By Robin Stewart of Anthony Gold
Many letting agents still take the view that licensing a property is something for landlords to worry about and they can simply leave it up to them. But managing agents who consider that ensuring that any required HMO or selective licence is in place is not their responsibility are quite simply wrong.
Even if an agent’s terms of business clearly state that they do not take on the responsibility for licensing and the landlord agrees to obtain any necessary licence, the Housing Act 2004 places responsibility for licensing a property on anyone who meets the statutory definition of person having control or person managing.
This duty is enforced through criminal prosecution and financial penalties. Where a company is involved, their directors can also be personally prosecuted sometimes.
If you receive the rent you’re probably liable
The legal definitions of “person having control” and “person managing” are highly technical and not easily summarised, but the key point for agents is that anyone who receives the rent on behalf of the landlord will be a person managing.
The law has generally been understood to place a duty on agents acting on a ‘rent collection’ or ‘property management’ basis since they will be collecting the full rent and then passing this to the landlord (after deducting their fees and commission).
This creates an obstacle for agents who want to collect the rent without otherwise being involved with the property particularly those offering an online-only service; the entire ‘rent collection’ business model does not sit easily with the agent having a responsibility for licensing and property conditions – the agent is not being paid to look after or inspect the property, but they still face criminal liability if something goes wrong.
In the ‘let only’ business model an agent would typically market a property, collect the first month’s rent and deposit form the tenant, arrange signing of a tenancy agreement, and then when the tenants have moved in, that is the end of their involvement. The agent deducts their fees and passes any balance to the landlord, and rent is subsequently paid by the tenants to the landlord directly.
Is a let only agent responsible for licensing?
In a recent prosecution, in which Anthony Gold acted, the London Borough of Camden prosecuted an agent who had received the initial month’s rent and was holding the tenancy deposit in accordance with an insurance based tenancy deposit scheme. Camden argued that the receipt of the first month’s made the agent a person managing for the whole of the term of the tenancy arranged by the agent. They also argued that that merely holding the deposit would also make the agent a person managing. The agent argued that one receipt of rent before the start of a tenancy did not make the agent a person managing later on – and the deposit was held on a ‘stakeholder’ basis and therefore not received as agent or trustee for the landlord.
In the event the deposit question was not ruled on in this case because District Judge Newton, sitting at Highbury Corner Magistrates Court, accepted Camden’s argument that the receipt of the first month’s rent was enough to make the agent a person managing for the whole of the fixed term of the tenancy.
The District Judge’s decision in this case is important, and is likely to influence local authority enforcement activity, but the judge’s interpretation of the law will not be binding on other criminal courts. No appeal was brought in this case but we fully expect these issues to be the subject of an appeal to the High Court in due course.
There is nothing in Housing Act 2004 which make clear for how long after a receipt of a single payment of rent an agent could continue to be a person managing.
As noted in the write-up of the case in Local Government Lawyer, even if the interpretation of the law reached, in this case, is applied again, it is not clear whether a ‘let only’ agent would continue to be responsible for licensing after the fixed term of a tenancy they arranged has expired. Since the statutory periodic tenancy arising at that point is a new tenancy, is that agent now off the hook?
It is notable that although the Judge convicted the agent for breaches of the Management of Houses in Multiple Occupation (England) Regulations 2006, absolute discharges were given for these offences (although fines were imposed for the failure to licence). Absolute discharges are usually only given where the judge considers the defendant to be technically guilty but in reality blameless.
The underlying logic of District Judge Newton’s decision appears to be that an agent who is not collecting rent and has not ongoing management role cannot reasonably be blamed for failures in management. However, a failure to acquire a licence which was needed at the start of the tenancy is a different matter.
Implications for the Let Only business model
The decision in this case and issues raised by Camden do threaten the viability of let only business model. We have often advised ‘let only’ agents to avoid leaving tenancy deposit protection to landlords to deal with because they remain potentially liable to tenants under if the landlord fails to properly protect a deposit.
