Over the last five years landlords have endured significant regulatory changes. These include additional stamp duty levies, taxation changes, the introduction of minimum Energy Performance Certificates (EPCs) and the requirement for electrical certification reports - all of which will reduce the landlord’s profit from their portfolio of properties.
To offset the loss of income, landlords are looking for alternative ways to increase yields and rental income from their properties. This has led to many landlords converting some of their existing buy-to-let properties into Houses in Multiple Occupation (HMOs), purchasing existing HMOs or purchasing properties with the view to convert into HMOS. HMOs provide a higher yield and income than typical standard BTL properties due to the number of tenants and demand from students and professionals.
With the increased demand for these properties, it’s important brokers ensure landlords understand the licenses and regulations these properties require. The penalties imposed by Councils can be significant if the properties do not comply with the regulations.
What is an HMO?
The Government’s legal definition of an HMO is a property rented out by at least three people who are from more than one 'household' but share bathroom and kitchen facilities.
On the 1st October 2018, the regulations and rules around HMOs in England changed so that any property which had five or more tenants required a mandatory licence. This meant that previously unlicenced HMO properties are now required to have a licence.
The new regulations include minimum room sizes for bedrooms and common areas, fire inspection reports, electrical certificates and waste collection. The regulations and requirements for an HMO can be significantly stricter dependent upon the local council regulations that have been implemented.
For example, Newham Council requires additional licenses for all HMO properties including purpose built, self-contained flats. This is different to the additional licensing scheme in Ealing, which excludes HMO properties occupied by three people unless they are in a mixed-use commercial / residential building.
Types of Licencing
There are currently three types of licences for buy-to-let properties:
These must be obtained for a property which has five or more tenants forming two or more households. These properties must meet the minimum room sizes for bedrooms, living areas and kitchens but would still share other facilities. These licences are valid for five years.
A council can impose a licence on any category of HMO in its area which is not subject to mandatory licencing. The council can do this if it considers that a significant proportion of these HMOs are being managed ineffectively and creating problems for the occupants or members of the public.
Local housing authorities have the power to introduce selective licensing schemes in relation to privately rented housing that is not an HMO in a particular area. Selective licensing is available only where the authority believes that it would reduce or eliminate specific housing problems.
Normally HMOs landlords do not require planning permission to change a house from a ‘dwelling house’ use class to ‘small HMO’ use class and back again. This is due to the Town and Country Planning (General Permitted Development) Order 1995 or “permitted development” for short.
However, any local planning authority can decide to give an Article 4 direction/restriction to a particular area (making it an Article 4 area) and therefore restricting a change of use that is normally permitted, such as HMO usage, to better manage housing. An example might be areas predominantly used for student lets.
The effect of an Article 4 Direction is that a planning application is required to be made for the change of use of a building from a dwelling house (Planning Use Class C3) to a small HMO (Planning Use Class C4) in the designated area. In other words, this change of use of a building is no longer “permitted development”.
Properties previously used as HMOs, before Article 4 Restrictions were put in place, would normally be acceptable but lenders may require the landlord to be able to prove usage as an HMO so it would be sensible to obtain a Certificate of Lawful Use for the property.
These are defined as self-contained houses and flats shared between seven or more unrelated people which normally require planning permission.
Duty of care
The rules and regulations around HMOs are complex but should not deter brokers or landlords from these types of properties.
The broker has a key part to play in asking specific questions of their client. Brokers should request information from landlords on the size of their property, the current licenses held and applied for, the planning requirements in the local area and the required reports including Electrical Certifications, Fire Safety Reports or Asbestos Management Reports.
While the ultimate responsibility for obtaining all these items falls on the landlord, brokers have a duty of care to make sure their landlord clients are informed and aware that lenders will require this information to be able to lend on HMOs.