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Private Sector Landlord

How to succeed in student

rentals

Do you own a Section 257

property? You could face a

big bill

A L I F E M A G A Z I N E S P U B L I C AT I O N I N C O N J U N C T I O N W I T H E M P O

E A S T M I D L A N D S E D I T I O N

FEB – MAR 2015

Is 10 years too long to fix your mortgage rate?

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FEBRUARY/MARCH 2015

Copy deadline: For April / May edition: 16th March 2015

CONTACTT: 01636 815561 M: 07812 575540 Life Magazines, 7b Church Street, Southwell NG25 0HQ

Sales: [email protected] Editorial: [email protected] Subscription: [email protected]

Published by: Life Magazines (Notts) Ltd

Editor: Howard Clemmow

Contributors: Adeela Ahmed, Howard Clemmow, Giles Inman, Steve Olejnik, Dave Princep

CONTENTS

Landlord News 6

Mortgages for Business 8

The Big Issue: Frustrated Homeowners 10

The Knowledge: Section 257 14

The Secret of My Success: Gopal Sahota 16

Subscribe to Private Sector Landlord 17

Letters Page 18

WELCOMEWelcome to our first edition of 2015 which looks set to be an eventful year across the board. The fallout from the additional licensing scheme introduced by NCC last year continues to rumble on; the latest issue lying with buildings that were converted into self-contained flats before 1991. Such buildings, known as s257 properties, are commonplace in many parts of the city. Giles Inman of EMPO and Dave Princep of the RLA tackle this thorny subject in The Knowledge.

One of the consequences of the financial crisis was the burgeoning number of first time buyers who couldn’t raise the 20%+ deposit for a mortgage. Known as frustrated homeowners, they have turned to the private rental sector in their droves. But do they make good tenants and how can landlords attract them to their properties? Turn to the Big Issue to find out more.

This month’s interview is with student landlord Gopal Sahota who has twenty years’ experience in the sector. He still sees a bright future in student lettings, despite the inroads being made by purpose built student accommodation blocks, but cautions that landlords will have to offer high quality accommodation if they are to prosper. On page 8 specialist broker, Mortgages for Business, takes a look at the new 10 Year fixed rate mortgages just launched on the market. While they are likely to be of limited appeal, older investors coming to the end of their mortgage term could well benefit.

Finally, if you run a business that provides services for landlords, why not promote it in the pages of this magazine? Advertising starts from just £60 + VAT. See our advert on page 19 for more details.

Have a prosperous 20015.

Howard Clemmow | Editor

6

FEBRUARY/MARCH 2015

Landlord NewsSection 257 Creates Headache for Landlords and HomeownersAn unexpected consequence of the Additional Licensing Scheme introduced by Nottingham City Council last year is beginning to cause problems for homeowners, leaseholders and landlords alike. Section 257 of the Housing Act 2004 covers buildings that were converted into self-contained flats prior to 1991. As such, it is particularly relevant to the Park area of the city where there are a large number of mansion flats, some of which are owner occupied and some of which are let to tenants.

Like much of the Housing Act, Section 257 was badly drafted in the first place and the result is a piece of legislation that is open to interpretation and so complex that even the enforcement officers don’t understand it. As a result, most councils that have introduced additional or selective licensing schemes have limited the application of Section 257 to

appropriate buildings where all the flats are owned by one individual. However, Nottingham City Council have applied it to any and all buildings that meet the criteria within the additional licensing zone, which encompasses much of the city centre and inner suburbs. The result has been a

rash of contentious Orders and Notices.

Giles Inman of EMPO comments, “The way that NCC has handled additional licensing of Section 257 properties is a real dog’s dinner. No attempt was made to consult with leaseholders or freeholders

before the scheme was introduced. Nottingham is one of only two councils to make a blanket application of licensing to Section 257 properties. We’ve come across situations where owner occupiers are being forced to fit fire doors because the building their flat is in is covered by Section 257.”

Dave Princep, a health and safety consultant for the RLA also noted that it is very unclear who should bear the cost of any works required to comply with the licensing scheme, freeholder or leaseholder, and that in some cases this could mean that an owner occupier is subject to the same regulations as a landlord. He also remarked that buildings could move in and out of Section 257, for instance where one of the leaseholders decides to rent out a flat that they were previously occupying.

For more information on Section 257 see The Knowledge on page 14.

Deposit Protection Scheme: Clarity in Favour of TenantsThe ruling in the Superstrike case served notice on landlords that all rent deposits must be protected in an approved scheme, irrespective of whether the tenancy started (or even ended) before the legislation came into effect in 2007. Now another legal precedent has further clarified the implications of the legislation in real life situations.

In the case of Charalambous v Ng (Charalambous was the claimant and tenant, Ng the defendant and landlord) the court ruled that the landlord could not serve a Section 21

Notice on the tenant because the original deposit had not been protected, even though the tenancy started in August 2002. The original one year tenancy agreement was succeeded by two express tenancies that ended in August 2005. The agreement then became a periodic tenancy. The court ruled that the Section 21 notice was invalid because the deposit had not been protected at any time and had not been repaid to the tenant before the notice was served.

Landlords now have a clear understanding of what they

need to do if they want to serve a Section 21 notice when the deposit hasn’t been protected, regardless of when the tenancy began or ended. Quite simply, they must repay the deposit to the tenant before serving the Notice. While this may go against the grain in a situation where the tenant owes several months’ rent in arrears, gaining possession of the property usually outweighs the loss of the deposit.

