October 2018
By Jonathan Bower, Solicitor at Seddons
It is well known that the significant growth in the UK’s residential rental market is a consequence of increasingly high property prices and a shortage of affordable stock which has left a large sector of the working population without the means, opportunity or capability to purchase a home of their own. Investors attracted by the benefits of rising and dependable rental income have invested their funds in property and greatly increased the number of let dwellings.
Many rental properties are classified as Houses in Multiple Occupation or HMOs, merely by reason of the number of occupiers living in them and their configuration. In general terms, an HMO is a dwelling let in sub units or rooms to several unconnected persons or households with shared communal facilities, which maximises occupancy and thereby maximises rental income for the landlord owner.
Local Authorities already heavily regulate HMO tenancy stock in their respective areas, but the government has recently introduced additional regulation to increase scrutiny and control of landlords and their rental properties. Landlords must obtain a relevant HMO licence from the appropriate Local Authority before a property can be occupied by more than a maximum number. Failure to do so is actionable by civil enforcement and criminal prosecution.
The regime can be confusing because it can vary widely from area to area. A Mandatory HMO Licence is standard everywhere, and required where any rental property contains five or more occupiers living in two or more independent households, usually where those households or occupiers share some common facilities like a kitchen or bathroom, and where the property in question meets the criteria set by the Standard Test, Self-Contained Flat Test or Converted Building Test (see the detail at the bottom of this article).
However, there are also Additional Licences and Selective Licences. An Additional Licence may be required by certain authorities in specific local circumstances where the landlord’s property would not normally meet the requirements for a Mandatory Licence but where the authority wishes to impose minimum levels of safeguarding or minimum housing standards. The criteria behind such requirements vary between authorities and landlords must check with their local authority to see if they need an Additional Licence, and what that entails - even where the Mandatory Licence is avoidable. Selective Licences give local authorities additional powers to impose specific requirements on any landlord within a given area. Selective licencing schemes are often reserved for areas with prevalent anti-social conduct.
Licencing is a serious responsibility and sometimes a landlord requires more than one type. Failing to obtain the correct licence or licences, can lead to both civil enforcement action by the prevailing authority, including criminal proceedings and a hefty fine upon conviction. While more let rooms equal greater rental income, licences can be a costly pre-investment with additional costs set by councils for processing the application on top of the costs of putting the property into a suitable state. Some authorities charge more than £1,300 for a five-year licence before the cost of any works. Aside from routine repair and decorations, works can impose a requirement to upgrade heating, draft proofing, sanitation, security, insulation, safety features and alarms, means of escape and signage for this and provisions for the disabled.
In short, once an investor has recouped the initial outlay of purchasing the licence(s) required and complying with the minimum standards set by the authority, HMOs provide a lucrative source of rental income.