The government believes there are around 500,000 HMOs (house in multiple occupation) in the UK, yet Kamma has tracked licences (mandatory and additional) for almost 800,000 HMOs and 200,000 selective licences across 285 local authorities.
With even the government unsure of the size and scale of the sector, we believe it’s time for an ultimate guide for letting agents.
Property licensing is not as straightforward as one might think (or hope), and although licensing has been around since 2006 there is still a lot of confusion around the definition of an HMO, which local authorities run discretionary schemes, what properties need a licence and who is responsible for obtaining it.
In this ultimate guide, we’ll look at everything from what constitutes an HMO to types and trends in enforcement and how agents can use this complexity to provide greater value to their landlord customers.
An HMO is defined as any property that has at least three occupiers, forming more than one household that share common areas and facilities. The common areas may be the toilet, bathroom, or kitchen. A household, according to the government’s definition, consists of either a single person or members of the same family who live together. It includes people who are married or living together and people in same-sex relationships.
A home is a large HMO if the following apply:
There tends to be a higher concentration of HMOs in university towns and cities such as London and Manchester, in fact almost a quarter of all HMOs in England are located in London (24%). But the sector is also seeing growth amongst older renters as they look to take advantage of the cheaper rents available. The cost of living also contributes to the growth of HMOs and shared living as tenants look for affordable places to live. Letting rooms in HMOs has become a popular way for landlords to increase revenue and maximise the rental value of their properties. In 2020 for example, there was a 160% increase in landlords planning to acquire HMOs as they looked to take advantage of the higher yields available. Renting more rooms in a property to more people drives revenue, but comes with more risk, with additional regulations and compliance requirements to meet, and hefty fines for those that fail to do so.
Property and HMO licensing was introduced in the Private Rented Sector (PRS) to uphold living standards and ensure tenants’ safety, precisely because many professional landlords have a history of taking actions to cut corners to yield higher profits. The licensing regime introduced measures for health and safety, including setting standards for acceptable room sizes and fire safety. The legislation really became a focal point for the government after several preventable deaths involving people in overcrowded buildings.
The Housing Acts 1985 and 1989 defined HMOs and laid out the first guidance for safety requirements and licensing. In 2006, two years after the Housing Act 2004 was introduced, mandatory licensing was established for large HMOs, with five or more tenants from more than one household.
Further changes to the legislation were then made in October 2018, where the ‘3 storey’ requirement for HMOs was scrapped. This means that since 2018, small and large HMOs with any number of storeys also require a licence. Since 2018 mandatory licensing is no longer limited to certain HMOs that are three or more storeys high, but also include properties with one or two stories. Since then, schemes have continued to grow, and more than 500 licensing scheme are now in place, including just under 400 mandatory schemes and over a 100 additional and selective schemes. We’ll get into the definition of the different schemes in more detail later.
The basic definition of an HMO is quite straightforward; however, complications arise for agents when they need to identify if their property needs a mandatory, additional, or selective licence.
To clarify, there are three types of licences that may be required.
Licensing schemes change periodically, for example additional and selective schemes are only in place for a maximum of five years before they either end, or are replaced with a new scheme. So monitoring the local council for any regulatory changes is very important: even if you’re compliant now, a change in the rules can put you at risk of fines in the future. Ignorance of the changes will not protect agents or their landlord customers from fines. This adds another layer of complexity for agents who are trying to navigate the PRS and protect their landlord customers against fines.
HMOs owned by a housing association or cooperatives, a higher education institute, a health service, a council or a police or fire authority are excluded from licensing requirements. Other examples include:
There are more than 100 additional and selective licensing schemes in place across the UK. According to Kamma’s data, a new scheme or consultation was introduced every eight days in 2021, and so far, since August 2022, more than 25 new schemes and consultations have already been introduced across the country. The interplay of selective and additional licensing schemes, along with Article 4 planning legislation, creates a complex patchwork of rules for agents to follow:
Some areas have extremely complicated licensing guidelines. Just within London, for example, we see wide diversity of approach from local authorities:
Haringey has recently announced their new selective licensing scheme that will go live later this year. Letting agents and their landlord clients in the London borough of Haringey will soon have to abide by a Selective Licensing scheme to include measures requiring those with low or non-existent EPCs to upgrade them. This is the first scheme of its kind and, the new EPC requirement has just been given the green light by the Secretary of State. The scheme will cover 14 or the 19 wards within the borough or some 30,000 PRS properties.
Last year Westminster council amended its new additional licensing scheme just a month after launching it in a bid to improve tenants’ living conditions. The change will exclude S257 HMOs (a converted block of flats where the standard of the conversion does not meet the relevant building standards and fewer than two-thirds of the flats are owner-occupied) from the council’s additional licensing scheme. Yet critics are questioning if the change is even legal.
The various start and end dates and the inconsistent regulations that underpin different licensing schemes mean landlords struggle to understand which schemes apply to them and which don’t. This confusion can and does lead to thousands of pounds in fines. Providing accurate answers to landlords displays real expertise and adds substantial value. In a competitive market, therefore, agents can stand out from the competition by being the leading expert on licensing on the high street.
Licensing schemes vary greatly between councils, and it’s therefore not surprising that many landlords and agents get unwittingly caught out and slapped with fines or, worse still, rent repayment orders (RROs).
Over recent years, fines have increased in amount and frequency as councils enforce their schemes more stringently. According to the Mayor of London’s Rogue Landlord and Agent Checker, as of August 2022, £8,010,344 in fines has been levied against rogue landlords and agents. Letting agents also stand to face fines for leasing unlicensed properties in the same way as landlords do. In fact, according to Kamma’s data, the average amount for fines imposed on agents (for all types of offences) is £4,440 compared to £4,223 for landlords. This means that although landlords get fined more regularly, agents get fined more (on average).
