HMO Additional Licence – Potential Housing Crisis?

by Readers Question

11:06 AM, 25th April 2016
About 3 years ago

HMO Additional Licence – Potential Housing Crisis?

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HMO Additional Licence – Potential Housing Crisis?

I have been renting out a 3 bed property to groups of 3 tenants for the last 10 years. It appears that this is classed as an HMO.crisis

Southwark Council have now introduced Additional Licencing which affects any landlord renting out their property with 3 unrelated people living together. You are deemed under the 2004 housing act to be running three households even if it’s a group of people operating under one short hold tenancy agreement.

I applied for the licence and while I am HMO compliant the freeholder and mortgage company have refused to permit the licence. As such I will in future only be able to rent the property out to either a family or two tenants – freeholder holds the cards. This will be the case for many others in the block my property resides in hence displacing many tenants in this block alone.

As London is significantly leasehold I wondered if there will be a big issue here. Letting agents, lawyers, landlords appear unaware of the or the fact that 3 unrelated people is an HMO. Additional licence will expose thousands of rentals that did not perhaps realise they were HMOs.

My view is that if other freeholders choose to reject HMO Licencing where Additional Licencing is required there will be a housing shortage for tenants. Freeholders will rely on the leasehold agreement which states one household. And why not, being licensed HMO means I could run a property as a refuge, student accommodation, with locks on internal doors etc. I don’t blame the freeholder or mortgage company for not permitting the licence. I do blame the law and council as it seems unreasonable that a group of 3 tenants can no longer live as a “family” unit in my property under a short hold agreement. (I get why it is necessary for people moving in and out of shelters).

I am interested whether other landlords are either:
– aware that you may require an Additional Licence if running a rental with three unrelated people. Southwark Council are now enforcing this for the Borough
– experiencing rejections from their mortgage companies or freeholders

I am now unclear whether the property will achieve rentals previously achieved and as such may be forced to sell. Whatever happens my learnings and experience will cost thousands and feels like it needs to be exposed.

I think this will create a housing shortage in Southwark once people realise they are affected. Good story for the Evening Standard I suspect?

Chris



Comments

Ian Narbeth

12:12 PM, 25th April 2016
About 3 years ago

Hi Chris
You may be right that Letting agents, lawyers, landlords appear unaware of the or the fact that 3 unrelated people is an HMO. The landlords may also be unaware that they need to put in fire doors, fire alarms in some properties and also meet minimum room sizes and amenity standards. The problem is that unprofessional landlords do cause problems and potentially put their tenants lives at risk. Parliament then imposes ever more onerous laws that competent professional landlords comply with and the ignorant continue to ignore or don't bother to find out about.

The law has to have some dividing lines and councils/courts cannot be expected to distinguish between 3 or more unrelated people "living as a family unit" or living separate lives. Some tenants in HMOs often don't talk to each other, don't know who is in the house at any particular time, don't report matters because they assume someone else will and generally live without much contact with the other tenants.

HMOs have a bad name in some quarters which is why some leases require single family or single household occupation.

If you have an HMO, an ordinary BTL mortgage is not suitable and you will be in breach from day one. HMO mortgages are available from a few lenders but they are more expensive.

Yvette Newbury

12:42 PM, 25th April 2016
About 3 years ago

"Freeholders will rely on the leasehold agreement which states one household." I would be interested to know the wording of this clause. Presumably your freeholder is not Southwark Council themselves? (ie. ex-local authority property)

Chris Mee

14:54 PM, 25th April 2016
About 3 years ago

Hi

Thanks for the initial comments to the article above (think I may be logged in differently but I wrote the post above).

I agree with you Ian - an HMO requires certain conditions to be met and I've now also complied with this after immediately understanding my obligations. So HMO compliant!

The blocker is the definition of household in my lease. You are right "Y L Newbury" that the freeholder is relying on this covenant. This is the issue I'm more worked up about for me, leaseholder landlords and tenants across London - since most have this type of wording in in their contracts too in some shape or form.

