HMO property gives rental yields that can’t be achieved with standard buy-to-lets and, in many areas, the demand for affordable, flexible housing as offered by HMO properties has never been higher. With the recent tax changes taking a bigger chunk of their revenue, there’s no surprise that many landlords are now looking to HMOs to maximise their rental income.
Many of our own clients converted their properties to HMOs over the past year. HMO properties produced the highest yields in the first quarter of 2018, at 7.1% – 1.3% over the market average. However, HMO landlords need to be aware of both the new rules for mandatory HMO licensing which will come into effect in October 2018 and the additional and selective licensing requirements that are applied to specific areas across the UK.
Duncan Chambers, our Senior Account Manager and an ARLA divisional board member, talked about HMO licensing and answer questions on HMO landlords must do to keep compliant in our latest webinar. Read below for a short guide on HMO licensing and regulation.
What classifies as an HMO?
For a building or part of a building, such as a flat, to be classified as an HMO, these conditions must be met:
- A building where more than one household shares amenities such as a bathroom, toilet or cooking facilities OR
- A converted building that does not entirely comprise self contained flats OR
- A building of converted self contained flats and where the standard of conversion does not meet the minimum required by the 1991 Building Regulations, and more than one third of the flats are occupied under short tenancies OR
- AND It must also be occupied by more than one household as their only or main residence (includes students, asylum seekers, domestic violence victims).
Besides, for a building to be classified as an HMO some ‘consideration’ needs to be payable for the occupation. This will usually be in the form of rents or fees but it also includes, for example, employment where ’live-in’ accommodation is provided – except in the case of certain types of domestic employment.
The exemptions from the HMO classification are buildings occupied by the resident landlord and a maximum of two other persons who are not part of his or her household and buildings occupied by no more than two persons.
Which HMOs must be licensed?
Mandatory HMO licensing applies across England to all HMOs of 3 or more stories and occupied by 5 or more persons forming more than one household. Starting October 2018 any property occupied by 5 or more people, forming 2 or more separate households will need to be licensed.
Additional HMO licensing
HMOs which do not meet the criteria for mandatory licensing can still require licensing. Councils have discretionary powers to extend licensing to other categories of HMOs which are not subject to mandatory licensing. This is known as additional HMO licensing.
Before designating an area to be subject to additional licensing, a local council must consider that a significant proportion of HMOs in that area is causing problems for tenants or the neighbourhood due to poor management. The use of this power will also be subject to consultation with those who would be affected by the designation, and approval from Government.
Once an additional licensing designation has come into force it is a requirement that HMOs that are subject to it are licensed. If you are unsure whether an HMO is subject to licensing you should contact the local council for advice.
Whether HMOs are covered by additional licensing schemes depends on exactly how the council has drafted the scheme designation. Some schemes cover the whole borough whereas others only cover smaller geographical areas. Each council will then decide what type of HMOs need an additional license. For example, New Ham Council has included all HMOs within its additional licensing scheme subject to a small number of statutory exemptions. Whereas the additional licensing scheme in Hounslow only covers properties two or more stories high occupied by four or more people in two or more households.
Unfortunately, there is no central directory of property licensing schemes so you will need to contact your local council or search on their website. Some council websites much more difficult to navigate than others so do contact your local council if you are still unsure.
Exemptions from HMO licensing
Under certain circumstances, you can apply to have your HMO exempted from licensing, but you have to satisfy the council that you are taking particular steps to ensure either that the building will cease to be an HMO or that it is one that is no longer subject to licensing. The council does not have to grant the exemption.
Applying for an HMO license
Normally the landlord or (if there is more than one landlord) the joint landlords should apply for the license.
You can obtain an application form from the local council responsible for the area your HMO is in. The Act requires you to notify various ‘relevant persons’ (who have an interest in the HMO) that you are making the application and to notify the council of those persons’ details. The ‘relevant persons’ can be:
- the landlord (unless you are the applicant)
- any other owner of the HMO if the landlord does not own the freehold ie the freeholder and any head lessors, who are known to you • any person who is a long leaseholder (You do not need to notify any tenant who has an assured shorthold, an assured or protected tenancy whose tenancy is periodic or has less than three years to run, or a statutory tenant.)
- any mortgagee
- the proposed license holder (unless you are the applicant)
- the proposed managing agent (if any, and unless you are the applicant); and
- any person who has agreed that he will be bound by any conditions in a license if it is granted.
Usually, a license lasts for a maximum of five years. The council may in some circumstances grant a license for a shorter period if it considers it necessary. Usually, before the end of the license period, you will be required to apply for a new license.
What will the council look at?