In addition to monetary fines, landlords and agents can also face prosecution, banning orders and even criminal charges for operating unlicensed properties. Agents failing to comply with local licensing regulations also face reputational damage, which can have a detrimental effect on any agency, especially in a competitive market like lettings. So, the financial ‘penalty’ could be much higher than the original fine.
To learn more about rogue landlord fines and licensing enforcement, subscribe to our monthly Licensing Update.
Enforcement through Rent Repayment Orders (RRO) is also increasing, so agents must act to protect themselves. There have been several RROs issued to rogue landlords and agents in various councils this year. For example, a letting agent in Bethnal Green in London was earlier this year hit with an RRO totalling more than £30,000 for not obtaining a licence for an HMO property. Each of the five tenants was awarded their full rent back for the months they lived in the property. The HMO was covered by Tower Hamlets Council’s additional licensing scheme, which has been in place since 2019.
Similarly, a landlord in Ealing was recently handed a £5,400 RRO for not applying for a selective licence earlier in the year. Despite the landlord’s defence that she was unaware of the licensing scheme, Ealing council and the Court refused the reasoning.
Another example is an HMO landlord in Preston that last year was faced with RROs of almost £50,000 and fines of £24,000 after the council found that the landlord did not obtain the correct HMO licence. As a result, the landlord was fined, but kept fighting the decision with appeal after appeal. However, the appeals were all dismissed and the landlord is now being forced to pay the fine, the RROs, and has been prevented from operating any licensed HMO properties in Preston.
Most landlords depend on letting agents to support their licensing needs, and rightfully so: letting agents actually share the landlord’s legal obligation to obtain the correct licence for the properties they manage. Even if a letting agent’s terms of business state that they don’t take on the responsibility for licensing, the Housing Act 2004 places responsibility for licensing a property on anyone who meets the statutory definition of person having control or person managing the property. We’ll get into more detail on how to get an HMO licence in the following section.
Applying for a licence is a complex, multi-step process and can be daunting for inexperienced as well as seasoned landlords. The first step is to verify if the property needs to be licensed and to find out if you need to apply for a mandatory, additional or selective licence. Second, speak to the council to double-check licensing requirements – as mentioned, the rules change. It’s important to carefully check each time as ignorance is no defence against being fined. A property inspection then usually needs to be set up and the licence applicant needs to meet and liaise with the council and manage the application through to a decision.
This is where agents can really help add value to their landlord customers. Understanding the type of licence that is applicable and then engaging with the council can be time-consuming, so any assistance that agents can give to landlords will pay dividends.
The first and most obvious answer is to avoid the sizeable fines and RROs that can quickly wipe out hard earned revenue. Aside from the financial hit, firms that are fined often make the news, impacting the long term value of their brand and threatening their ability to acquire new customers.
As we’ve mentioned, however, agents can also use licensing to their advantage. As well as offering additional value to landlords, agents that offer a licensing monitoring and application service can ensure that the landlord is always compliant and protected against fines. This can be a huge competitive advantage, as agents that are operating unlicensed properties can be banned from leasing the property.
Second of all, agents that apply for a property licence on behalf of their landlord customers hold it for up to five years (before it runs out, or a new scheme is introduced). This ultimately supports customer retention beyond the usual 12 month contract term as the landlord would have to apply for and pay for a new licence if they were to change managing agent.
Lastly, letting agents that use a monitoring service such as Kamma’s can really build revenue through the additional support they can offer to landlords including licensing monitoring and applications. All of which can help landlords manage their risks whilst creating new revenue streams for the agency.
For more information about letting agents’ responsibility when it comes to property licensing, read our blog post ‘Everything agents need to know about property licensing‘.
To keep track of the ever-changing regulations, Kamma offers a licensing monitoring service that keeps track of all regulatory changes. A single property or an entire portfolio can be monitored to ensure that you are always aware of new changes and stay compliant. This is particularly useful for agents with portfolios spanning across several local authorities.
The simplest way for agents to handle the licensing application process is to use proptech tools such as Kamma’s licensing monitoring and application services that can take care of all licensing needs and applications.
Kamma’s application service can support landlords and agents with the licensing application process. Kamma can file licence applications for any UK property and manage the whole process on your behalf. This is a premium service that can be white labelled so agents can sell onto your customers, generating additional revenue and adding to your agency’s benefits all without you working to provide the service. This allows agents to focus on their core business and simultaneously provide customer satisfaction and peace of mind.
HMO licensing was introduced to protect lives and uphold minimum standards for tenants in the PRS. Navigating the process isn’t easy and can take a lot of time and effort if you don’t know what you’re doing. The complexities of achieving compliance do mean that even well-intentioned landlords get caught out and fined.
As discussed, licensing schemes vary greatly between councils and change over time, so it’s not surprising that many landlords and agents get fined and face RROs.
It’s important to note that landlords and their letting agents are liable and can receive fines for non-compliance with operating unlicensed HMOs. Therefore, agents and landlords must find ways to effectively monitor the licensing landscape to reduce their risk of fines and reputational damage.
At Kamma, we understand that property licensing is complex, inconsistent and ever-changing. Our technology and software cut through that complexity to keep you on top of all the changes with clear and accurate advice.
We analyse and sort data to help agents, landlords, and surveyors understand the impact of property licensing on their properties and assets. We leverage technology and data to help agents and landlords stay on top of new property licensing schemes and avoid licensing fines.
To learn more about rogue landlord fines and licensing enforcement, subscribe to our monthly Licensing Update.
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