My leasehold says " Not use the Property nor permit the same to be used for any purpose whatsoever than as a private residence in the occupation of one household". The freeholder is not Southwark Council by the way.

The freeholder is clearly now relying on the House Act Definition of Household in rejecting my application. I guess that is correct even though Household is not defined in my contract. It's not written as Household with a capital H (which I assume means it's been defined), it's written as a common noun (small h)

And this is quite an interesting point then since if my freeholder does rely on household as one single person or a family what does that mean for rentals in leasehold properties across London?

- 2 friends, 2 professionals, boyfriend and girlfriend, 2 boys, 2 girls could no longer live in my property to rent under a single shorthold tenancy agreement. They are two households aren't they.

So I feel the housing act with it's definition of household creates a situation where the freeholder appears to have the upper hand. Do people agree?

I get HMO regulation and its place but did the law really intend this for three young professionals who were very happy living together to have to break up or find another property that has an HMO licence. Surely there should have been an exemption for groups of 3 or 4 where a single shorthold tenancy agreement was in place. Or, the law should recognize that large number of people live together in groups that do want to live under one contract - as a family unit.

I fear in Southwark availability for 2/3 bed HMO's will be scarce and by the way Sourtwark Council estimate this Additional Licencing affects 10,000 flats. It's going to affect the majority if landlords start to rely on their definition of household or family also.

Further thoughts / clarifications welcome.

Ian Narbeth

15:22 PM, 25th April 2016
About 3 years ago

Hi Chris
If you are now HMO compliant then almost by definition it is not a single household but multiple occupation. Household includes: a family (married or unmarried) with or without their children and step children, siblings and cousins living together. http://www.legislation.gov.uk/ukpga/2004/34/section/258

People in a relationship living together count as a household.

The landlord is not being unreasonable in adopting the Housing Act definition. Indeed it would be unworkable if each landlord could come up with his own definition. I think you have a problem with three unrelated friends living together unless the landlord will relax his requirements.

From the Council's perspective they have to have clear rules and for every one example of tenants getting along there are probably five where there are problems. Yes, there may be a problem in Southwark but landlords need to lobby to change the law.

Yvette Newbury

15:37 PM, 25th April 2016
About 3 years ago

I agree that your lease is restrictive and that it seems even 2 sharers would not be possible. I would like to know how it works that the freeholders and your mortgage company "did not permit the licence" if Southwark Council approved your property - is the final step that the Council confirm to them that you are authorised to rent to 3 sharers, and if they refuse then the licence is not issued?

My leases do not have this wording, though they are not "new" flats. The one purchased from new in 2006 refers to "one family OR by no more than two adult persons with or without children" so could be rented to 2 adult sharers.

Gary Dully

15:43 PM, 25th April 2016
About 3 years ago

HMO's are being sold off by landlords all over the place in Liverpool and Manchester at the moment as they become aware of the proposed mandatory licensing of ALL HMO's proposed in the new Housing Bill.

It isn't the licensing that is the problem , or the standards required as they are fairly straightforward to achieve.

it's the fact that upon application for a license, the landlords have to give details of the mortgage provider.

Why?

There are very few properly financed HMO's as most are probably on standard BTL mortgages, which isn't the crime of the century, but might be seen as such by the lenders.

That is going to cause carnage in the HMO market, as the guys with clipboards from the council see that single question alone on the application form shut down thousands of HMO's Then they won't have anywhere to rent and the shrieking of tenants in their thousands find themselves homeless as a result.

Once again a Tory housing Minister has introduced something that on the face of it, seemed the right thing to do, but within minutes of its news will send the good quality landlords out of the market, leaving behind the rogues, who will never be touched.

Yes, the landlords should have had HMO finance, but they had little choice to convert if the profit on single lets was so derisory in their area and the people looking to rent couldn't afford to rent a full property, pay council tax, tv license, broadband, gas, electricity and water charges.