The council must be satisfied that the license holder is the most appropriate person to hold the license. There is a presumption in the Act that this will be the landlord. However, if the council does not consider that he or she is suitable to hold the license (e.g. because he is not fit and proper or the management arrangements are inadequate), it can agree that the license is held by someone more appropriate, such as a managing agent.
The council will send you and the relevant persons a copy of the license, together with a notice setting out the reasons for granting it. If you disagree with the terms or conditions of the license (for example, the condition stating the maximum number of occupants permitted to occupy the building, or a condition requiring works to be carried out) you can appeal against the decision. An appeal is made to a Residential Property Tribunal.
If the council refuses to grant a license, before making its final decision it must consult with you about its proposal and the reasons for it. It must consider any representations you make about its decision and allow a minimum period of 14 days for those representations to be received.
If following the consultation the council is still of the opinion that it cannot grant a license it must notify you and the relevant persons in writing of its decision and the reasons for it. You will have a right of appeal against that decision to a Residential Property Tribunal. The council is under a duty when a license cannot be granted, to make an interim management order.
Your responsibilities as an HMO landlord.
These are mandatory conditions which require the license holder to:
- produce an annual gas safety certificate
- keep electrical appliances and furniture supplied by the landlord in a safe condition and to supply declarations of their safety to the local council on demand
- install smoke alarms and keep them in proper working order and to supply to the local council, on demand, a declaration of their positioning and condition; and
- give the occupiers a statement of the terms on which they occupy the HMO.
HMO landlords need to be aware of the Management Regulations, which apply to all HMOs (whether or not they are licensable) and impose certain duties on managers and occupiers. If a manager, or occupier, fails to comply with any management regulation without a reasonable excuse they may be prosecuted and liable to a fine of up to £5,000.
The council may also specify conditions such as those relating to the facilities in the HMO, its condition and the management of the building, including how the license holder deals with the behavior of occupiers.
Running an HMO without a licence and breaking the conditions
You will face a penalty of fining up to £20,000 plus costs for running without a license. It is your responsibility to ascertain whether the building should have a license.
You are committing an offense if, without a reasonable excuse, you fail to apply for a license for the HMO if one is required.
If you are prosecuted by the council for not holding a license and you are convicted of the offense you could face a fine of up to £20,000 plus costs.
The council cannot, however, prosecute for the offense if you have made a valid application for a license, or alternatively for exemption from licensing, and the council has not made a decision on the application.
Local authorities may designate an area for selective licensing either:
- if the area is (or is likely to be) an area of low housing demand or
- the area is experiencing a significant and persistent problem caused by antisocial behavior and some or all of the private sector landlords are failing to take action to combat the problem
Where selective licensing applies, unlike the other forms of licensing which relate to HMOs, then normally all houses within the private rented sector for that area must be licensed, except where they require to be licensed as HMOs. Non-licensable HMOs must be licensed under Selective Licensing.
Generally, the same rules apply when granting a Selective Licence as with an HMO license. The main differences are:
- It is mandatory to take up references for a prospective tenant before letting a property subject to Selective Licensing.
- Unlike HMOs, the licensing authority does not have to consider suitability for letting or amenity standards when granting a selective license. However, the license holder must still be a fit and proper person.
A designation can last for five years and it can be renewed.
New HMO rules from October 2018
The new HMO rules will come into effect across England on the 1st of October, 2018. The main change is the definition of an HMO under the Housing Act 2004. When it comes into effect later in the year, the new definition of an HMO for licensing purposes will be: ‘any property occupied by five or more people, forming two or more separate households’.
If you already have a license for your HMO under the current “Licensing of Houses in Multiple Occupation (Prescribed Descriptions) (England) Order 2006” definition, then your license will continue to be valid until the license expiration date (usually 5 years from the date of issue). After the expiration, you will need to apply for a new license as usual.
If you currently rent an HMO which didn’t previously require licensing but will do after the new order comes into effect later in the year, then you will need to apply for a license through your local council before 1 October.
HMOs affected that are currently licensed under an Additional Licensing scheme will be pass-ported to the mandatory scheme. You will also need to ensure you comply with your local council HMO licensing standards, which may involve making changes to your property to comply with minimum room sizes, amenity standards (kitchen facilities, number of bathrooms etc).
HMO property management with Howsy
Howsy offers a fixed-fee HMO property management service that includes finding tenants. For a flat fee of £35 inc.VAT per month per room outside the M25 and £55 inc.VAT per month per room if your property is in London, we provide quarterly photographic inspections, rent collection with credit score reporting to Experian, management, and coordination of all repairs, 24/7 support for all issues that arise, and renewals and contracts. Find out more here.