There has also been legal precedent where a landlord has been ordered to pay three times the deposit amount to the

tenant(s) because the deposit was not protected within the prescribed timescale, the maximum penalty allowable under the legislation. This has resulted in numerous claims from solicitors acting on behalf of tenants, demanding immediate payment of large sums of money. It should be noted that only a judge can order a landlord to pay such a penalty.See Letters Page on page 18 for a real life example.

7

FEBRUARY/MARCH 2015

Peterborough based housing association, Cross Keys Homes, has announced its fi rst foray into the private rented sector, letting out homes at market rate. The properties will be marketed by a newly formed company, Cambridgeshire Homes, and their fi rst purchase is an existing block of luxury apartments, Saffron Court in the heart of Peterborough. Claire Higgins, the new chief executive of Cross Keys, describes the move as a “true milestone for us” and claims there is “much more to come.”

Cross Keys already provides over 10,000 homes in the region through a mix of shared ownership, sheltered accommodation and affordable housing schemes. At the time of writing, Cambridgeshire Homes has yet to develop a web presence.

Cross Keys is following in the footsteps of several large housing associations that have already made a move into market rate rentals. Sovereign Housing Association owns

Cross Keys Homes Joins Stampede into Private Rentals

over 36,000 homes in the M4 Corridor and is rapidly increasing its portfolio of private rentals. London based associations, Notting Hill Housing and A2 Dominion have also gone down the same path.

This development is proving controversial among some traditional private landlords and property investors. Housing Associations were set up with a clear mission statement to provide affordable housing for low income households and key workers. Most of them are not for profi t organisations and many enjoy charitable status. More importantly, virtually all of them receive local authority funding and government backed guarantees that allow them to borrow very cheaply. Housing associations in England currently have over £30 billion in borrowings. Inevitably, there are accusations of unfair competition. However, housing associations claim that any fi nancial surpluses are reinvested in the supply of affordable housing.

A Leicester landlord named as Ms Uppelle was ordered to pay £34,209 in damages after being found guilty of illegal eviction. Her tenant, Mr Alabbas, rented a property off her from April 2008. Mr Alabbas complained to his landlord about a water leak that caused part of the ceiling to collapse. When the damage was not repaired he complained to the Environmental Health Department at the local council. Ms Upelle then claimed that she had issued a Section 21 Notice but when he checked he found that no valid Notice had been issued so he stayed put. Ms Uppelle then made several threatening phone

Landlord Resorts to Hired Thugs to Evict Tenant

calls where she threatened to have him killed if he did not leave.

In April 2009 four men let themselves into the house with a key. They punched and kicked Mr Alabbas, shouted racial abuse and cut his face with a knife before throwing him out. Following the assault, he slept rough for 16 days before moving into unsuitable hostel accommodation for a further 160 days.

He was treated for his injuries in hospital and spent 2 months being treated for PTSD but had to make a civil claim to be awarded damages.

Court Date Set for Additional Licensing Judicial ReviewAfter lengthy procedural delays, a court date has been set for a hearing on the Judicial Review called for in respect of the additional licensing scheme introduced by Nottingham City Council last January. However, the hearing will only rule on whether the request for a Judicial Review can be heard in court so there’s a long way to go before this legal battle comes to a conclusion.

However, EMPO which put forward the request can take heart from a High Court ruling made on December 11th last year. Landlord, Constantinos Regas, was

granted a Judicial Review of an additional Licensing scheme set to be introduced by Enfi eld Borough Council in April of this year. The judge overthrew the scheme on the grounds that a proper consultation had not been carried out. In his summing up, Judge McKenna lambasted the council’s cabinet, accusing them of seeking to criminalise landlords and stating that they had “demonised tenants, defi led democracy and disgraced themselves.” He also refused to grant leave for the council to appeal against the judgement.

Bishop & Sewell LLP are a commercial law firm based in Central London specialising in residential and commercial property. The firm provides a wide range of other legal services including company commercial, litigation, private client, family law and employment.

The Landlord and Tenant department deal with all aspects of the leasehold reform legislation including; lease extension, freehold purchase and right to manage.

We also deal extensively with service charge disputes, possession cases and other property litigation. Talk to our experts about your landlord and tenant matters.

Contact: Mark Chickt : 020 7631 4141f : 020 7323 0498e : [email protected]

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t : 020 7631 4141f : 020 7636 5369e : [email protected]

8

FEBRUARY/MARCH 2015

Fixing your buy to let mortgage for 10 years is a pretty big commitment, so you have to be pretty sure it’s the right step for you says Steve Olejnik, Sales Director at Mortgages for Business.

The Mortgage Works has done it again and should be congratulated in leading the way with the launch of the only 10 year fixed rate in the buy to let mortgage market (as of January 2015).

Many of you will recall that The Mortgage Works were the first to go to 80% LTV after the credit crunch and, as one of the dominant lenders in the vanilla buy to let space, has continued to support both first time landlords and professional investors. The launch of the 10 year fixed rate fills a gap in the long term fixed rate market. It was no surprise to most commentators that at some stage lenders would follow the launch of Skipton’s seven year fixed rate product late last year. The Mortgage Works has been the first to step up to the plate.

Available at a LTV ratio of up to 75%, the rate is fixed at 4.99% (5.04% APR) for 10 years and is available for purchases, remortgages and those looking to let to buy. The arrangement fee is a flat £995 added to the loan and the rent to interest calculation is 125% at 4.99%.

