New government rules regarding HMO licensing will come into force in England, on October 1, 2018.
Jorden Abbs, director of operations at Commercial Trust discusses what the extended rules will mean for London’s buy-to-let landlords.
What is an HMO?
An HMO is a house of multiple occupancy.
The government describes an HMO as “a property rented out by at least three people who are not from one ‘household’ (e.g. a family), but share facilities like the bathroom and kitchen. It’s sometimes called a ‘house share’.”
HMOs can help a landlord to reduce the risk of a completely empty property, and therefore mitigate the impact of a tenant moving out, as rent comes in from multiple parties.
Generally, HMOs tend to offer tenants a cheaper rental option, as they are not renting the whole property, just a bedroom with shared use facilities. This can make an HMO attractive to would-be tenants, particularly for people in London, where rental prices are typically higher than elsewhere and demand for rental homes is also consistently high.
HMO properties typically deliver higher yields than other types of rental property. For example, a four-bedroom house rented out to a family might attract a monthly rent of £1,000. Whereas, the same property, if converted into an HMO, might achieve four separate rents of £350 a month each (for example), totalling £1,400.
Who needs a licence? At present, landlords operating an HMO, are subject to the Licensing of Houses in Multiple Occupation (Prescribed Descriptions) (England) Order 2006 (2006/371), which is applied in certain regions of England and Wales.
Local authorities set the cost of obtaining such a licence.
There are three types of HMO licenses:
Mandatory licensing for large HMOs
This type of licensing is relevant across the country.
According to the government, a large HMO is a property rented to five or more people, who form more than one household. The property will be at least three storeys high and tenants will share toilet, bathroom or kitchen facilities.
However, depending on where you live, your local authority may also require you to obtain a licence, even if your property does not meet the large HMO criteria.
Additional licensing local councils have the authority to introduce additional licensing under Part II of the Housing Act 2004, but can only do so in instances where they believe many of the HMOs in an area are being poorly managed.
Additional licensing relates to properties deemed (HMOs), that fall outside the scope of the mandatory HMO licensing scheme.
If your property is defined as an HMO, you will need to check with your local authority to establish if the location of the building falls within an additional licensing jurisdiction. In London, some schemes only cover local areas, elsewhere they will relate to the whole borough.
Each council defines the type of HMOs which need a licence within an area.
Once again, this type of licensing is determined by the local authority and can impact on different types of HMO, irrespective of size, number of rooms, number of storeys and number of tenants.
Recent legislation is going to change some of the above criteria and is likely to affect more landlord-owned properties that will have to be registered as HMOs.
Is my property within an existing licensing area?
At present, HMO licensing is limited to specific local authorities, but it is absolutely imperative that you have the appropriate licence if your local council requires one.
What are my obligations if I need a licence?
In order to operate a licenced HMO, you will need to apply to your local council. If you have a managing agent who represents you, they may apply on your behalf.
There will be a fee to pay, which is set by the local authority.
You will also need to meet a number of standards, which are listed below:
* the house has to be suitable for the number of people living there;
* the person responsible for managing the property – which could be the landlord or an agent, must be considered ‘fit and proper’ – with no criminal record or history of breaching landlord laws of code of practice;
* you must provide the local council with an updated gas safety certificate every year;
* you must install and maintain smoke alarms;
* you must also provide safety certificates for all electrical appliances within the property when requested.
The penalties for running an unlicensed HMO in an area requiring a licence, or for failing to meet the above standards, can be severe.
You could receive an unlimited fine if you rent out an unlicensed HMO.
How are the rules changing?
In early March, 2018, the government introduced the licensing of HMOs (prescribed description) (England) Order 2018 (2018/221) (LHMO 2018)’
From October 1 2018, there will be an extension to the scope of mandatory licensing requirements for HMOs, under section 55(3) of the Housing Act 2004 (HA 2004).
This means that more properties will require a licence before they can be let.
From October 2018, HMOs occupied by five or more people, must have an appropriate mandatory licence, with the number of storeys no longer a consideration.
The changes go further; HMO licensing will also now apply to purpose-built flats where there are up to two flats in the block.
HMOs that currently require a selective licence, will be subject to mandatory licensing from 1 October 1 2018.
HMOs will become subject to mandatory licensing in England.
Landlords will have to obtain a mandatory licence where their property meets the following criteria:
* It is occupied by five or more persons;
* is occupied by persons living in two or more separate households; and
* the standard test under section 254(2) of the Act;
* the self-contained flat test under section 254(3) of the Act but is not a purpose-built flat situated in a block comprising three or more self-contained flats; or
* the converted building test under section 254(4) of the Act.
A licence is valid for five years and a separate licence must apply to each HMO property.
What should I do now?
“It is absolutely essential that you keep up to date with the changes taking place and ensure that you have the relevant HMO licence, if this is required. In the first instance, you should speak to your local council to learn if a licence is necessary and if so, what you must do.
“The changes coming in will impact on a number of London’s landlords, but represent a further effort to improve standards with the private rental market.
“Lenders already adopt differing approaches to investors who are looking to finance an HMO. “If you are looking to obtain financing for an HMO, come and talk to us.
“We work with a broad range of buy-to-let lenders offering landlords a wide choice of products. With a telephone conversation, we can help to identify the best buy to let mortgage to fit your circumstances.”