house which is occupied by persons who do not form a single household’. Up and down the country, local environmental health officers used this definition to ensure that buildings occupied by a variety of tenants were safe. Buildings classified as HMOs under the old legislation were usually those with five or more sharers, bedsits, old conversions, etc. The reason for the legislation was simple. Five separate meals being cooked equals five times the fire risk. These rules covered a variety of scenarios – from single-bedroomed flats in elderly conversions; hostels where many people shared amenities; right through to large, complex house shares. In other words, a minority of landlords running very particular types of units were affected.

Why the law was changed recently

Unfortunately, at a time when the numbers of young people leaving home to attend university exploded, a landmark legal judgement (Barnes v Sheffield City Council (1995) 27 HLR 719) moved the goalposts. Previously, local authorities only intervened when they felt that student accommodation was clearly inadequate. Environmental health departments did not have the resources to harass every landlord in town. Nor were they interested in penalising responsible student landlords – only those trying to maximise profit at the potential cost of someone else’s safety.

Unfortunately, this landmark legal judgement decreed that – under the Housing Act 1985 – students sharing houses could effectively be legally regarded as a single household. This, in effect, meant that most student housing (despite often being some of the worst) was exempt from the protection of environmental health officers and that safety measures on clearly unsatisfactory housing could not be enforced, where students had all signed a single lease.

What is both interesting and already being mis-reported is that local authorities already had powers to enforce safety on almost all of the 2004 Act’s ‘compulsory’ section. Most problem units have already been tackled and standards have risen exponentially.

What was certainly not required to solve these issues was a five-year consultation and legislative proposal to protect tenants in property that was already largely protected by the 1985 Act. The reason for this extended process was driven by the Barnes v Sheffield City Council case and the outcome clearly allows local authorities across England and Wales to intervene much more extensively than was envisaged by the 1985 Acts.

Defining a ‘single household’ as one person – a co-habiting couple – or a single family – as they now have, is a very radical move.

Thus, many more landlords will now be running units which are HMOs – though many will still not require a licence – yet.

Some local authorities will use their new discretionary powers to licence some smaller shared units almost immediately, as it’s now a local choice.

Others will act more slowly or discriminately. This is likely to vary significantly – area by area. Why? Because each borough contains massively different types, styles and age of property. Where older, shoddy housing is used en masse to house tenants (particularly the young and the poor) a local authority is likely to be very concerned. In newer towns, where the student population, for example, is housed in pretty reasonable accommodation, their concern is likely to be less.

Any landlord whose property falls into the compulsory section must contact their local authority immediately. Other landlords whose property falls into the discretionary sections of the legislation will need to keep a careful eye on their individual local authority’s policy – both now and in the future – as this legislation is likely to ‘evolve’. However, over time, local authorities may decide to impose policies over a far wider range that at present. Their opportunity to do so is very clear to anyone reading through the licensing section on the Department of Communities and Local Government website. This could mean that many thousands of landlords with modest tenant numbers of two or three could find themselves running HMOs. This is particularly clear from the short question and answer section later in this Lesson between myself and the ODPM in February 2006.

The role of environmental health officers

Theirs is a necessary and often thankless task. However, investors should understand that we cannot take 50 per cent of a tenant’s income each week and expect to be allowed to get away with dangerous conditions. Environmental health officers do a vital job in protecting our young people, and our more vulnerable adults. So, no one is trying to put you out of business. However, standards that may cost some money to implement may well be required, now or soon.

The 2004 legislation (in operation from April 2006) makes potential provision for almost all shared properties to be licensed – and puts all landlords who rely on more than one tenant to pay the rent on imminent notice of change.

New rules from April 2006

This guide attempts to escort you down the widest of the new legislative avenues but any landlord who rents property to any combination of rent payers needs to contact their local environmental health officers now for detailed guidance. This lesson is no substitute for the detailed technical help you will need to comply with these complex new laws if you rent out shared property. Landlords need to check for future policy changes – where councils can make charges, they tend to act – and licenses are already being mooted at costs ranging between £100 and £1,000.

The new definition of a ‘household’

The new definition encompasses:

• A family.
• Single persons.
• Co-habiting couples (whether or not of the opposite sex).

