Investing in HMOs: A summary of the law and regulations

Houses in multiple occupation (HMOs) have become increasingly popular across the UK, particularly among students and graduates in large cities where there is a demand for affordable and communal housing.

Investors and landlords need to ensure that the property is safe and compliant with the relevant laws and regulations but each local authority has differing requirements. So, what should be considered when purchasing or refinancing a HMO property? 

What is a HMO?

A HMO is a house in multiple occupation comprising of three or more tenants who are not of the same household and sharing facilities such as a bathroom or kitchen. Where there are five or more tenants, a HMO would be considered ‘large’ and there may be additional factors to take into account, such as ensuring that there are enough shared facilities, and that the property is big enough to accommodate the tenants.

Do you need a HMO licence?

The Housing Act 2004 introduced two types of specific HMO licences –mandatory HMO licences and additional HMO licences. HMO licence requirements vary by local authority, so it’s a good idea to check the local authority’s specific regulations in the first instance.

To comply with legal regulations, there is a requirement to renew the licence before it expires as the licence is only valid for a maximum of five years. In some instances, a licence may be valid for less than five years and keeping track of the expiration dates is crucial in regularising your property’s HMO use.

A HMO licence cannot be transferred so, when purchasing a HMO property, an investor will need to submit a fresh application to the appropriate local authority. When applying for a HMO licence, you will need to ensure the property is suitable for the number of tenants and be a ‘fit and proper’ candidate. In addition to this, each local authority will require updated gas safety certificates, the installation and maintenance of smoke alarms, and electrical safety certificates.

If an owner of a HMO property is found not to have a valid HMO licence, they may face a civil penalty, an unlimited fine and, in some instances, legal proceedings.

What are the planning requirements for a HMO property?

There is a common misconception that if a property has a HMO licence it is planning law compliant. This is not necessarily the case and there may be a legal obligation to apply for planning permission authorising the HMO use. If the property is being used as a HMO and the landlord does not have the relevant planning permissions, they may be subject to enforcement action, even where the local authority has issued a valid HMO licence.

A change of use from a residential dwelling to a HMO is generally permitted without consent under permitted development rights but many local authorities, especially in urban areas, have introduced Article 4 directions.

An Article 4 direction is legislation allowing a local authority to take away certain permitted development rights within a designated area and, in particular, investors should make enquiries as to whether an Article 4 direction has been made to remove such permitted development rights in respect of a change of use from a dwellinghouse (Use Class C3) to a HMO (Use Class C4). Details of any Article 4 directions will be shown on a Local Search. Where the property is located within an area where permitted development rights have been removed, it will require a valid permission allowing the change of use to a HMO unless it can be established that the HMO use pre-dated the Article 4 direction.

HMO licensing and planning permissions are handled separately, so it is important that both are checked as part of due diligence.

What will a lender look for before financing a HMO property?

The lender will raise questions surrounding the compliance of the HMO property, with particular focus on the licence and planning position. In most cases, evidence of compliance will be a condition precedent to drawdown of funds and failure to provide such evidence could cause delays to re-financing or purchasing the property.

Prior to securing funding from a lender, it is therefore recommended that investors conduct thorough due diligence to ascertain the planning and licensing status of the HMO property. Failure to do so could have an adverse effect on how the property is managed.