Well now they are going to have to as the HMO's start to get taken out of the market.

I sympathize with your predicament, you will have to,refinance and put your rents up or evict your tenants and rent as a single occupancy.

Those that you evict, should write to their local MP and congratulate them on passing another stupid law, without thinking of how so many HMO's came into existence in the first place.

Yvette Newbury

15:57 PM, 25th April 2016
About 3 years ago

It seems that your issue is not with the license scheme, but more the fact that your lease does not allow you to rent to 3 sharers, whether or not it is classed as an HMO. In addition your mortgage either does not allow sharers or does not allow HMO's (I am uncertain which).

The point you are making is understood and yes it seems that there could be a problem by the sheer numbers of landlords affected by either their mortgage or lease limitations. I do wonder whether there will need to be a change in thinking further down the line as any landlords that can comply will be in the minority. What angers me about this is that, once again, rogue landlords will not be affected, and in some cases (in London) are actually supported by their tenants who want to live centrally and are too scared to complain about conditions. These are the landlords that should be heavily penalised.

Ian Narbeth

18:26 PM, 25th April 2016
About 3 years ago

Reply to the comment left by "Gary Dully" at "25/04/2016 - 15:43":

Gary you say: "There are very few properly financed HMO’s as most are probably on standard BTL mortgages, which isn’t the crime of the century, but might be seen as such by the lenders."

Some of us do have proper HMO mortgages and pay about an extra 1% pa for the privilege as well as higher arrangement fees. If landlords deliberately get the wrong sort of mortgage then I have little sympathy. They are unfairly competing with those who play by the rules.

HMO landlords with the wrong sort of mortgage are also risking:
(a) the lender finding out and calling the loan in;
(b) the lender cross-defaulting other loans even if they are properly set-up;
(c) the lender charging hefty fees to transfer the mortgage onto the right product; and
(d) the lender making adverse comments on their credit record.

The problem is that once landlords start bending some rules they may decide to bend others and/or don't acquaint themselves with the law. Before you know it they look like "rogue" landlords. I know of an HMO landlord with perfectly decent well-maintained houses who got himself in a right muddle with the wrong sort of loan. He also did not know about the fire safety requirements. It cost him about £4000 to sort himself out and I dare say he has a black mark on his credit record.

Chris Mee

19:38 PM, 25th April 2016
About 3 years ago

Really enjoying the thread discussion - thanks for all your comments which are helpful and reassuring.

Yes - I'm happy to comply with HMO rules and regulations as people see fit. Regulation and standards are usually a good thing although it tends to be that when you try to abide with them Councils for instance love to punish you for your proactivity.

Gary - you hit the nail on the head though and I think it's going to be a car crash too because:

(1) the majority of landlords, agents, lawyers are not fully aware of what an HMO actually is based on the enquiries I've been making. They understand Mandatory License rules but not Additional License rules. You are the first people I've become aware of that appear to understand the differences.

(2) As the council enforce "Additional Licensing" thousands of landlords will learn that they need to comply. 10,000 properties in Southwark apparently will need one.

(3) As Leasehold landlords try to comply their freeholders (and mortgage companies) will stop them. I think leasehold contracts often talk in terms of one family, one household and freeholders will naturally want to avoid getting into discussions with a leaseholder since it will cost them freeholder money for no gain. This is the main gotcha point so either I'm very unlucky and wrong or my situation will be the common situation.

(4) Mortgage companies, don't want you running an HMO although I think they may be more bothered by Mandatory HMO (5 people, 3 storeys type deals) than Additional Licence HMO's (3 people unrelated). I don't know but they are certainly confused by it. Southwark Council did seem to suggest that mortgage companies will need to change their policy intimating that there is clearly an issue currently.

