Lender says letting out as licenced HMO breaches terms and conditions?

Lender says letting out as licenced HMO breaches terms and conditions?

14:58 PM, 11th October 2021, About 3 years ago 23

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I am a residential landlord of a small portfolio of buy-to-let properties in London. I purchased my most recent property in March 2018, and took out a 5-year fixed-rate mortgage with a lender to enable me to do so. I rent it out to 4 tenants, either professionals or mature students.

In October 2018, the local council for where the property is located, introduced an additional HMO licensing scheme, stipulating that if a property has 2 or 3 tenants and shared bathroom and kitchen facilities, it is deemed to be an HMO.

I was not made aware of this change to the law until a letting agent informed me around this time last year when seeking his services to rent out another one of my properties during the difficult Covid-19 period.

As a result, I have applied for additional HMO licences for all properties in my portfolio in keeping with the law and these applications are still being processed. When making an application, one is required to inform the mortgage provider and any other ‘interested party’. I, therefore, informed the mortgage lender for my most recent property purchase (stated above).

Not long after making the application, I received a call from their mortgage services team, saying that I cannot let out the property as an HMO as it breaches the terms and conditions of their mortgage offer, which was sent to me in February 2018. I would need to let out my property either to a family, or I presume, 2 or fewer tenants.

I checked the terms and conditions of the mortgage offer and they do indeed state that: “a condition of the advance is that the mortgaged property is not a House in Multiple Occupation (HMO) and will not be used as an HMO at any time in the future…letting it as an HMO will constitute a breach of the mortgage conditions and serious event under E2.1 of the mortgage conditions”.

However, at the time of the mortgage offer (February 2018), a HMO only related to a mandatory HMO, which is renting out to 5 or more tenants. As I was going to rent out to 4 tenants, the property was not a HMO. The additional HMO licensing scheme was introduced well after I accepted the mortgage offer and purchased the property.

There is nothing in the terms and conditions here about letting out the property as an additional HMO. I think it is grossly unfair of the mortgage lender to insist that I have to stop letting out the property to 4 tenants and can only rent it out to a family or maximum of 2 tenants.

The property was clearly not a HMO when taking out the mortgage advance as stated. To be forced to rent out the 4-bed flat to a family or a maximum of 2 tenants will grossly reduce my rent, and simply make it not feasible for me to stay in business as a property landlord. Surely this is unreasonable behaviour by the mortgage lender.

I wonder if I have a case to appeal?

Why would they insist I only let out the property to a family or 2 tenants maximum, when doing so will entail such a substantial reduction to my rent, and significantly increase my chances of defaulting on the mortgage! I have always made my mortgage payments on time.

I am sure I can’t be the only one, and that many other landlords out there must have been affected by the additional HMO licensing scheme and its conflict with mortgage lender conditions, as many landlords let out to 3 or more tenants.

I feel I am being penalised for simply being a law-abiding and conscientious landlord who has complied with the ever more legislation against landlords, including the additional HMO licensing scheme.

I earnestly seek advice and guidance.

Mr S

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Rob Crawford

18:57 PM, 11th October 2021, About 3 years ago

Irrespective of whether a licence is required, it is still an HMO if let to multiple tenants as described. You don't mention that the lender specifies "licensed HMO". In fact you quote it as only "HMO", no reference to licensing. As such whether licensed or not, you are not compliant with the lenders T&C's.

Lional Chong

21:13 PM, 11th October 2021, About 3 years ago

Hackney Council I presume? I sold my Hackney properties for this reason - too much hassle now. I recommend doing the same.

Tessa Shepperson

10:12 AM, 12th October 2021, About 3 years ago

Rob is correct. If you rent to 3 or more unrelated occupiers it is an HMO whether or not the property requires licensing. For example, you will need to comply with the HMO Management Regs.

