Taking stock of HMO changes

Landlords and operators of purpose-built student accommodation (PBSA) will need to monitor proposed regulatory changes to HMO legislation that may result in more PBSA and co-living schemes requiring HMO licences. Current law At present, a residential space shared by three or more people who share cooking or washing facilities and do not form a single household is an HMO (house in multiple occupation). Under the current law, if an HMO is occupied by more than five people and includes more than two flights of stairs, it needs a licence from the local authority. Legislation and guidance (and the result of London Borough of Islington v The Unite Group Plc [2013] EWHC 508 (Admin)) make it clear that it is the space used exclusively by the tenant occupiers that is the HMO, and needs to be licensed. Where student occupiers of PBSA share a cluster of bedrooms with a shared kitchen, it is the “cluster” of bedrooms that is an HMO. Having a number of these clusters of bedrooms across multiple floors in a building does not require an HMO licence, if the individual clusters of rooms do not include flights (plural) of stairs. Someone operating a student housing block or looking to invest in one can therefore be confident the usual means of structuring these blocks does not require a specific licence from the local authority. There are compliance obligations, but these tend to be addressed through leasehold covenants, building/planning approval and membership of ANUK and other codes. Failure to comply with HMO legislation is a criminal offence. It may also breach funding or lease covenants to comply with all relevant legislation. If an HMO landlord needs a licence and does not have one they are not allowed to use the section 21 housing procedure to obtain possession on tenant default. Proposed changes The Ministry of Housing, Communities and Local Government published a consultation response “Houses in Multiple Occupation and residential property licensing reforms” at the end of 2017 following the issue of a consultation and technical paper in 2016. The 2016 paper suggested that operators of PBSA could be exempt from HMO licensing or face discounts or more limited licensing requirements if they could show that they complied with industry practice. At the date of writing there is no draft legislation to consider but the consultation response makes it clear HMO licensing will apply more widely. Because the licensing will be operated at local authority level, PBSA operators (and people considering how co-living can be brought to the UK) will need to meet the requirements that each local authority introduces. A single operator with schemes across a number of authorities has to comply with the requirements in each of them. This will cause issues if those requirements differ. In a post-Grenfell world, government is likely to resist the introduction of concessions or exemptions from licensing requirements that ultimately relate to building safety. This potentially means another compliance hurdle for operators to overcome and an additional operating cost. Most likely changes Most HMOs occupied by five or more people will need an HMO licence, regardless of the number of storeys. Previous consultation responses suggested that PBSA operators would be exempt from HMO licensing requirements if they could show that they complied with an approved code of practice. The new consultation response makes it clear that this will not be the case. There will be no requirement for local authorities to discount their fees when dealing with PBSA schemes that need HMO licences. That had also previously been proposed. Small blocks/arrangements of up to two flats will need an HMO licence if either or both of those flats are occupied as an HMO. This regulation is targeted at flats above shops. The licence will specify which rooms in the HMO can be used as bedrooms. There will be mandatory minimum room sizes, to prevent overcrowding. Rooms smaller than 4.63 sq m cannot be used as bedrooms. Rooms smaller than 6.5 sq m can only be occupied by children under 10. Rooms below 10.21 Sq m can only be occupied one person. Bigger rooms can be occupied by no more than two people. Operators will need to consider this when designing their schemes. The licenceholder will have to make specific arrangements for waste disposal. Applicants for HMO licences have to show they are a fit and proper person. A person or corporate who has contravened (ie breached) housing or environmental legislation may not be seen as “fit and proper”. As a result of a separate HMRC consultation (“Tackling the hidden economy: public sector licensing”), applicants for HMO licences may have to show they are registered to pay all applicable taxes. The intention is to use public processes such as HMO licensing as a way to check that the applicant is tax registered. Off-shore owners of PBSA would need to understand what this means.   HMO law changes: practice points Clearly the main point to make at this stage is that the changes are proposed, and may be refined further. This is something to monitor. Once the legislation is drafted, understood, and introduced, it will need to be followed. No responsible landlord or investor will want to avoid complying with the law, or want to operate an unsafe building. Licensing regimes level the playing field by making sure that everyone has to operate to a certain standard. Future licensing requirements At this stage it appears that each cluster of rooms in a PBSA scheme will, going forward, need an HMO licence. There is a suggestion in the consultation response that large purpose-built blocks of flats might be exempt from mandatory licensing, but it is not clear that this would include student blocks. In any event, it is the cluster of rooms or flat that is an HMO and may need a licence, not the block containing them. A single corporate entity is probably going to own the legal interest in those clusters, and needs a licence for each of them. Operators will need to make sure that none of the clusters is missed out when applying for new licences. It will be sensible to check that this has been done when funding or investing in a PBSA scheme. An issue, as ever, is that the rules proposed have a broad scope and are likely to be interpreted differently by different local authorities. To an extent, that is understandable as particular authorities (in particular city authorities) will have different housing stock and different concerns. The PBSA sector depends on scale, and most operators will seek to operate in more than one university town or local authority area. Councils are also facing severe resource constraints, and if they are having to issue licences in respect of compliant properties, rather than focusing on enforcement against criminal landlords, there could be delays in obtaining licences. This could have an unwelcome impact on operators seeking to sell or fund their schemes in circumstances where councils are unable or unwilling to issue the necessary licence. Fit and proper applicants If the applicant for the licence is not considered to be a fit and proper person by the local authority, they will not be given a licence. Again, no one will dispute that action needs to be taken to drive out rogue landlords. An issue with corporate landlords/operators is that they will need to obtain multiple licences. A single failure to comply with housing legislation, environmental law, immigration law (such as right to rent) or even tax legislation could have a widespread and draconian effect. That failure could lead to future applications (and re-applications) being refused for all the HMOs that the applicant owns and operates. The risk will be compounded because each local authority will have its own interpretation of what a “fit and proper” landlord looks like. A solution in this situation might be for a new application to be made by a management company operating across the relevant operator’s entire platform, which company is compliant with the relevant legislation and has not previously failed the “fit and proper” test. Works requirements Operators may find (perhaps with older stock or conversions) that building work is required to meet new minimum room sizes, and to meet new requirements for storing and disposing of rubbish. Mixed-use schemes It is possible that a mixed-use building might be treated as an HMO because it partly comprises student accommodation. The risk is that the whole building may require a licence, even when parts of it are not used as student accommodation/HMO because the common parts and structure are seen as being in the HMO landlord’s control. So, if care is not taken, the Starbucks on the ground floor, or the private flats, could technically require a licence. Common parts also need to be considered. The suggestion is that if the common parts are not controlled by the owner of the HMO and not used exclusively by the HMO occupiers, then they should not form part of the HMO. There could be complications in mixed-use schemes if common parts are to be demised to a PBSA operator but shared with other tenants. Those other tenants will want to ensure that the operator complies with the HMO legislation as it relates to common parts. Co-living The idea of co-living is nascent in the UK, and there is little to no legislation dealing specifically with the sector. Clearly, HMO legislation could apply to any scheme that gives its occupiers limited or no private washing or cooking space, because they have access to much smarter and larger communal facilities. The points above will apply to any house or cluster of rooms used by five or more people in a co-living arrangement. Andrew Wallis is a partner and Brian Dowling is a senior associate in the real estate department at Irwin Mitchell LLP