The Housing Act 2004 received Royal Assent on 18th November 2004.  It introduced several important new provisions onto the housing law statute books, especially with regard to fitness standards and licensing. 

In the second of a series of articles on these Housing Act provisions, Phillip Hopkins and Paul Ives explore the new provisions for the licensing of houses in multiple occupation and the likely effects for landlords, agents and tenants.

It all started with a fire. Deaths some years ago in a London property occupied by a number of people sharing caused much concern about the health and safety of such properties.

HMO Provisions

In outline the Housing Act 2004 proposes the introduction of a mandatory national licensing scheme for houses in multiple occupation throughout England and Wales. It will be mandatory to license larger, higher-risk HMOs and the Government's present view is that these will be 3 storey properties with 5 or more occupants which comprise two or more households.

Local Housing Authorities (LHAs) will also have the discretion to extend licensing to other categories of HMOs to address particular problems that may exist in these smaller properties in their particular area, or indeed any other type of rented housing where there are deemed to exist problems with either bad landlords or bad tenants.

The Act also provides for a new definition of an HMO, and limits the scope of licensing and enforcement action, other than in relation to Housing, Health and Safety Rating System action (see Letting Update April 2005), to certain types of HMOs within that definition. A licence fee will be payable and a rate determined locally.  Controlling or managing an HMO which is not properly licensed will be a criminal offence, plus there will be other onerous civil penalties.

Three schemes

There will be three main licensing schemes that will be introduced under the Housing Act 2004:

Mandatory HMO Licensing

Additional HMO Licensing

Selective Licensing

Mandatory HMO licensing

For certain categories of HMOs, all local authorities will be required to establish licensing schemes in their local areas (whereas under current HMO licensing, there is no compulsion on the local authority to set up a scheme if they do not feel it to be necessary).  The current thinking is that such schemes will initially apply only to properties which comprise three storeys or more and are occupied by five or more persons, who comprise two or more households.  The legislation has been carefully drafted so that the scope of mandatory licensing could be widened or restricted in future to include other types of building (e.g. two storey buildings) occupied by individuals who do not form a single household under the new HMO definition. 

Additional licensing

Under the Housing Act, local authorities will have the right to formulate an additional licensing scheme for other types of HMO outside the mandatory HMO scheme.

For example, a local authority may decide that it wants to extend HMO licensing in the local area to all two storey HMO buildings occupied by three or more persons.  There are certain conditions that have to be met; the local authority would be required to undertake consultation and gain approval from central government which must be conducted according to prescribed timescales.

Selective licensing

The Act also empowers a local authority to introduce selective licensing to all landlords in a particular local authority area.  The intention of selective licensing is to provide a further control over the private rented sector, especially in run-down areas or areas where there are problems with anti-social behaviour arising from the activities of a landlord or his tenants.  Again, subject to some simple controls such as consultation and approval from central government, a local housing authority will be permitted to require all private landlords in a particular area to be licensed.  Before a licence is issued, the local authority will be able to undertake checks on the landlord for good character and any previous convictions.  The local authority will also be able to specify minimum standards of management that must be met.

If a landlord owns a property that is already registered as an HMO, then there will be no requirement to apply again for another licence on the same property for selective licensing.

Many aspects of selective licensing remain to be finalised and we will report further on selective licensing in Letting Update as more details are available.

Definition of HMO

One of the problems in this area has been the definition of an HMO. The Act attempts to resolve some of these issues as far as licensing is concerned, but does not change the definition as far as Council Tax and planning are concerned. So the problem of conflicting definitions remains.

The previous definition of an HMO within earlier housing legislation caused the Government and local authorities many problems because it was so imprecise.  In the new Act, the Government definition is more precise but in the process, it has created a complex definition that does not make for easy description.