Anyone renting to sharers should inform themselves about the law relating to HMOs. Ideally before buying the property. We have a lot of guidance on Landlord Law (some of it free) which you can read about here: https://landlordlaw.co.uk/information-on-landlord-law-on-hmos/


10:16 AM, 12th October 2021, About 3 years ago

Reply to the comment left by Lional Chong at 11/10/2021 - 21:13
Irrelevant. Hackney Council are not the mortgage providers, nor do they set the terms of the mortgage.
The property is a HMO licensed or not.

Adam Smith

10:17 AM, 12th October 2021, About 3 years ago

I had the same problem which I ascribe to different definitions of HMO by the local authority and the lender. When I informed the lender that the 3 bedroom property in Tower Hamlets is let on a single AST the problem seemed to go away.
The lender describes as an HMO a property where each bedroom is let on a separate agreement.

Tessa Shepperson

10:28 AM, 12th October 2021, About 3 years ago

There is a lot of confusion about different types of HMO. There are two separate definitions under the Housing Act 2004 (s254 and s257), a different definition for council tax purposes and also for planning.

Most times when people refer to HMOs they mean the HMO as defined by s254 of the Housing Act 2004, but not always. You will find explanations in our free HMO 101 course here: https://landlord-law.co.uk/HMO101/content/index.html#/

paul robinson

10:52 AM, 12th October 2021, About 3 years ago

always pick "NO" for other interested parties

As other have said 3 unrelated has always been a HMO, the need to get a licence is a different criteria.

If 4 on a joint tenancy, you may find its ok.

land law

11:09 AM, 12th October 2021, About 3 years ago

A related point. It does seem that you are in breach of your mortgage conditions - but the real point is what are they going to do about it.

It’s not a criminal offence to be in breach of a contract - so why are they telling you. Do they plan to seek possession, are they asking for a fee, do they plan to offer a different interest rate or they will seek possession. In other words, what’s their point? If they do nothing for a while, they will have waived the breach.

PS check your insurance covers HMO.


12:50 PM, 12th October 2021, About 3 years ago

Please read Tessa's very helpful comments and links.
Practical advice: tell your Lender that you will comply. You may either continue with or withdraw your HMO Licence application.
Somehow ensure that you let to a single household only. it does not have to be a family with children. You should not be involved in the selection of individual tenants. It is not difficult for 3 people to be a couple plus a lodger. The 3 may be mentioned in your AST as joint and several tenants, but make sure they have a single household bank account from which you are paid the monthly rent in one lump sum.

BTL Property Owner

14:05 PM, 12th October 2021, About 3 years ago

I don't know if my experience helps, but I faced virtually the same problem few years back with my large BTL property. Out of the blue I received a similar letter from my lender. My agent had sub-let my property to a company who let out individual rooms to students and professionals which I was aware of, but blissfully completely unaware of HMO licencing. After about 18 months (unbeknown to me and, allegedly, my agent as well) this company had applied for and received an HMO Licence in their name. At just under 2 year mark I remortgaged the property for a further 2 year discounted mortgage interest rate. About 3 months later I received a letter from my lender advising me that they have learned from my council that the property is now a Licensed HMO. They said that this was in breach of their mortgage terms (i.e. property should only have been let to a single family) and asked me how I was proposing to resolve the issue. My agent said there was no demand for single family let and advised me to re-licence the property as an HMO in my own name for which some additional work was necessary to ensure compliance. I reluctantly agreed to this proposal, had the property vacated and advised my lender accordingly. However, my lender said that I had to re-mortgage the property in accordance with their HMO BTL mortgage T's & C's which were different to the single family BTL T's & C's. Having re-morgaged only a few months earlier, they would not transfer me to their HMO BTL mortgage. I had to re-apply and go through virtually the same process again and pay for all their standard fees (property revaluation, mortgage arrangement, etc).
As they say, ignorance is no excuse. It was an expensive lesson learned.
In your case I suggest you clarify your lender's issue(s) clearly before taking any action. Good luck.

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