House in multiple occupation (HMO) popularity may be on the rise as landlords chase higher yields, but a growing trend of local authorities “aggressively” enforcing HMO licence conditions could lead to fines and a loss of income for those investors who are unprepared.
Speaking on the Mortgage Solutions podcast, Julian Sampson, partner and head of lending at TWM Solicitors, said he had seen a “big thematic change” in the increase in selective licensing as a whole and a shift in the way councils were now policing licensing schemes for HMOs.
Changing attitudes
“When we see the same transaction come through time and time again, especially in relation to licensing and regulation, we can see how councils’ attitudes are changing the multi-let arena,” Sampson said.
“From 2019 onwards, we’ve seen a general increase, and a marked increase in the last 15 months, in the way that councils are now aggressively licensing certain areas and then consequently aggressively enforcing in relation to the absence of a licence or in relation to the failure to address conditions within the licence.”
Prior to this, says Sampson, licensing was treated more like a “paper exercise”.
Landlords need to obtain an HMO licence when their property is being let to five or more people who form more than one household and who share some of the facilities, such as the kitchen and bathroom. Some councils insist on licences for smaller properties too.
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Licences are valid for five years and contain conditions, such as making sure it is a suitable size for the number of tenants living there, as well as that smoke alarms are installed and maintained correctly and gas safety certificates are obtained yearly.
Landlords may have bespoke conditions added to their licences such as the stipulation to add fire doors or improve the standard of the property.
Greater scrutiny of licences
TWM is seeing more licensing officers not only talking to landlords more about how they can better support tenants, but it is also hearing of cases where they are talking directly to the tenants asking them if they have received essential documents such as gas safety certificates.
Allowing the licence to lapse after five years or being found in breach of its conditions can carry hefty financial consequences for landlords and pose a risk to the buy-to-let (BTL) lender’s security.
Risk of hefty fines and losses
In Haringey, for example, the council has dealt out fines of more than £100,000 to landlords and letting agents without a licence in the first six months of this year.
Meanwhile in Liverpool, the city council’s private sector housing team prosecuted four interlinked companies for illegally renting out properties without HMO licences, hitting them with £250,000 of fines.
But it isn’t just receiving a fine that can damage a landlord’s finances. If the HMO is no longer suitable to rent out because it does not comply with health and safety regulations, the landlord will lose their rental income.
They also risk facing a Rent Repayment Order. Rent paid to the landlord over the past 12 months must be repaid to the tenant, exposing the landlord to capital issues as they are forced to use savings that were earmarked to cover void periods or maintenance to repay rent instead.
Danger of default
This, said Sampson, creates a risk that the landlord’s cash flow issues will prevent them from being able to maintain their mortgage payments.
He added: “It’s definitely a trend we’re seeing.
“From a legal perspective, it means that we interrogate licensing even harder than we used to. We put the borrower to task as to how they are addressing the conditions of their licensing and how they’re dealing with the potential issue of the assessment of room sizing.
“That was something that might be a valuer’s issue initially. However, how a borrower wants to transition their property over a period during the term of that licence now becomes very relevant for us.”
