UNDERSTANDING HMO PLANNING AND LICENSING

Summary

A House of Multiple Occupancy is a house or flat rented to three or more people from two or more households.

HMOs that have 5 or more bedrooms will require an HMO licence.

An HMO licence is obtained from the local council, costs around £500 and lasts for 5 years.

The licence enforces size, safety and quality standards within an HMO and operating without a license is a criminal offence with unlimited fines.

HMOs can fall into one of two planning classes. C4 if there are 3-6 residents and Sui Generis if over 7 or more residents.

Obtaining planning and obtaining a licensing are unrelated and administered by different departments.

HMO planning laws largely deal with any external impacts (to protect the the local area) that a HMO may have and licensing deals with internal standards within a HMO (for the protection of the residents)

In most cases if you wish to turn a building into a HMO you must apply for planning permission and it is likely to be rejected by the local council as councils do not want the creation of new HMO’s due to their (previously deserved) bad reputation.

If you buy an existing HMO you must be sure that it is a legal HMO, meaning that it has the correct planning class. You will require a Certificate Of Lawful Development which confirms the planning class (either C4 or Sui Generis)

Alternatively you must have detailed evidence that the property has been used as an HMO consistently for the last 10 years.

Evidence would usually be a 10 years worth of unbroken AST’s (assured short hold tenancy agreements) as well as 10 years worth of consistent HMO licences.

Sui Generis comes from the latin for ‘Unique” and covers any type of building that doesn’t fit into the other use classes such as theatres, nightclubs, funfairs, police stations etc.

Background

It’s worth understanding where the HMO and private rental sector has its modern roots and how it has been enabled by the banking sector.

In the 1980s under Margaret Thatcher social housing was largely sold off through the Right To Buy Scheme.

The vast majority of this housing stock therefore ended up being owned by private landlords.

In addition to selling off social housing the government stopped building social housing and instead supported low-income houses via subsidies. (Making renting to lower income households less risky for landlords.)

This led to rapid growth in the rental sector which was then bolstered by the introduction of ‘Buy to Let’ mortgage products in 1996 meaning that growing and financing portfolios of rental assets became easier and more popular. In addition this was a time when real house prices were rapidly rising, (ending 2007) fuelling further mania and FOMO.

The HMO became an increasingly popular product as more tenants meant better yields and yet more investors entered the space. Planning at this time was far less sophisticated and licensing hadn’t yet been invented. (Not until 2004)

To illustrate the growth in the sector in the 1980’s there were 50k private landlords in the UK and now there are over 2 million with 20% of all housing stock being owned by landlords. (This is a staggering amount of landlords when thought of in the context of the population)

As of today there are a little under 500k HMO’s in the UK and an estimated 2 million HMO rooms.

Regulation was Needed

This growth led to regulation via licensing and then planning.

The 2004 Housing Act introduced selective licensing for HMO’s. Selective licensing meant that all HMO’s of five or more people (or in buildings of more than 3 stories) would require a mandatory licence.

Then in 2010 planning law changed with the aim of giving the power to require all new HMOs in their area to require planning consent. This was done through the invention of a new planning class called C4 which would cover all HMO’s of 3-6 occupants.

Prior to 2010 a small HMO (6 people or less) was, from a planning point of view, the same as a family home. They were both C3 dwellings.

It was only 7 bedroom (and over) HMO’s that held a separate class. (Sui Generis)

Despite the newly created different planning class between a family home (C3) and a small HMO (now C4) permitted development meant that owners could still switch between renting buildings out to families or operating as an HMO as they wished.

This then led to many councils exercising their power to removing permitted development rights in select areas by introducing what is called an Article 4 Directive. By taking away permitted development rights in certain areas they very effectively restricted the creation of new HMOs because this conversion would now require full planning permission.

The councils reasoning was that too high a density of HMOs in the same area would have negative impacts for the local community. Its worth noting that the government doesn’t want councils creating too many Article 4 areas and so states that it must be ‘limited to situations where an Article 4 direction is necessary to protect the local amenity or the well being of an area’

Its also worth owners knowing that local authorities must give landlords 12 a month warning of an area becoming Article 4 area so plenty of time to get you house in order from a planning point of view.

What does this mean for investors?

Significantly more due diligence is required compared to investing in single-lets.

Specifically a very clear understanding of what areas fall under Article 4 as well as a clear understanding of the planning class of the building you are buying to avoid buying an ‘HMO that isn’t.’ In that it may well have been operating an HMO for for decades but when you try to officially seek permission to formalise its status as a HMO you may be rejected meaning that you will have to operate it as a family home at a vastly lower yield.

It also means that lending on HMO’s has become stricter which although frustrating can help a purchaser ensure than everything is in good shape from a planning point of view as they are increasingly less likely to lend if the planning status isn’t correct. Ultimately it will be harder (and potentially impossible with more sophisticated lenders) to complete on the transaction unless the lender can be totally satisfied that the building has the correct planning status.

So in an ideal world if you are buying a 3-6 bedroom HMO then you are looking for an official planning certificate that says the building is a C4 dwelling and if you are buying a 7 (or more) bedroom HMO you are looking for a planning certificate that says Sui Generis.

Its often not an ideal world

Especially when you are buying assets from undisciplined landlords who have spent the last few decades doing the very least they can get away with in terms of quality, maintenance and tenant-satisfaction as well as spending most of their time ducking-and-diving the various planning authorities.

In instances where they have been operating it as an HMO for many years but have the wrong planning class and it technically isn’t an HMO (on paper) then you must work with the vendor to collect a body of evidence that will be sufficient to prove that the building was already operating as a HMO prior to the Article 4 Directive coming into place or pass what is called The 10 Year Rule.

The 10 Year Rule

The 10 Year Rule means that if the building has been operating as a HMO for more than 10 years and has not been substantially altered and you can evidence constant use as a HMO then you simply need to apply for a certificate of lawful development. This requires the submission of a body of evidence to the council which makes your case. It’s wise to engage a planning consultant to run this process for you which will likely cost a couple of thousand pounds at max.

It’s worth remembering that a council can refuse your application if it is not backed up with enough evidence and then they are likely to serve you with an enforcement notice and prevent you from operating the building as a HMO.

Key Date Timeline

1957

Housing act sets out basic standards for housing

1996

Introduction of the BTL mortgage (then huge ‘real house price growth’ until 2007)

2004

Selective and mandatory HMO licensing introduced for what were considered larger HMO’s of 3 or more floors or 5 or more occupants.

Tenancy Deposit Scheme introduced.

2006

Mandatory licensing for all HMO’s of 5 or more people

2010

Use class C4 created to differentiate small HMOs from family houses and to allow more planning control over smaller HMOs.

Council begin exercising their power of removing PD rights in select areas by introducing an Article 4 Directive

Summary

Planning and licensing for HMO’s is simple but not easy.

It’s simple as its very clear what you need to do in order to ensure your buildings are correct from a planning point of view.

It’s not easy because so many people currently selling HMO’s have avoided obtaining CLD’s as they spent a career wanting to avoid planners at all costs compounded by the fact that many don’t have a decent paper trail, making gathering up the requisite evidence harder than it should be.

Lenders are increasingly sophisticated when it comes to HMO’s and so you need to be aware of what special conditions (related to planning and licensing) the lender may have as early as possible in the conveyancing process to avoid delays.