(4) There will be mass evictions occurring where 3 or more unrelated people live together as landlords try to become more compliant. My tenants will now have to go and have been very gracious of the situation that I've actually put them in - given they could have relied on their tenancy agreement and made life very uncomfortable for me.

(5) Demand will build for 1 / 2 bed rentals as they are less likely to be needing HMO licences. Rents will go up and three and four beds will have a room or two empty.

Southwark Council appear to plough on regardless and are not yet recognizing the situation they are creating for themselves and thousands of people.

So yes, lobbying is one next step I will take but additionally there needs to be much great national awareness of how HMO legislation is set-up and how it threatens thousands of law abiding tenants and landlords as Additional Licensing kicks in.

I think the Evening Standard in London and perhaps a National Paper would see a story here how law abiding tenants (since there is never sympathy for a landlord) are losing their homes and family units they are operating in. Certainly, given that Southwark have tried to keep it quiet I fully intend to put this on their doorstep with the 10,000 landlords they need to register with.

What is a solution? Thoughts welcome but I would suggest:

- Revisit the definition of household or family - it should cover more than just blood family or single persons. I believe that if a landlord operates One single Short hold tenancy agreement where everyone is responsible for the property, and they choose their rooms, there are no locks on bedrooms, they share the bills - living as a family unit all responsible for the building jointly then this should be one household (like it used to be in the good old days. Conversely if three people have separate tenancy agreements in the same property then this would in my view act as 3 households. They are clearly living independently) The current definition is not appropriate for today's environment.

- Perhaps educate mortgage companies / freeholders / insurance companies etc. that Additional Licensed HMO's are probably less risky than Mandatory HMO's. New financial products could perhaps be developed or existing ones relaxed.

- And finally - recognize that the law is a bit odd when it seems not ok to let out a property to 3 unrelated people without meeing certain HMO standards but is ok to let out to a vulnerable family of eight who constitute one household. (perhaps this would constitute a Mandatory Licence and if so it's merely the definition that is the problem)

What a pickle.

Gary Dully

20:13 PM, 25th April 2016
About 3 years ago

Reply to the comment left by "Ian Narbeth" at "25/04/2016 - 18:26":

Hello Ian,

I know that fact Ian and I am not disagreeing with you, far from it.

I could arrange car finance and pay 2 different interest rates from the same high street, one for a Taxi and the other for the family car.
One is Consumer Credit Licensed and the other isn't.

The fact that the lenders wont be happy etc, wasn't the point of the post.

There is a proverb that says, "Beg For Forgiveness and Never Ask For Permission"

Some people bridge finance with a Credit Card.

What is undeniable is the sell off in Liverpool and Manchester by HMO Landlords who have seen the writing on the wall.

In the last week alone I have been offered 5 different HMO portfolios that will require licensing and also upgrading to meet the regs.
I am told by the people offering the leads that the Landlords are "Tired" - Nobody gives up feeling tired of a Gross Yield of 21% vs 5%, so the fact I'm told their tired doesn't wash.

I bet they are 'Tired' - but the real reason is the problem with their lenders.

No problem with remortgaging, but what will be the problem is the LTV (which is too high) on their mortgages and too low from the HMO lenders.

So the properties may be switched back to single occupancy or emptied.

So even for the 5 portfolios that I am aware of - that equates to about 110 households, who could face eviction.

So apart from the landlord, who may end up having a 'Black Mark' against their name - that's little relief for all the households that will face eviction.

Lets face facts, HMO's exist because there is a housing shortage and properties to purchase or rent outright are too expensive.

If I offered a 3 bed semi all bills included for £70pw - there wouldn't be any left on the shelf, but that's not what is offered by a HMO.

Get smart with lease, freehold and mortgage terms as much as you want, but if you remove even more quantity, the price is going to go up.

I am not trying to justify what they have done, what I am pointing out is that they are about to cause carnage in the HMO Market, not by licensing, but by enquiries to mortgage companies.

Which, I suspect, was the real subject of this post.

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