Here at Mortgages for Business, we have been strong supporters of the longer term fixed rate and having a 10 year product is certainly a welcome addition to the suite of options available. It will, however,

be interesting to see what appetite there actually is among landlords to fix for longer than five years.

For many, five years is long enough and often suits life cycles and allows the landlord to review the finance options and potentially refinance or potentially release capital before fixing again. In my opinion, fixing for as long as 10 years will not be everyone’s cup of tea and I suspect that The Mortgage Works won’t be inundated with applications. Skipton’s seven year fixed rates were withdrawn last November only a few months after being launched. To date, there has been no word on whether these products will be replaced with a like for like alternative.

I still believe though, that there is a market for longer term buy to let mortgages; in the last Property Investor Survey, carried out by Mortgages for Business in November 2014, 8-10% of landlords said they would consider fixing for 10 years and I can particularly see older investors looking for certainty for the last 10 years of their mortgage term.

However, ten years can be a long time, so those who do take the rate will have to bear in mind the penalty charges should they wish to redeem the mortgage before the 10 years is up. These charges can be hefty, being 7% of the amount being repaid during the first four years and then decreasing by 1% increments each year until the end of the initial term. These are not small amounts, although 10% over-payments are allowed each year without penalty

and I would expect many to take advantage of this concession.

Many landlords are sitting on very low, Bank Rate linked mortgages issued by the likes of Mortgage Express, Capital Home Loans and many other pre-crunch lenders. It will probably take a couple of Bank Rate rises for borrowers to actually consider coming away from current low rates but there are some for whom a 10 year fixed rate will be attractive - in particular those with 10 years left on their mortgage term not to mention accidental landlords looking to lock away investments for the long term.

The Mortgage Works is an intermediary only lender, so landlords will have to go through a mortgage broker to access the rates.

If you are interested in finding out more about fixing for 10 years and/or reviewing your buy to let funding options, do get in touch with us on 0845 345 6788, or visit our website at www.mortgagesforbusiness.co.uk.

We offer a free of charge, no obligation review of property portfolio finances with the aim of helping landlords save money and, where needed, expand their portfolios.

About Mortgages for Business

Mortgages for Business is an independent UK mortgage broker with whole of market access, specialising in buy to let, complex residential and commercial mortgages. It also brokers short term loans and property development finance.

Sourcing finance for of thousands of UK property investors and professional landlords, Mortgages for Business has access to market leading mortgage rates and products. It is a founding member of the National Association of Commercial Finance Brokers and is regulated by the FCA.

Mortgages for Business is currently the only UK broker to have been awarded NACFB Fellowship Status for excellence in business practices and customer service.

In 2014 Mortgages for Business won several awards including Best Broker for Customer Service at the What Mortgage Awards. For the third year running it won Buy to Let Mortgage Broker of the Year at the Business Moneyfacts Awards, where it was also the runner up in the Best Commercial Broker category. In 2009 David Whittaker, MD, received a Lifetime Achievement Award at the Business Moneyfacts Awards.

Mortgages for BusinessThe pros and cons of fixing for 10 years

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10

FEBRUARY/MARCH 2015

The rise and rise of the Private Rented Sector (PRS) in England can be best demonstrated with some stark statistics. The number of households renting privately outstripped those in social housing for the first time in over 60 years last year. The number of households renting privately has more than doubled in a decade to around 4 million. At the same time, the proportion of households that are owner occupiers has fallen from 71% as recently as 2003 to less than 65% today, while the population of England has risen from 49.2 million in 2001 to an estimated 57.5 million now. Last year, over half of new build homes completed were bought by private sector landlords.

A number of factors are driving this dramatic change in fortunes. All those extra people living in the country need somewhere to live, but the supply of social housing has fallen far short of demand. Perhaps more importantly, one of the consequences of the financial crash has been much tighter controls on mortgage lending, particularly in the form of higher deposits and lower earnings multiples. The result of this is that there are now hundreds of thousands of private tenants who would have been owner occupiers ten years ago. These are largely people with the income, job security and solid credit rating necessary to raise a mortgage and keep up the payments on it. On that basis, they make ideal tenants. It seems that in the current market landlords are in a position to pick and choose their tenants and they can afford to be fussy. It is not surprising that it is

estimated that around 80% of private sector landlords will now not take on social tenants, mainly due to perceived issues around rent arrears and social problems. So, do these frustrated homeowners make the perfect tenants and, if so, how do you find them?

The two obvious criteria that define a good tenant are will they pay the rent on time and will they look after your property, but there is much more to it than that. For starters, different landlords have different priorities. It may suit some landlords to keep the same tenants in their properties for long periods of time, possibly several years. That way, there is no risk of the property lying empty for months on end while new tenants are found, it avoids the trouble and expense of finding new tenants and also a mutual trust develops, even a friendship. Other landlords like to turn over their portfolio fairly regularly and take advantage of relative changes in the property and rentals markets. Where there is very strong demand and rapidly rising rents, landlords might opt for short tenancies so they can capitalise on those rising rents and push up yields.

Having a tenant that looks after the property is all well and good but it should stop short of customising it to meet the tenants own tastes. Decorating rooms and changing curtains and blinds can leave the landlord with a hefty bill when the tenant moves out if the “improvements” are very “personal” in taste. Effectively they will have to pay to “undecorate” the property. Unfortunately, all too often this is exactly

what frustrated homeowners will want to do – set their mark on the property and treat it like it was their own home. Even so, it is simple to put a clause in the lease forbidding redecorating or stipulating that any rooms that have been redecorated must be returned to their original state when the tenancy ends. If push comes to shove, the landlord can always deduct the costs of undecorating from the deposit.