In the Housing Act 2004, a 'House in Multiple Occupation' means a building, or part of a building, (e.g. a flat):

a building or part of a building (e.g. flat) which is occupied by more than one household and in which more than one household shares an amenity such as a bathroom, toilet or cooking facilities.

a building which has been converted into several living units of accommodation, and where not all the living accommodation is self-contained (whether or not there is also a sharing of amenities)

a building converted into self-contained flats, less than two-thirds of which are owner occupied, and the standard of conversion does not meet, at a minimum, that required by the 1991 Building Regulations.

In all cases, the assumption will be that the typical occupants of an HMO are people who pay rent and occupy as their main or only residence.  These definitions are not entirely fixed.  For example, the Act defines that students who only occupy accommodation part time could classify as an HMO occupant, and other classes of occupation remain to be dreamed up by the civil servants and can be prescribed in future regulations.

Household

Whether or not a group of people classify as a 'household' is also a controversial point under the legislation.  A family will classify as a household, whereas a group of individuals sharing a house will normally be considered as multiple occupation.  People may also be considered as part of the same household if they are married, living together or even just related to each other (including half relatives and step-children).  The Act allows and leads us to expect that regulations will be introduced that prescribe other types of relationship - such as domestic staff or fostering or carer arrangements) that may be either included or excluded within this definition of household.

So far so complicated .... the landlord or letting agent will now have the unenviable task, in some situations, of prying into the relationships of the individuals.  Are they related? Are they sleeping together?  It will not always be straightforward to determine.  For example a couple who are co-habiting will count as a single household (whether or not they are of the opposite sex).

For example, a house shared by five individuals holding a joint tenancy, and sharing kitchen and bathroom facilities will qualify under the new definition as a house occupied by five households.  But if two of those individuals are related or in a relationship and 'living together', then there will only be four households.

Whether this definition will be any clearer or easier to understand than its predecessors, we will have to wait and see just how it will be operated in practice. However, given the complexity of this definition, the problems involved with trying to define an HMO seem likely to continue. 

Flats

The situation with flats within a larger building is a particular source of complexity and confusion under the Act.

Firstly, a self-contained flat may also be an HMO, if it is occupied by people who are more than two households.

Secondly, the Act recognises that larger buildings have been converted into several units of accommodation.  The whole building itself can become an HMO if not all the flats are self-contained, or if there is sharing of amenities such as a bathroom or toilet.

Thirdly, the building can become an HMO, even if it has been neatly divided up into self-contained units, if the conversion does not meet the 1991 Building Regulations.   The licensing provisions will apply not only to the dwelling which does not meet the building regulation requirement but to all other owners and managers of the other flats in the surrounding building where less than two thirds of the flats are owner-occupied.  This may give rise to problems for the remaining occupants and flat owners who could be other long leaseholders or private landlords.  The flat owners or their managing agents could become liable for committing criminal acts under the new legislation simply because of the non-compliance of other flats in the building. 

There are likely to be a considerable number of pre-1991 conversions around the country. Many people living in flats that they own would appear now to be covered by this definition.

The current view is that in calculating three storeys, regard should be had to attic or basement accommodation used, or capable of being used, for residential purposes. It is also intended that any part of a building not used for residential purposes, such as commercial premises on the ground floor of a building, will form part of the HMO for determining the number of storeys, but shall be excluded for all other purposes. It is clear that the purpose of this provision is to cover flats above shops which in many towns and cities are rented by groups of people sharing as they are frequently seen as inappropriate or unsuitable for other groups in the rental market. But again many are going to find themselves unexpectedly caught by this HMO scheme.

Penalties

Controlling or managing an HMO which ought to be licensed, but is not licensed, without a reasonable excuse for doing so, will be a criminal offence, subject to a maximum fine of £20,000. It should be noted that this may be subject to challenge on Human Rights grounds as happened recently in Northern Ireland.

There will be additional civil penalties for operating an illegal HMO. Firstly, the landlord will not be permitted to issue a section 21 notice - any such notice will be deemed to be invalid.  Secondly, the local authority may impose, via the jurisdiction of a residential property tribunal, a Rent Repayment Order (RRO) on the landlord which can require the landlord to pay a penalty equivalent to one year's rent. 