Though still in its infancy, the old idea of shared housing has undergone a radical adjustment – strengthening by a considerable amount any council’s enthusiasm for knowing what’s going on inside those investments of yours.

Any sharing (with that exception of co-habiting couples or genuine families) means that the property is an HMO – no matter how the lease is organised. How your own local authority decides to interpret its new powers is crucial. And this definition is so narrow that tens of thousands of landlords may, wholly unwittingly, find themselves being caught up in the HMO net. The status of tenants becomes immaterial – this new regime is a simple numeric equation. Three City lawyers in a smart flat equals an HMO (though the council may or may not demand licences). Far more detailed information is available as usual at: www.communities.gov.uk. Click the ‘licensing’ or ‘HMO’ links.

Exceptions to the new legislation

• Buildings or parts of buildings, occupied by no more than two households each of which comprises a single person (ie a two-person flat share).
• Buildings occupied by a resident landlord with up to two tenants.
• Buildings managed or owned by a public body (such as the police or NHS) or a local housing authority or a registered social landlord.
• Where the residential accommodation is ancillary to the principle use of the building, eg religious establishments, conference centres, etc.
• Student halls of residence, where the education establishment has an Approved Code of Practice.
• Buildings regulated otherwise than under the Housing Acts such as care homes, bail hostels, etc and the description of which are specified in regulations.
• Buildings entirely occupied by freeholders or long leaseholders.

However, for those of you who just felt a chill down their spine, I defy you, having read the fascinating replies from the ODPM to my queries, to believe that this is anything less than a sea change for a huge number of us. The Q&A took place prior to the legislation coming into force.

• QWhat happens if a two-bedroom flat – let by the landlord/ agent to two single, non-related persons – is sublet by the tenant to one additional person without the management’s knowledge or consent – will this unit still be an HMO?
• AYes it will be an HMO – in your tenancy agreement you should make it clear that tenants cannot sub-let.
• QIf this happens and the landlord/agent is served with a notice to comply with the HMO regulations, who will be liable for the cost of remedial works to bring the building into statutory compliance, if the tenant has broken a condition of their lease by sub-letting?
• AA Landlord/agent.
• QHow is the management (landlord/agent) supposed to be able to prevent or supervise this – without breaching a tenant’s right to ‘quiet enjoyment’?
• AIn the tenancy agreement, it should be made clear that tenants should not sub-let, the landlord/agent should also know who is renting the property at the start of the tenancy agreement and throughout the life of the tenancy agreement (emphasis added). Land-lords/agents should also make regular checks of the property.
• QIf the tenant sub-lets and charges no rent – is an HMO still created?
• AYes – if the property is sub-let making it suitable for operating as an HMO, it will need a licence.
• QWill service of a Notice to Quit on tenants who have created an HMO without their management’s knowledge or consent be sufficient to suspend any notification demanding HMO improvements?
• AAgain, it depends on the property being suitable for operating as an HMO and whether it is going to be used as an HMO. If it is going to be rented out and operated as an HMO then it will need to have a licence. If this is an issue you have with your property, you may want to check with your local authority as they may want to see some sort of proof that the property will not be let out as an HMO.
• QWill landlords be legally obliged to understand that they are operating an HMO – or not?
• AYes, all landlords requiring HMO licences will be required to apply for a licence from 6 April 2006. There will be a grace period of three months to allow landlords sufficient time to send in applications once the three month period is up, any landlords requiring a licence who have not applied will be subject to legal proceedings, ie fines.
• QWill landlords who have no awareness that this new legislation affects them (the thousands of small portfolio landlords operating one/two/three bedroom properties without letting agents or membership of any landlord association) – who breach this legislation through complete ignorance of its existence – still be liable for a fine of up to £20,000 – or does this only apply if a ‘licence’ is breached? If so, what sanctions will be placed on landlords who don’t know their obligations and fall foul of the law?
• AThe ODPM will be running a national publicity campaign. By 6 April [2006] all landlords should be aware of the requirement to have a licence. Once licensing becomes law in April 2006 there will be a three-month grace period in which landlords will be encouraged to apply for a licence without becoming liable for fines. If landlords who have not applied for a licence after this three-month grace period and are found to be operating an HMO illegally, they will face fines of up to £20,000.
• QIs there a précis (shortened version) of the new Hazard Rating System for landlords – the full guidelines are 193 pages long and far too technical for a layman?
• AThere is a factsheet on the HHSRS system. The address is: www.odpm.gov.uk/hmo.
• QDoes this new legislation supersede the Barnes v Sheffield City Council case, which managed to exempt student sharers on a single lease?
• AYes. It will supersede Barnes v Sheffield City Council. Here is more detail.

