Court of Appeal Confirms that Property Guardians Occupied an HMO

A recent Court of Appeal decision has highlighted the risks that come with appointing property guardians to look after empty properties for landlords.

In the combined decision of Global 100 Ltd v Carlos Jimenez and Others [2023] EWCA Civ 1243 the Court of Appeal decided that multiple occupancy arranged by a guardian company created an HMO. 

The decision clarifies the interaction between property guardians and HMOs. Not all HMOs need to be licensed, but those with five or more occupiers which form two or more households are subject to mandatory licensing requirements. Local authorities can extend licensing requirements to cover a broader range of properties. The licensing requirement lies with the person who controls or manages the HMO. Non-compliance carries criminal sanctions and can lead to a rent repayment order (requiring the landlord to repay rent or any housing-related benefits to the occupants).

This is an important decision because guardian companies are a relatively recent innovation in the UK real estate market. Guardian companies and occupation by guardians can provide a small income stream for landlords of empty properties and reduce the risk of squatters and vandalism.  Guardian companies can take responsibility for any conversion works and can provide and manage the guardians who live in the property. Landlords should be aware of the importance of properly structuring any agreement with a guardian company.

In one of the two cases an NHS trust appointed a guardian company, Global 100 Ltd (the “Guardian Company”), to provide guardians for a vacant hospital building. A case was brought by the London Borough of Hounslow alleging that the hospital had acquired HMO status. HMO status would have required the Guardian Company to apply for an HMO licence.

The Court of Appeal made three key points:

Multiple use

Under the Housing Act 2004, if there are multiple uses of the property, it cannot be an HMO. The Guardian Company argued that since the guardians were both residents and protectors, the property was subject to multiple uses and therefore could not be an HMO. The court rejected this argument, distinguishing between the ‘use’ of the property and the ‘purpose’ of the use. This raises the possibility of any property guardian arrangement being an HMO.

Did the Guardian Company have a tenancy or a licence?

Anyone managing an HMO is responsible for licensing. A key part of managing is having a tenancy. Here, the Guardian Company’s agreement with the owner was described as a service agreement. It argued it was merely a licensee, rather than a tenant. The court held that since the Guardian Company had exclusive possession of the property and paid rent, the agreement constituted a lease and it was therefore a tenant. This made them liable as a result of not licensing the HMO. 

This emphasises how important it is to carefully consider the terms of any contract with a guardian company. If the property is deemed an HMO and the guardian company is not a lessee, then the property owner will be solely liable for non-registration.

The same difficulty applies to the status of the guardians themselves. If they are granted exclusive possession and pay some kind of rent, they may be deemed to have a tenancy, which will potentially be an Assured Shorthold Tenancy. This could take place even though the guardian company was only granted a licence. Again, the occupancy arrangements for the guardians should be set out in the agreement with the guardian company and carefully considered by the property owner.

The status of the occupation is important because it impacts the landlord’s ability to obtain possession of the property. If it is determined that the guardians hold ASTs and the property is an HMO, it will be necessary to hold an HMO licence before a valid Section 21 Notice to terminate the AST could be served. In addition, other regulatory requirements include providing gas safety and energy performance certificates.

Receiving payments

Even if not managing, a party can nonetheless be responsible for HMO licensing if they have control of the HMO. This is defined as receiving or being entitled to receive rack-rent (two-thirds of market rent). The Court decided that any payments received are evidence of market rent and did not need expert evidence on this point. 

Even if the guardian company is not a tenant and therefore not managing the property, there is therefore nonetheless the risk that they will be deemed to control the property and thus liable for licensing if they receive payments relating to the property.

As long as landlords are aware that a guardian arrangement is likely to be an HMO with the need to potentially obtain an HMO licence and carefully consider any arrangements with a guardian company, guardianship can be an effective way to protect empty property. Using guardian companies can protect the property, provide the landlord with some income and outsource conversion and management work to a third party. Landlords should be aware of the potential for HMO status and also the need to structure guardian company agreements and any arrangements with property guardians carefully to ensure that they terminate these arrangements, when needed.