Let’s look at the issue of affordability. Traditionally, young professionals (a mainstay of the first time buyers segment) have relied on high multiples of recently acquired generous salaries to service large mortgages, the expectation being that those generous salaries will increase over time and the value of their property will rise while the outstanding mortgage balance falls. There are a few problems though when considering them as suitable tenants. Firstly, there are plenty of calls on their disposable income such as car loans, holidays and credit card bills. In addition, they are unlikely to have any significant savings to act as a buffer against unexpected expenses and, of course, they can always lose that well paid job. However, all these factors are outweighed by the fact that people who are hoping to raise a mortgage at some stage tend to be very aware of their credit rating and will work hard to protect it. Getting into rent arrears and running the risk of picking up a CCJ will do little to support that. Also, even if they should lose their job, highly qualified young professionals find it relatively easy to get a new one and, by and large, well paid white

collar jobs also tend to be very secure jobs. In practice, most landlords report that this class of tenant are statistically least likely to get into arrears.

We’ve established that frustrated homeowners are likely to be very good tenants, but how do you find them and, more importantly, get them to come and live in your properties? There is a vast range of ways to advertise your rental property, anything from a card in the window of the local newsagent to full listing on Rightmove. However, it’s worth remembering that the majority of enquiries still come through the two main property portals, Zoopla and Rightmove. What’s more, frustrated homeowners are far more likely to go to these portals as their first port of call because they will have used them to search for houses for sale; Rightmove and Zoopla have a combined market share of almost 90% of home sales enquiries. The problem with the main property sites is that listings can only be placed by a lettings agency, landlords cannot directly place adverts themselves.

This isn’t necessarily an issue. Most lettings agencies offer a scale of charges, starting with advertising the property and passing on enquiries and going up to full scale property management. Contrary to claims by some landlords, the majority of lettings agents do earn their keep as well, providing a degree of expertise that landlords may not possess themselves at a reasonable price. Landlords with multiple properties can generally negotiate a better deal. There are also a number of online letting agents that offer a fixed

The BIG IssueDo frustrated homeowners make the perfect tenants?

11

FEBRUARY/MARCH 2015

fee advertising and referral service for as little as £100 and then charge extra for additional services such as credit checking and drawing up tenancy agreements. Alternatively, there are services such as Rentify.com which will advertise your property for free on its own website and list it on the main property websites for a small extra fee. In fact, the revolution in online estate agents that is touted so heavily by Sarah Beeny was originally driven by the growth of online letting agents.

Advertising the property and generating enquiries is actually the easy bit. To convert those enquiries into tenants, the landlord must offer properties that this type of tenant actually wants to live in and, just as with selling houses, the old adage “location, location, location” holds true in this situation. To establish what location our frustrated homeowners will want to live in, the Sunday Times guide to the best places to live in Britain is a good place to start. This is based on a survey of homebuyers in which they list a number of factors that influenced their decision to buy in order of importance. A weighting is then assigned to each factor according to how important it is to the buyers. Different areas are ranked by how well they match the weighted criteria. Obviously, different tenants have different priorities but, even so, the location related criteria that this type of tenant will be looking for tend to be, in descending order of importance:

• A low crime rate

• Good local state schools

• Good transport links

• Plentiful facilities including shops, bars, restaurants and sports facilities

• A lively social life and sense of community

• A ready supply of suitable housing

• Affordability

Interestingly, the best place to live in the East Midlands in 2014 was Bingham, a market town to the east of Nottingham.

The problem with nice places to live is that houses there tend to be expensive. The extent of this can be illustrated by comparing a 4 bedroom terrace house in Notting Hill, yours for £2.7 million, with a similar property in Lenton, Nottingham, asking price around £150,000. Clearly, rent levels are considerably higher in W11 than NG7 but, even so, the yield on the Notting Hill property would be a fraction of that on the Lenton one, probably 2% versus 7-8%. However, frustrated homeowners are unlikely to choose to live in student land at the heart of Lenton because it doesn’t tick any of their location boxes. A better example would be a modern 4 bedroom detached house in Bingham which sell for between £250k and £300k and would deliver a yield of between 5 and 6%.

Looking at the kind of property that will appeal to this type of tenant, things like a spare bedroom, en-suite bathrooms, a large dining kitchen, off road parking with a garage, low energy bills and an enclosed rear garden will all appear at the top of the list. These are all things that are likely to feature in a house built in the last 20 years; little wonder that so many new build homes are snapped up by private sector landlords.

It is clear that some landlords who wish to target this desirable segment of the renting populace may

well have to modify their business models. Higher purchase prices mean fewer properties in their portfolios, not to mention a greater requirement for upfront investment capital, while lower yields mean a lower income from the business. There is also less scope for making capital gains out of renovating a property and then renting it out. However, there are a lot of positives to this kind of business model. For starters, this sector is likely to see much stronger price growth than rundown inner city areas with high crime and bad schools; lenders will also view modern properties in desirable areas in a much more favourable light. Maintenance costs should be minimal and there is unlikely to be a need for major investment in the property to bring it up to a high standard. Also, with vacant periods likely to be minimal and the lack of unforeseen expenses, the gap between the notional yield and the real yield will be tiny or non-existent. Last but not least, this kind of property let to this kind of tenant is much less likely to attract the kind of costly and restrictive legislation that has impacted on landlords in much of Nottingham city centre in particular.