Unanswered queries

Here are two final questions that getting answers to has not been possible.

• 1.What happens to a unit that slides in and out of the licensing requirements as sometimes it’s let out to two, other times to three – depending on the market conditions?
• 2.Once licensed, what precisely do you have to do to become unlicensed? Or will that building be licensed for a period of time that may affect its saleability on the open market?

Still confused?

Small wonder. After all these years of consultation, we still don’t have the one thing we needed, a national standard that all local authorities and landlords are forced to adhere to and applied across the board so we all knew exactly where we stood and our costs matched our local competitors. This ‘will they? won’t they?’ is a nightmare for those crunching tight numbers. The vast majority of rentals involve more than one tenant – and each local authority will still be able to decide for itself which buildings may require a licence and which may not.

What do these new laws mean I need to do?

Any landlord who rents out property that clearly offers accommodation to more than one of the legally defined households, needs to discuss matters with their local environmental health department. Just make your call. Environmental health officers are not the private landlord’s enemy, they exist to raise standards in what is often pretty poor accommodation. Remember, they often see the worst, rarely the best – and this is bound to affect their view of our industry. But most EHOs are helpful goldmines of information. They don’t want to penalise you – but they have legal responsibilities to enforce safety and they just became a whole lot more important to most landlords in the UK.

Will I need a licence?

Many landlords who rent out everything from swanky mansion flats in the City to two bed-room terraces in the north are going to find themselves on the local authorities’ radar. A good rule of thumb is that every landlord who relies on more than one income to pay rent needs to contact their local authority promptly and enquire whether or not that type of housing in their area has been locally designated as requiring a licence to operate yet. If so, you need to apply and comply. No debate.

What happens if I don’t report that I’m letting out an HMO?

As you read in my Q&A, landlords who ought to have a licence and fail to apply will be fined. Although your local authority may decide that you don’t need a licence to operate, you’d have to have very deep pockets to assume that much when £20,000 fines are being bandied about. Plus, read the last paragraph of this Lesson – for a true toe-curling moment. These laws have teeth and they will bite unwary or under-informed landlords.

What can the local authority make me do to the building to
obtain a licence?

More muddy water I’m afraid. Where local authorities used to be able to have a uniform set of standards (a certain type of wiring standard, fire doors, so many electrical sockets per room, etc), the new 2004 Act introduces a mouthful of letters – the HHSRS (Housing Health and Safety Rating System) with its 193 pages of endlessly interpretable guidelines. Each unit applying for a license needs to be separately assessed and hazards ‘rated’ by environmental health officers against a Byzantine formula.

Yet again, I can see the logic. Given the sheer numbers of properties that may eventually fall into a licensed category, it does seem mad to insist that (say) a nearly new three-bedroomed house on a smart estate (as opposed to the shabby old terraced house with exactly the same number of tenants sharing) has to have all its wiring replaced etc. But this complexity makes it very difficult for investors to know exactly what is required.

Rather than a clear set of rules, environmental health officers are required to make professional assessments based on a new safety rating system. I can see endless challenges as one State EHO makes one professional assessment – only to be challenged by an equally qualified and professional Private EHO engaged by a landlord, who makes a different, equally professional assessment.

Here we are back in Whitehall’s beloved land of unintended consequence. When will they learn?

But these new rules won’t affect me…will they?

As for those landlords and agents, currently so certain that these new rules won’t affect them, I’m afraid I don’t share their confidence. Local authorities have been running Registration Schemes and piloting licences for years. They know their own areas well and they’ve had (rightly in my view) powers to serve improvement notices on larger buildings and larger house shares since 1985 – and have done a good job in raising standards. The reason behind this new legislation was to correct the Barnes v Sheffield City Council anomaly – in other words, they’ve already tackled the most dangerous housing scenarios – this legislation is designed to bring smaller scale operations under their safety umbrella. For those of you tearing your hair out by the roots, let me assure you that your three-bedroom semi housing three students may well be pristine. Unfortunately, across the country, many are appalling and, due to the Barnes v Sheffield City Council judgement, so long as four or less students signed a single lease, there wasn’t a thing the local authority could do to protect those tenants – until now.

