Permission to let can be lost in an area designated by an Article 4 Direction. How can this happen? What impact might this have on the value of a property? Will the property be easier or harder to sell? What other legal implications should I countenance? These and more HMO issues are addressed here.
- Permission granted can be lost by default by doing nothing. Is this so? Read on.
- Houses in Multiple Occupation (HMO) status was settled in the Housing Act 2004.
- Prior to this date, varying dubious definitions were adopted: e.g. some lenders viewed HMOs as bedsits: different departments within the same Local Council (dept. of environment, housing, etc), and even Fire Officers had their own definitions. Some dinosaurs have yet to accept and adopt the now firmly established criteria. Ask about one aspect and depending on the respondent receive a reply to another. There are essentially only two types of HMO:
- An HMO since 2004 is now defined as a large or small HMO according to its status:
- Small HMO – Three or more unrelated tenants sharing a house (including kitchen or bathroom amenities) forming two or more households.
- Large HMO – Five or more unrelated tenants sharing a house (including kitchen or bathroom amenities) forming two or more households over three or more stories. This type of HMO requires a Mandatory License. However, such properties with more than 6 tenants, whilst still classed as a large HMO, require additional planning permission creating a third unique category of its own as its name suggests:
- Sui Generis – Seven plus unrelated tenants whatever the other criteria – i.e. no matter how many floors there are; planning permission is required. This category is the oldest of the three categories and has long required planning permission based purely on the number of unrelated occupants. There are some rare exceptions where such occupation predates legislation. However, if there are three floors and 5 or more unrelated occupants forming two or more households, the property must be Mandatory Licensed, without exception.
- However, a more recent introduction, belatedly provided for by the same Housing Act 2004, enables local authority discretion to introduce an Article 4 Direction. An A4D, if applied, requires permission to create any new HMO within the A4D area(s) only. Established criteria is found in the Town & Country Planning Order 1987, providing for certain changes of property use from Class C3 residential use, to Class C4 HMO use. An A4D restricts the creation of any new HMOs. It does not, as some erroneously imagine, control or influence tenant behaviour. Not all local authorities designate HMO areas as requiring A4Ds and even when required these will generally be restricted to limited localities within concentrations of HMOs.
- All this said, even after receiving such permission, HMO status can be lost by default. Should the occupation no longer conform to the criteria establishing the existence of an HMO, then it is no longer an HMO.
- E.g. if a family of relations take up actual occupation, then it is no longer an HMO as they no longer fulfill the criteria of being “unrelated”. The authority for this can also be seen in Case Law – Street and Mountford – “One can call a four pronged instrument a spade, but it is in reality, a fork!” It is not what you call it, but what it is in fact, and thus in law, that matters!
- So three brothers taking up occupation, all sharing a property, does not constitute an HMO because they are all related. However, if one brother leaves and is replaced by an unrelated friend, then the property becomes an HMO by default, whether or not permission has been granted.
- The issue then arising is not about HMO status (that is simply determined as a matter of fact by falling within the HMO criteria above), no, the issue then becomes whether anyone thought to obtain planning permission and if not, whether a breach of rules has occurred by default, for not procuring permission to create a new HMO?
- Alternatively, if say, a family of five tenants live in, and rent, a three-storey building as a non-HMO and are later joined by an unrelated tenant, then at that point it becomes an HMO – but it is a large HMO. As such, this requires the owner to procure a Mandatory License to let. Failure to do so can give rise to fines of up to £20,000 and the loss of entitlement to issue a section 21 notice to quit, to end any applicable tenancy e.g. an AST. A further twist is seen if the owner of a licensed property no longer complies with the requirement to be a ‘fit and proper person’ due to the breach. As such, the owner would not be permitted to let the property in person. He would need an agent to do this on his behalf. An agent need not be an official letting agent, but must be a ‘fit and proper person’.
- Note, even some rented non-HMOs, as well as some HMOs might be required to have either an Additional Licence or a Selective License in areas so designated such as Oxford and Lewisham or Margate. The criteria in these instances is merely that a property is ‘rented’ – to any number of tenants.
- Generally a property, with existing HMO status, is worth more than one without. In an A4D area the pre-existence of HMO status ensures certainty that buyers are permitted to continue letting it. Any uncertainty will be reflected in the selling price. Alternatively, even where there is no A4D, an HMO is still likely to sell for more, as any conversion and compliance issues within the property are likely to have been effected by the selling landlord investor. However, there are fewer prospects for buyer to realise any potential capital gain following such improvements, if already done by the seller.
- An isolated HMO in say a posh area, may be worth significantly less than neighbouring properties occupied by non HMO families. But inversely, in this scenario, were there a number of HMOs in any area, then those HMOs are likely to be worth significantly more than neighbouring non-HMO properties. This is because investors will generally pay more than families. A family is unlikely to be endeared to move to an area predominantly occupied by renters in HMO areas, unless the selling price is very attractive – i.e. reduced. Conversely, if the property loan to rent ratio is not viable, then a posh isolated HMO will see the seller struggle to secure a buyer. This property value will fall until reverted to a family home – this is the exception to the norm.
- An individual’s circumstances will determine their decision – whether to allow HMO status to be lost by default, based on the above scenarios.