If a letting agent is involved, is usually in the interests of tenants for the professional agent to make sure a deposit is properly protected before they hand control back to the landlord. If Camden’s argument about the deposit is upheld by later courts this will provide an incentive for let only agents to stay away from dealing with the deposits.
There will be cases where an agent could defend prosecutions by relying on a defence of reasonable excuse: perhaps if a property became licensable after they were no longer involved because more people moved in, or a new licensing scheme was introduced.
However, a professional agent would struggle to defend a prosecution if they had made a mistake or failed to adequately train staff. It would also be for the agent to prove their ‘reasonable excuse’ because if the basic elements of the offence are proved, the presumption of innocence does not apply – the defendant must prove that they have a reasonable excuse.
All agents will need to have systems in place to ensure that a suitable licence is in place whenever they arrange a tenancy, even if they are not collecting rent or managing the property. The increasingly broad definition given to “person managing” by the courts means that blaming the landlord is not likely to amount to defence.
If agents are concerned about properties which have become licensable due to changes in occupation or the changes to mandatory licensing they should take advice – it may be that they have a reasonable excuse at the moment, but failing to take prompt action would make it more difficult to rely on that defence.
This post first appeared on the Anthony Gold site here.
Anthony Gold’s Housing and Property Disputes team advises landlords and agents on all regulatory issues relating to the private rented sector including data protection, trading standards and the law relating to houses in multiple occupation. Contact Robin Stewart or David Smith.
This has wide reaching consequences for enforcement where the dodgy Rent 2 Rent model is being used. Common practice with ‘Smoke-screening’ is for an agent to source a tenant, who then advertises the whole place on Gumtree or similar and crams it with tenants. Often the original agent then passes day to day management onto another agent, usually not incorporated and with no high street or online presence.
The case has the potential to allow enforcement teams to bat away the finger pointing at the fake agent and go straight for the real perpetrator, their ‘Tenant’ also being a smoke screen, who runs other properties for the originating agent.
Where this all falls down is there doesn’t seem to be a will by many councils, nor even the mechanism, to prosecute retrospectively a property that should have been licensed but somehow stayed under the radar and “got away with it”. It is still possible for the unlicensed HMO to avoid having the required number of tenants by the time the inspection occurs, probably by illegally evicting some of the tenants, often by moving them to other properties. A licensing scheme that encourages illegal evictions seems to be somewhat of a farce.
If one could prove beyond reasonable doubt with witness statements or electoral register records that a house should have been licensed would a pro-active council be able to prosecute? Even if they could it seems most would simply say “We’ve found you – now one of you good chaps get a licence”.
Another flaw is that, however dodgy these middlemen and/or the owner may be, the least dodgy would be the one put forward as a fit and proper person and would probably pass, given the extreme unlikelihood of the Police having taken any previous action against either landlords or agents in incidents that they will have nearly always passed off as “a civil matter”.
John an illegal eviction does not end the tenancy. The person may not be able to occupy but they are still officially tenants. I am involved in two such cases this week where the landlord thinks if he chucks the tenants out he will avoid licensing.
Technically true but in most cases the tenants will probably simply have been told to leave and either through not knowing their rights, or through being frustrated with the landlord or agent for other reasons they will often just roll over and comply. It may only be a stubborn one or two that literally get thrown out, then they have the often massive obstacle of getting either the Police or the underfunded LA to record it as an illegal eviction. Most tenants don’t have the fight in them and usually can’t get the help even when they do. Only the most determined would file a civil suit.
Or let’s say you are a tenant in an unlicensed HMO and the LL gives you a S21. You may have read somewhere on a blog that it would be invalid without the HMO licence, but won’t you likely move anyway rather than risk going to court and possibly being landed with costs when the onus is on you to prove that the licence was required on a property that isn’t currently on the council’s radar and still probably won’t have been inspected by the time the hearing takes place or will have too few tenants left by then to need one. How in fact do you satisfy the court that an HMO should have historically had a licence when defending an S21? I’ve never seen this issue addressed on this or any other blog.