Why has the bar about what constitutes an HMO been set so
low?

I have no idea. Nor do I know anyone who expected a bar below 2 or 3. There will undoubtedly be legal challenges. The next three years promise to be yet more of those ‘interesting times’ the UK is so often in.

A breakdown of the main changes

• HMO stands for House in Multiple Occupation.
• A single household consists of one family, one co-habiting couple or a singleton.
• The 2004 Act makes it compulsory to license larger, high risk rentals.
• The 2004 Act allows councils to run licensing schemes on smaller shared properties.
• The 2004 Act creates three types of license:

• 1.Compulsory
  For properties that are three or more storeys high; have five or more tenants who share amenities such as bathrooms/kitchens.
• 2.Additional licensing of HMOs
  Discretionary powers that councils may decide to apply to a particular type of HMO – for example, students or asylum seekers (or any others it considers a priority).
• 3.Selective licensing (mainly discussed in this lesson)
  Properties that are not subject to mandatory HMO licensing could be also be covered under a selective licensing scheme. This is where the local authority may declare certain areas (eg where there is low demand or anti-social behaviour) as appropriate for selective licensing. This could cover many forms of rented property including a vast number of shared arrangements.

Collectively – these three forms of licensing potentially cover virtually every type and income bracket of property across the UK.

To obtain a license

Anyone who owns or manages a compulsory HMO (unless your borough has decided to classify other types of sharing immediately) that must be licensed has to apply to the local authority for a licence. The local authority should give a licence if satisfied that:

• 1.The HMO is suitable for the number of people allowed under the licence.
• 2.The proposed licence holder is a fit and proper person.
• 3.The proposed management arrangements are satisfactory.
• 4.The financial structures of the management are suitable.
• 5.That fees are paid.

How long will a licence last?

A maximum of five years.

Can I be refused a licence?

Yes – unless you comply with the requirements made on the number of occupants, condition of building, facilities and contents.

Can I operate without one?

No – not unless you fancy the fine.

Can I appeal if they refuse me a license?

You must appeal to the Residential Property Tribunal (details available through the local authority) within 28 days of being refused a licence.

You mentioned fines – are there any other sanctions?

A £20,000 fine for not having a licence – and £5,000 if you breach any licence conditions.

Oh, and just one final sanction

Tenants living and paying rent in accommodation that should have been licensed – but wasn’t – can claim back all the rent they paid during the unlicensed period (up to 12 months’ worth of it.). They also need to approach the Residential Property Tribunal to lodge a complaint. Councils can reclaim housing benefit they paid out too.

Whys and wherefores

As usual, the best sources of information on this topic remain the government on www.communities.gov.uk. Look for Housing in Multiple Occupation, or licensing links and click through what you find – looking for factsheets. The Royal Institute of Chartered Surveyors’ website is another good one to try on: www.rics.co.uk. All environmental health departments have had additional training provided by the government. to help prepare them for the changes so you can telephone for informed advice.

CHECKLIST/SUMMARY

• The new legislation came into force from April 2006.
• All landlords who let property to more than one tenant need to contact their environmental health department to check what the local interpretation of these laws will be.
• Local authorities have been given sweeping powers that have the potential to regulate most landlords.
• Some properties will require immediate licensing – check.
• This new legislation is a simple numeric calculation – three tenants in one unit always equals an HMO. Two tenants in some limited cases could also be an HMO.
• Licensing of HMOs, however, is far from automatic – each local authority will decide for itself how to interpret these vast new categories of housing according to local conditions.
• The government has introduced a Byzantine Hazard Safety scheme for all HMOs (HHSRS). There is a factsheet on this topic on the government website. Although 193 pages long, the details so far don’t include fire prevention measures.
• Landlords with questions should email: licensing@communities. gov.uk.
• Local authorities will only issue licences where they feel it is appropriate – in terms of the building and amenities. This may also mean that some landlords will need to reduce tenant numbers to comply.
• Landlords wishing to operate outside the scope of licensing altogether will need to have very low tenant numbers indeed.
• Licences can be refused. There is an appeal procedure.