These are, indeed, very onerous penalties.   They represent the first time in almost 30 years (since the Rent Act 1977), that Government has interfered with the landlord's basic right to receive a fair rent and to repossess his property.  It will make any landlord or agent particularly careful not to fall foul of the legislation, inadvertently or otherwise.

"These are very onerous penalties.  They represent the first time in almost 30 years, that government has interfered with the landlord's basic right to receive a fair rent and to repossess his property."

Passporting and temporary exemption

The Government is intending to publish Regulations that will provide that, where an HMO is registered under an LHA Registration Scheme with Control Provisions, the property may be passported into licensing. That is to say a property that is registered at present will become licensed automatically. Where the HMO is registered and will be subject to mandatory licensing it must be passported into licensing. A licence will be granted for the residual period of registration and at no cost to the licence holder.

An owner or manager of an HMO may apply to the LHA for a Temporary Exemption Notice (TEN). If a TEN is granted the HMO is exempt from licensing and accordingly the manager/ owner does not commit the offence of operating an HMO without a licence. An LHA may only grant a TEN if it is satisfied that the applicant is, or will shortly be, taking steps to ensure the HMO ceases to be subject to licensing; for example, if planning permission has been obtained for the conversion of the HMO to single family occupation. Similarly, where a landlord has inadvertently created a HMO by letting to a group of sharers, the granting of a TEN would allow the landlord time to issue a possession notice to terminate the tenancy.  A TEN can only be granted for a maximum period of three months, but in exceptional circumstances the LHA may issue a second TEN to last a further three months following the expiry of the original.

Exemptions from the HMO definition

Certain types of buildings will not be HMOs for the purpose of the Act, other than Part One (HHSRS) and are, therefore, not subject to licensing. These include those:

• Buildings, or parts of buildings, occupied by no more than two households each of which comprise a single person, for example two person flat shares;
• Managed or owned by a public body, such as the police or the NHS or an LHA or a Registered Social Landlord;
• Where the residential accommodation is ancillary to the principal use of the building, for example, religious establishments, conference centres;
• Student halls of residence, where the universities are specified as exempt by order;
• Buildings regulated otherwise than under the Act, such as care homes, bail hostels, and the description of which are specified in regulations;
• Buildings entirely occupied by freeholders or long leaseholders. (But note the problem of mixed occupancy properties mentioned above.)

Obtaining a licence

A person owning or managing a licensable HMO will be required to apply to the Local Housing Authority (LHA) for a licence.   The LHA must grant a licence if it is satisfied that the HMO is reasonably suitable for occupation by the number of persons permitted under the licence having regard at least to the minimum prescribed standards of amenities and facilities. These include the number, type and quality of shared bathrooms, toilets and cooking facilities.

The licence holder should be a fit and proper person and the LHA must have regard, amongst other matters:

• to any previous convictions relating to violence, sexual offences, drugs or fraud;
• whether the proposed licence holder has contravened any laws relating to housing or landlord and tenant issues;
• whether the person has been found guilty of unlawful discrimination practices; and
• whether the person has managed HMOs otherwise than in accordance with any Approved Code of Practice.

A licence will normally be granted for a maximum of 5 years, but may be granted for a lesser period as desired by the local authority.   The situation regarding the cost of HMO licences remains to be confirmed by Government.  Current thinking is that no maximum licence fee will be prescribed by central government.

A licence may be varied by the LHA by agreement, such as where a new manager is appointed. It may vary the licence without agreement if there has been a change of circumstance, such as there is need to provide additional amenities, carry out works or alter the maximum number of persons permitted to occupy the property.

If the LHA refuses to grant a licence, then it will grant an Interim Management Order (IMO).  The IMO would make appropriate arrangements for the interim management of the property by the local authority or a designated manager.