There’s also my bug-bear that if you, the tenant flags up an unlicensed property, the LL/agent will obtain the right to legitimately evict you in revenge with an S21 merely by applying. Which bright spark thought that one up? It’s no wonder the council get no help from tenants in finding these properties.
You mentioned RROs. Some solicitors aren’t interested cos the costs can exceed the award. Add to that the risk of a tenant chasing one on his own and he might go after the wrong person, or a middleman with no assets, rendering the RRO useless. Also, with RROs how are arrears treated? Is your liability to pay the rent treated as extinguished instead? What if you get HB but have withheld it from the LL? If the LA go for an RRO will they end up recovering the HB amount from the LL anyway, leaving him to chase the arrears, or will they chase the tenant instead, leaving the LL no worse off?
John I get and appreciate your passion there but you raise so many questions that it would take a whole other article to pin them down. Here are a few points that I can focus on in the time I have this afternoon.
-Solicitors dont need to do RROs. Its a fairly simple process that can often be dealt with even without anyone having to go before the FTT. I’ve got about 9 on my desk as we speak, they arent difficult.
-The council can involve advice and assistance to help a tenant do one. Again, I have 9 at the moment in line with those powers to assist by our council partners
-You dont waste time going after middle men, you go after the landlord, thats how the law is structured.
– A tenant cant do an RRO on HB paid, only the council itself can do this. A tenant uses an RRO to claim back rent paid.
-The LA cannot chase a tenant for an RRO claim on HB.
The amount claimed in an RRO must be money paid to the landlord, not money owed under the contract, so if a tenant receives HB but doesnt pay it over, the money cant be claimed under an RRO.
– If the landlord has no assets then an RRO will allow the council or the tenants to register a charge against the property and force sale to recover the money.
On your point ” How in fact do you satisfy the court that an HMO should have historically had a licence when defending an S21? I’ve never seen this issue addressed on this or any other blog”
I cant vouch for any other blog but the matter is dead simple. You just advise the court on a defence form or at a hearing that the property is unlicensed, quoting the relevant legislation and local licensing provisions. On the accelerated possession form N5B a landlord applicant has to quantify this licensing requirement with dates and licence numbers. It is up for the claimant to prove their case, not the respondent.
Ben, you say ..
“On the accelerated possession form N5B a landlord applicant has to quantify this licensing requirement with dates and licence numbers. It is up for the claimant to prove their case, not the respondent.”
It’s not super clear what you mean. What’s to stop the landlord lying about how many people have occupied the property, and simply arguing that the accusation has no merit?
Thanks for the detailed answers.
“You don’t waste time going after middle men, you go after the landlord, that’s how the law is structured.”
Your excellent series of articles about “The Criminal Model of HMO” suggests the “Landlord” may not necessarily be the owner. What if Agent A rents out rooms for Landlord L who himself has a short commercial lease from Owner O. Tenant T gets an S21 a week after another tenant “voluntarily” moves out, leaving 4 tenants left. The HMO now doesn’t need the licence, so A is off the hook even under the rules in the opening post. If the T goes for an RRO won’t the onus now be on HIM to prove that A, L or O did indeed need a licence before the other tenant moved out and might he then end up chasing Landlord L who could be an origami-prone Ltd company or an impecunious individual with no assets? Even if you can prove your case to a criminal standard you might still not get paid. Or are you saying that the actual owner and final end-recipient of rent in the entire chain is the one the RRO hits? If that’s the case then effectively the owner would be being held responsible for the actions of everyone below him, which could make things interesting.
Regarding arrears – suppose the T is 6 months behind – how does an RRO treat this? If the Tribunal would normally have awarded, say, 9 months rent in the circumstances, would they award it as 3 months actual rent repayment and extinguish the 6 months of liability for arrears, or would the tenant end up still owing a net 3 months of rent? Or would the Tribunal award as much as they could of the remaining 12 months of rent actually paid to get as close to the intended 9 months?