But before you offload the HMOs in your portfolio and snap up a few new builds in a pleasant little market

town, there are a couple of medium term risks to this strategy that should be taken into account. Firstly, the rise of the frustrated homeowner has been caused largely by mortgage rationing. While no one wants to see 95% LTV ratios becoming the norm again, the mortgage market is definitely freeing up and the Help to Buy scheme is likely to be extended for a couple more years. In a few years’ time it is quite possible that many of today’s frustrated homeowners will become actual homeowners. The second concern is the number of new homes being built. For the last decade this number has been far below the amount required but changes to the planning laws and improving market conditions mean that the number of new builds completed is increasing markedly year on year. The laws of supply and demand dictate that this could lead to a softening in the housing market in coming years, impacting on the capital gains of property investors.

Both the residential lettings and the housing markets are in a constant state of flux and major changes can take place in just a few short years. It takes a canny investor to stay ahead of the curve.

Howard Clemmow Editor

East Midlands Property Owners Limited

EMPO

The East Midlands Landlord & Letting Agent EXPO

Hosted by

The East Midlands Conference Centre, Nottingham, NG7 2RJ

Friday 8th May 201510am-4pm

Whether you are the owner of a large property portfolio including licensable houses in multiple occupation (HMOs), a letting agency, a small buy to let or accidental landlord, or thinking of investing in the private rented sector the

EXPO is the must attend exhibition for you.

Over 80 Exhibitors, FREE seminars, including “How to avoid a bad tenant” “Beat the Taxman” & “Why join a Landlord Association”

Live Graham Penny Auction, Networking lounge, Advice on the current PRS Legislation, Guest Speakers

Visit www.eastmidlandslandlordexpo.co.uk to book your FREE Tickets

“Empo’s vision is to be the landlord’s fi rst choice for support and advice in ensuring compliance and professionalism leading to improved housing standards across the East Midlands.”

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EMPO

The East Midlands Landlord & Letting Agent EXPO

Hosted by

The East Midlands Conference Centre, Nottingham, NG7 2RJ

Friday 8th May 201510am-4pm

Whether you are the owner of a large property portfolio including licensable houses in multiple occupation (HMOs), a letting agency, a small buy to let or accidental landlord, or thinking of investing in the private rented sector the

EXPO is the must attend exhibition for you.

Over 80 Exhibitors, FREE seminars, including “How to avoid a bad tenant” “Beat the Taxman” & “Why join a Landlord Association”

Live Graham Penny Auction, Networking lounge, Advice on the current PRS Legislation, Guest Speakers

Visit www.eastmidlandslandlordexpo.co.uk to book your FREE Tickets

“Empo’s vision is to be the landlord’s fi rst choice for support and advice in ensuring compliance and professionalism leading to improved housing standards across the East Midlands.”

Offi cial Sponsors


Sponsorship Opportunities Available

FREE VISITOR EVENT

14

FEBRUARY/MARCH 2015

There would not have been many well-wishers at any anniversary celebrations for the Housing Act 2004. It has had a significant impact on the private rented sector and made the lives of both private sector landlords and tenants more difficult, complex and expensive.

The Act introduced the Housing Health and Safety Rating System (HHSRS); Home Information Packs (HIPs) – which were quickly abolished following pressure from the conveyancing industry; Rent Deposit Schemes; Property Licensing and a new definition for houses in multiple occupation (HMOs). Whether these issue have delivered the anticipated outcomes is very arguable, but they are here to stay for the foreseeable future.

The 2004 Act redefined houses in multiple occupation (HMOs) and replaced the previous one paragraph definition with the current version which extends to 7 pages plus additional Schedules, Orders and Regulations. Its massive complexity causes confusion and misunderstanding, even amongst enforcing officers.

This article will look at one type of premises affected by the Housing Act 2004, namely converted blocks of self-contained flats, which are included within the definition of an HMO by virtue of section 257 of the Housing Act 2004. These HMOs can be problematic as they often include both freeholders and leaseholders who have specific rights and responsibilities, but the leases may be vague

or silent on several issues. Here are a few: the difficulty in ascertaining whether the building is a HMO; problems in deciding who is responsible for complying with the legal requirements; who is responsible for carrying out and paying for works resulting from the Act; the fact that the occupiers and person in control may be completely unaware that the building they occupy is a HMO. Throughout this article I will refer to this type of HMO as an “s257 HMO.” The complexity around the law is demonstrated by the number of amendments and re-amendments required in the first three years of the Act; many of these amendments were introduced to deal specifically with problems around s257 HMOs.

The definition for any HMO includes two criteria, the Building criterion and the Occupancy criterion and both must be met for the building to be a HMO.

The Building

The building criterion for an s257 HMO is that it must have been converted into and only consists of self-contained flats; the standard of conversion did not meet the Building Regulations 1991 or later standards and less than two thirds of the flats are owner occupied.

The Building Regulations 1991 introduced changes to the fire precaution requirements for conversions and the layout of flats, meaning renovations which complied with these regulations were significantly safer than earlier conversions. It is the

reason that s257 HMOs are sometimes referred to as poorly converted blocks.

Problems can be experienced in discovering whether a building complies with the Building Regulations 1991 or later, especially where subsequent alterations and building works have been carried out. In some cases an expert would need to be employed, especially if the local authority records are not complete. The requirement around the proportion of owner occupation can lead to buildings coming in and out of the s257 HMO definition where an owner occupier lets their flat and subsequently moves back in.