Contents of a licence

A licence will specify the maximum number of occupants who may occupy the HMO and may also include conditions relating to:

• the management of the house, including taking such steps as are reasonable to deal with anti social behaviour of the occupants and people visiting it;
• the condition of the house, its contents, and the amenity standards, for example, the bathrooms and toilets (other than in respect of an HHSRS hazard see Letting Update article April 2005);
• A requirement to carry out specified works or takes certain actions, within such times as is specified in the licence.

Revocation

A licence may be revoked with the agreement of the licence holder, such as when a house ceases to be an HMO. It also ends automatically after 5 years. A licence ceases to be in force on the death of a licence holder and for the first three months following the death of that person no licence is required. Unless the HMO ceases to be licensable within that period or the LHA grants a temporary exemption notice on the expiry of that period the HMO must be relicensed or an Interim Management Order made.

A licence may also be revoked if there has been a significant breach of the licence conditions, the property ceases to be an HMO, or the licence holder and others involved in the management are no longer fit and proper persons.

Appeals

The legislation provides for a right of appeal.  An appeal may be made to a Residential Property Tribunal against a decision of the LHA to grant, refuse to grant, revoke or vary a licence. An appeal must normally be made within 28 days of the decision being made, but if the tribunal thinks there are good reasons to do so, it may extend the period for appeal.

Concerns

There are many concerns about this new legislation, some of which we have raised throughout this article.

There is widespread concern that Government has created serious criminal penalties for a particularly complex piece of legislation where it could be all too easy for a landlord or property manager to fall foul of the regulations whilst going about his innocent and everyday business.

There is also the issue of vicarious liability - that the landlord should be responsible for the actions of others.  Government intends to use licensing to clamp down on bad landlords and anti-social behaviour of tenants.  A landlord could be liable for the behaviour of his tenants or even his tenant's visitors.  In a recent case in Northern Ireland (reported in the previous issue of Letting Update), a new HMO licensing scheme was declared void on Human Rights grounds for a number of important reasons which included the issue of vicarious liability.  It is likely that the UK legislation could encounter a similar challenge.

The Housing Act 2004 redefines the definition of 'house in multiple occupation' and household.  Yet in doing so, it poses new challenges, uncertainties and privacy issues.   Landlords and property managers may need to be aware of the exact nature of the relationships between the individuals - whether any of the tenants are related to each other, by family, or because they are living together in a sexual relationship.   And if the relationships dissolve, this again could affect whether a property is licensable, and therefore the criminal liability of the landlord or property manager.

There will be many practical implications and risks involved with the management of HMOs.  For example, HMOs must be fitted with smoke alarms and the licence holder must " keep them in proper working order". It is of some concern that it may not be practical for licence holders, be they landlords or agents, to check the functioning of the alarm regularly. Indeed, if the tenant disables a sensor or removes the battery or power supply (usually because of false alarms caused by burning the toast or using the grill) then the alarm is not in working order. The licence holder could have committed an offence carrying a penalty of a £5,000 fine, and a rent repayment order of up to one year's rent. This would also create a new method of defeating a section 21 possession claim as, if the licence conditions have not been met, the section 21 notice will not be valid.   Both sanctions could be used by a tenant simply as it is to their specific advantage. As with the rest of these provisions only time will tell. Hopefully, if brought to the courts, they will imply a reasonableness test.

Summary

This is an important and complex set of legislation which carries severe penalties and for which significant parts remain to be finalised by Government.  It is likely to affect all aspects of residential lettings.

There is evidence that some landlords who currently operate multi-occupancy properties will or have already decided to sell up and re-invest into the less regulated non-HMO sector.

Another likely and unintended outcome is that many professional agents and managers will either simply refuse to undertake management of HMOs, and leave this domain to the amateur landlord or perhaps to a new breed of letting agents specialising in HMOs.  Alternatively, firms are likely to increase their management charges to compensate for the additional risks and paperwork involved.