Joint Tenancy HMO: The New Normal

In recent years, many landlords subject to a property licence have been engulfed by the House in Multiple Occupation (HMO) regulations with various possible outcomes: face increased costs and raise rents, reduce occupancy, or leave the sector altogether.

This is having a dramatic impact on rents and availability, but with the right advice, landlords can keep a profitable business and rents can be contained, ultimately infusing the market with the reassurance it needs.

The expansion of the HMO regulations

A House in Multiple Occupation (HMO) is any property rented to three or more individuals forming two or more households. When it comprises five or more people, it becomes a mandatory or large HMO and it requires a licence in all cases.

Until recently, most small HMOs did not need a licence, as only a few local authorities enforced the HMO regulations. Therefore, large HMOs with a mandatory licence naturally attracted people renting individual rooms, sometimes called bedsits, and smaller properties focussed on families and sharers under a single tenancy, without a licence. The illustration below shows what it looked like.

What it used to be like:

Therefore, a three-storey property rented to, say, eight tenants with individual contracts or a small house rented to, say, three sharers under a joint tenancy both qualify as an HMO, although the regulations apply differently to individual and joint tenancies:

• Individual Tenancies - each tenant has a contract for their room only, and the landlord is generally liable for paying council tax and utilities. More importantly, the Management of HMO Regulations 2006 makes the landlord responsible for the communal areas and the Fire Safety Order (FSO) 2005 applies, with somewhat onerous consequences. As a result, individual tenancies are more expensive due to higher management requirements, heavier maintenance burdens, and more extensive safety protocols, and they present higher risks in terms of income predictability and possession recovery. Yet the demand for these properties is high, and they are more lucrative for landlords who can charge higher rents for all-inclusive contracts.
• Joint Tenancies - all tenants are on a single tenancy, they are in charge of the communal areas and the bills, and the aforementioned FSO 2005 does not apply. Likewise, the Management of HMO Regulations 2006 depends upon the contractual obligations of the tenant, including the upkeep and cleaning of their home. Consequently, joint tenancies are cheaper, safer and easier for landlords, as tenants are in charge of managing their home, maintaining the communal spaces, paying their bills, etc. For tenants, it is more inclusive and empowering as well, as they gain autonomy and responsibility over their dwelling. Among other things, they can choose their housemates and they have exclusive possession of the entire property, not only their room. Overall, it is a win-win for both landlords and tenants.

What HMOs look like today:

In summary, it is not the property size or the number of tenants that determines the responsibilities involved, it is the type of contract landlords have with their tenants. Therefore, renting an HMO as a joint tenancy or as individual tenancies has different implications in terms of revenues, costs and risks.

What is hindering the growth of joint tenancies, then?

Unfortunately, property licences and mortgage restrictions are both preventing the full development of joint tenancies in HMOs.

• Property License - Since the Housing and Planning Act 2016 councils have had greater powers to enforce licensing schemes for all HMOs, whether small or large. More and more local authorities are entering the licensing race every month, and whilst councils achieve greater levels of Health and Safety compliance with this strategy, it is also restricting the rental capacity in the market when landlords choose not to apply for a licence.
• Mortgage Restrictions - Many lenders impose a blanket ban on HMOs in their Buy-to-Let mortgages due to the risks involved. Arguably, bedsits and individual rooms HMO are riskier, and mortgages for these are more expensive for that very reason. Nevertheless, these risks do not affect joint tenancies, which are as safe as families by the nature of their contract. Yet, many Buy-to-Let mortgages do not yet differentiate between joint and individual tenancies, making their mortgages more expensive for all HMOs irrespective of the type of tenancy in place. Without realising it, lenders are pushing landlords away and losing an otherwise profitable business.

Here is what is happening as a result:

• Increase rents. Landlords who want to rent to three or more sharers must apply for a licence and switch to a more expensive HMO mortgage, increasing their costs and driving rents higher.
• Reduced occupancy / Families only. Landlords without a licence or with restrictive mortgages have only one option: reduce occupancy and rent to families, excluding sharers from their property altogether.
• Leave the market. More often than not, landlords who don’t know how to navigate this will prefer to sell their properties and seek greener pastures elsewhere.

This whole situation is heavily constricting the supply of rented properties and increasing pressure on rents. However, with the right knowledge, landlords can adapt their contracts and find solutions that work for them, their tenants and their lenders.

What is there to do?

Landlords, agents and lenders all have a role to play in solving this situation.

Landlords & Agents must weigh the pros and cons of joint tenancies over individual tenancies in each case, highlighting the costs, the restrictions, the responsibilities and the risks involved. For example, with a property licence and the appropriate mortgage, a three-bedroom property that was initially rented to two sharers could be rented to three or four joint tenants, thus increasing the landlord's income whilst reducing the rent per capita.

Lenders must distinguish between joint and individual tenancies and offer HMO mortgages based on the type of tenancy. By taking this simple step, HMOs rented to joint tenants would classify as a low-risk investment and could be offered at the same rates as mortgages for families.

Each of the above measures can alleviate the pressure on landlords and tenants, restore the much-needed confidence in the market, and help unlock the supply of homes in Britain.

EDITED Apr'24

Boris Drappier

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