There are further problems in deciding who “controls” the building, especially where flats are owned on long leases. Some leases, especially older ones, are not specific about the division of responsibilities between leaseholder and freeholder, or how any costs incurred due to the Housing Act 2004 are to be recovered. Older leases often also do not have any requirement that a leaseholder is required to seek the freeholder’s permission to let their flat, exacerbating the problem in establishing the proportion of owner occupiers v renters.

Across England, 35% of councils have introduced an s257 licensing requirement under their HMO additional licensing schemes. Nottingham is one of those councils. However, unlike Nottingham, the majority of these councils (see below) only include converted buildings or properties

that are wholly tenanted or where all the dwellings in the building are in the same ownership under the licensing scheme. This is done to overcome the issues outlined above.

The Occupancy

The occupancy criterion for all HMOs is that the building or part of the building must be occupied by 3 or more persons consisting of 2 or more households. A household is a family unit, e.g. parents, children, uncles, aunts, cousins, a cohabiting couple etc. But this also includes any persons and their family, who provide domestic services such as an au pair, gardener or carer. In assessing occupancy, the type of rental agreement that applies to an occupier is irrelevant; it can be for a bedsit, shared house or individual let, a lease, freehold, an assured shorthold tenancy (AST), contractual tenancy or licence to occupy.

The occupancy criteria applies to s257 HMOs, but the whole building must be considered, not just the individual flats. If a building had been converted into 2 flats, but each flat is only occupied by one individual then, because there are less than 3 persons occupying the whole building, it is not a HMO (s257 HMO).

Similarly if one household occupied a flat and the other flat(s) within the building were occupied by service staff for the household, or by members of the same family, then the building would not be an s257 HMO. The whole building is occupied by one

The KnowledgeAdditional Licensing Section 257:

Houses in Multiple Occupation

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FEBRUARY/MARCH 2015

household, not the 2 or more as required by the definition.

However if the building is converted into 3 flats, where two flats are occupied by one individual and the remaining flat is owned by a family then the building as a whole is a s257 HMO and would require licensing.

In the majority of cases, the general requirement of 3 or more individuals in 2 or more households would be met, but the proportion of owner occupation may exclude a significant percentage from the s257 HMO definition.

The Sanctions

The HHSRS applies to all domestic accommodation, irrespective of whether the building is an s257 HMO. It is this which brings about most improvements in the safety of blocks.

There are a set of Management Regulations which apply to all s257 HMOs and impose duties on the managers, including the duty to take safety measures, the duty to maintain the water supply and drainage, to supply and maintain gas and electricity and have gas and electricity installations regularly tested and the duty to maintain common parts, fixtures and fittings and living accommodation. The Regulations set out that occupiers must not interfere with safety requirements and assist managers to undertake their duties. These regulations apply irrespective of whether licensing applies.

The problems of dealing with s257 HMO is acknowledged by these regulations as the manager’s duties are considered to be confined to those areas over which they would be reasonably expected to exercise control. This is a vague terminology and only the Courts will be able to provide more guidance on how this will apply where leasehold flats are involved

Although s257 HMOs are

excluded from the national Mandatory Licensing of larger HMOs, discretionary licensing is becoming more common as more local authorities introduce local schemes. Additional HMO licensing has been introduced by some local authorities in part or the whole of their jurisdiction. It can apply to any type of HMO and some authorities have decided to include s257 HMOs. Where schemes cover all types of HMO, any building which is an s257 HMO would require a licence and any flat within the building which itself is a HMO would require a separate licence.

Before introducing discretionary licensing, local authorities must undertake consultation, but in many cases the consultation fails to mention the impact licensing of s257 HMOs would have on the owner occupiers of flats. The owners may incur costs due to the works required by the licence or in apportioning of the licence fee. The failure to include owner occupiers in many consultations may be a difficult issue for some councils to justify, especially due to the resulting costs to the leaseholders.

The difficulty in deciding who controls a s257 HMO where some flats are owned by leaseholders is not clear as the Regulations do not define the person who should be the licence holder, but instead provide a hierarchical list which is worked down to decide the most fitting person.

As mentioned earlier, some local authorities limit licensing of s257 HMOs to those buildings where the owner of the building and the flats are the same. This overcomes many of the problems in deciding who should be the licence holder and in deciphering the nuances of leases and relevant responsibilities. This is a pragmatic approach and overcomes many of the problems associated with leasehold flats.

Many of the terms and conditions applied to standard HMOs are not relevant to s257 HMOs such as room sizes, amenity ratios and so on and often HHSRS has to be relied upon to bring about improvements due to the difficulty in the licence holder being able to require works to leasehold flats. A common area is where the flat entrance doors need to be fire resistant to protect the communal means of escape, but they have been changed by the flat owner. Because of the limitations of applying terms and conditions to s257 HMOs, it is questionable that licensing has much impact and the HHSRS can be used irrespective of whether a building needs a licence.

There are restrictions on the use of s21 Housing Act 1988 notices seeking possession where a licence has not been applied for. The restriction is blanket for cases where the landlord owns the whole block, including all the flats, but the landlord of a leasehold flat may still use s21 if the freeholder is separate and no licence has been sought.

Any person served with a HHSRS notice or affected by licencing can appeal to the Residential Property Tribunal which is an informal and inexpensive process where legal representation is not necessary. The tribunal can rule on the reasonableness of any requirement and the rate of success is relatively

high, yet few appeals are submitted. The increased use of the tribunal could help clarify some of the vagaries around s257 HMOs and help publicise good practice.

The housing law is generally complex, but for s257 HMOs it is even more tricky and difficult as the law is littered with uncertainty. With the increasing use of licensing we will see more issues coming to light and hopefully changes can be brought about which, whilst still protecting occupants, can help simplify the law and clarify responsibilities. But I wouldn’t hold your breath!

Councils where additional licensing is currently operational without including s257 properties

Bath and North East Somerset, Brent, Brighton, Ealing, Haringey, Hastings, Kingston, Oxford, Portsmouth, Slough, Southampton, Tottenham

Councils where the only s257 properties subject to additional licensing are converted buildings/properties that are wholly tenanted.

Croydon, Hounslow, Luton, Peterborough, Rochdale

Councils where all s257 properties are subject to additional licensing.

Bedford, Nottingham

Dave Princep & Giles Inman

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FEBRUARY/MARCH 2015

Gopal Sahota describes himself an “accidental Landlord”. His parents came to England from India in the 1960s and settled in Lenton, Nottingham. Growing up in the 1970s, Gopal’s neighbours included many students and overseas doctors who worked at the newly built Queen’s Medical Centre. At this time the local council were encouraging residents to rent rooms and houses to students and medical staff in order to assist with the housing shortage so, when Gopal and his family moved out of Lenton, they rented out their property to students.

In 1996 Gopal brought his first investment property. This was initially a part time hobby as he was still in full time employment. Juggling time between managing his property and working was very challenging so, eventually, once he had purchased further properties and built up a small portfolio he made the transition from part time landlord to a full time property investor.

Giving up his job was a huge gamble but it meant he was able to focus more on his property business, which he felt would lead to more opportunities. He was actively building up his portfolio around the time of the financial crisis, when everyone was running scared from property and the banking system looked like it was going to collapse. Somehow he says he persuaded the banks to lend him money and he has never looked back since.

Gopal gained an Economics degree in London before beginning a career in sales in the financial services. From there he became a successful IT consultant. This generated the income to further invest in his property portfolio. It was during breaks between consultancy work that he and his wife managed to get involved with renovations and development projects and it was the profits from this that enabled him to give up his job

as he was in a position to live off the rental income from his properties.

I wanted to know what advice Gopal has for property investors looking to enter the rentals market today. “I would say research the market and location well for investment opportunities. Who is your target audience and what do they need?” He also said landlords should ensure they offer a high quality of properties and services for their tenants. Gopal says, “Have a long term strategy because this should not be a Get Rich Quick scheme. Consider development opportunities to add value and ensure you are aware of current and any proposed legislation that will affect the market as this could prove disastrous if not taken into consideration”.

I was interested in the type of tenure Gopal deals with and why. “I only deal with student lets; this is what I have done from the beginning so I am more confident when dealing with students. These types of tenants do, however, need a lot of managing, particularly HMOs where the tenants have left home for the first time. In fact sometimes I feel more like a dad to them than a landlord!”

I wanted to know what Gopal felt were the major challenges of being a student landlord. He says financing the purchase of investment properties and the renovation costs has been extremely tough since the banking collapse. However, in his opinion this is improving slowly. In the student sector there has also been a huge expansion of purpose built student accommodation which Gopal claims is a threat to private landlords serving that market. He feels all

landlords in this sector need to be aware of this and they must make their offering more competitive. He suggests another major challenge is the introduction of Article 4 which has restricted the market.

I asked Gopal what was the most satisfying aspect of being a landlord. He feels that the flexibility of being ones own boss is one of the most attractive features of being a landlord as well as being in control of your own business rather than working for others. He also gets a lot of pleasure from restoring old properties to their full potential.

I asked him what he thought of the fact that a lot of politicians still think more regulation is required in the private rented sector. “The buy to let market in the UK has become a huge business. The financial collapse has created a market where people cannot afford large deposits and so are forced to rent. Regulation of the market does need to be carefully thought out, but I am concerned politicians could be exploiting this in order to win votes. In actual fact, we already have a lot of regulation and licensing schemes in the HMO sector.

I was interested in Gopal’s main tips for financing his business. He said he has never used Buy-to-Let products or mortgages. When financing, he only ever speaks with his bank’s business relationship managers in order to arrange commercial loans and these are always on a capital repayment basis. He states “These loans have proved far more flexible and the relationship managers have taken the time to understand my business in depth.” This approach proved a huge advantage during the financial crisis and market

downturn. Gopal says “If the rental income can cover the repayments on capital then this creates a more secure and powerful business model and strategy. Recently I have considered 10 year fixed rates to fix my business costs; we know rates will only go up in the medium to long term.”

Finally I asked Gopal for his main tips for ensuring success as a landlord. In his opinion, landlords should consider this as a business and not as a part time hobby. He continues, “Treat your tenants with respect and build good relationships with them as this will pay huge dividends.” He reiterates the importance of continually making improvements to properties. Gopal feels that communication is extremely important. He states, “Make sure you can be contacted and respond promptly to all requests.”

Gopal’s final words of advice are to be proud of what you are doing and enjoy it. “Don’t be afraid of making mistakes as you learn from them, but make sure you do your research and work with people who have the same positive view and outlook on investment decisions.

Adeela Ahmed

The Secret of My SuccessGopal Sahota

17

FEBRUARY/MARCH 2015


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Q: I have a property in Worksop and it is shared

accommodation (the landlord does not reside there). There are 4 unrelated people letting 4 rooms over three storeys with a shared WC, bathroom, kitchen and dinning room. Do I need to apply for a mandatory HMO license?

A: The rules on MANDATORY licensing are the following

1. It must first qualify as an HMO

2. 5 or more individuals

3. 2 or more households (i.e. linked individuals)

4. 3 floors of accommodation

You must tick ALL of the above to make it necessary for the MANDATORY license

In the case you have outlined, you tick rules 1, 3 and 4 but do not tick 2. You therefore DO NOT need a MANDATORY license.

However, there are THREE important things to understand

1. DO NOT allow any individuals to have any ‘partners’ to stay on a long term basis as this would (even though tenancies show only FOUR tenants) push you above the ‘5’ threshold and into MANDATORY licensing.

2. You MAY need to get a license IF the Council have designated any areas of occupation under the remit of a SELECTIVE or ADDITIONAL licensing. I called Bassetlaw Council and no-one could

answer that question. It is unlikely they have any areas like this, but you will need to check.

3. Just because you do not need a license, it does NOT remove you from any obligations under the Housing Act in regard to operating an HMO. You have an HMO, but at present it does not need a mandatory license. There are some quirky things needed to conform to ‘Management of HMO’ regulations, so you need to be careful. One is a requirement to have a notice of emergency procedures and contact phone number displayed in a communal area (generally the hallway); another is an electrical safety certificate.

You may want to go to www.hmosafe.co.uk and take their 30 day free membership which gives you access to lots of good guides on how to be compliant.

Q: We are receiving letters from a solicitor working

for the ex-tenants of one of my properties.

The tenancy started on 2nd April 2012 for one year but the tenants stayed in the house for a further year without a new agreement being signed. They left the house after giving one months notice on March 2nd 2014. In November 2013 I realised I had not protected their deposit in an approved scheme but immediately did so. At the end of the tenancy I did a final inspection and found that the property had been left with quite a bit of damage; we lost a month’s rent while this damage was rectified and we also had to pay the council tax for that period.

I had asked the tenants to accompany me for the final inspection but they declined. I then informed them of all the damage they needed to fix and they said they were not prepared to do this.

I asked the DPS for the deposit to be kept against the damage but then the tenants threatened me with court action. Since we were away on an extended holiday we were unable to have the relevant form witnessed by a solicitor. We then agreed to release the deposit however on our return to the UK we wrote to

the tenants and asked for cost of the damage.

We received a reply from our tenant’s solicitor who said we “had to” pay 3 times the deposit for the fixed term and 3 times the deposit for the periodic term (6 x £625)

This seems quite unfair as we put the deposit in the scheme for 6 months before the end of the tenancy so the deposit was actually protected. Can you please advise the best course of action?

A: My sympathies go out to you. This type of

‘Ambulance Chasing’ is endemic in society at the moment, and I’m afraid you will need to stand your ground and/or employ the services of a solicitor.

I do have to say that I think you were a little naive to go chasing for damages AFTER the deposit had been returned. The deposit had gone and I doubt any Court would take account of the fact you were on holiday. That said, there are a few things you might like to think about and check.

The basis of the claim is an unprotected deposit. This claim is correct based on the information you have given as you freely admit.

1. Were there TWO lots of deposit taken or is he assuming that the same deposit has not been registered twice?

2. Am I correct in thinking that you had an Agent and they took the original deposit and then passed this money to you? If this is correct, then your next port of call is to ask the Agent to help you with this claim. An Agent has to comply with The Housing Act IF they physically took the money from the tenant and then paid it to you. This is argued as a joint vicarious liability (Law of Agency), similar to not having a mandatory Gas Check done, and they are embroiled in this whether they like it or not. I would call the Agent and explain the situation. Hopefully they have PI insurance; if so, you can get their solicitors to deal with it and act as joint defendants. If they did take the deposit and are denying any liability, you should stress that if the Court finds in favour of the tenants,

you will be counter suing them for compensation. Even if they don’t have PI, they should help.

3. I would need to see the tenancy agreement that was signed, but assuming you used the EMPO one, the solicitor’s statement on ‘2nd deposit’ is flawed. EMPO contracts do not allow ‘statutory periodic’ tenancies, they proceed to ‘contractual periodic’ tenancies. There might seem to be no difference, but as no ‘statutory’ tenancy is created, a ‘new’ tenancy is not created (the so called ‘Superstrike’ precedent), and the original tenancy is deemed to have continued. This means that the claim can only be for one ‘lot’ of compensation and not two.

4. Even so, in light of recent cases that have gone to Appeal the government have made a clear intention to overhaul this ridiculous compensation system and deposit registration as it is not ‘Fit for Purpose.’ This is important, and I would suggest that an additional approach maybe to indicate this to the solicitor; there will probably be further legislation on this within the year.

5. You may also want to consider looking into the fact that the tenancy has ended, the deposit has been repaid and the tenants have accepted the deposit in full. This is a strong indication of full and final settlement on their part.

6. I would also consider presenting a case for countersuit for the damages you have tried to claim for. If the case goes to court this may actually reduce any award given, since at the end of the day the damage was done and they are responsible for it.

There are some good solicitors around that can help if needed, and it maybe that we can call on out 3rd level support from EMPO’s legal adviser if you want more information.

If you have any questions or comments on any aspects of being a landlord, please email them to [email protected]

Giles Inman East Midlands Property Owners Ltd

PROPERTY VINEQuestions answered by EMPO’s resident in house expert

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