The Court of Appeal on property guardians and HMOs

The Court of Appeal has confirmed that property guardianship companies must licence premises as HMOs (houses in multiple occupation). Ranjit Bhose KC and Tara O’Leary analyse the ruling.

The Court of Appeal has handed down judgment in the combined appeals of Global 100 Ltd v Jimenez & Ors [2023] EWCA Civ 1243.

In a unanimous decision with Lord Justices Lewison and Singh, Dingemans LJ dismissed conjoined appeals by property guardianship companies which arose from their management of two sets of premises.

The background to the Hounslow proceedings was set out in previous summaries of the First Tier Tribunal and Upper Tribunal decisions. In short, the FTT and UT held that two sister companies and their director had each committed the offence under s.72(1) of the Housing Act 2004 of failing to licence a premises in Stamford Brook as an HMO. They dismissed appeals by the companies against civil penalty notices issued by Hounslow, and made Rent Repayment Orders (“RROs”) in favour of several “guardians” who had lived in the premises.

Similarly, in Jimenez the FTT and UT ruled that one of the same companies had committed the s.72(1) offence at another premises in the West End, and made RROs in favour of three residents of that building.

The Court of Appeal dealt with three important issues.

Licensable as HMOs

Firstly, the companies argued that neither premises – in fact, probably no premises occupied by property guardians anywhere – was capable of meeting the Standard Test for HMOs because the guardians’ occupation was not “the only use of that accommodation” within the meaning of s.254(2)(d). They argued that the guardians’ security function offered a second ‘use’.

Rejecting this argument, the Court confirmed [50] that the focus of the Standard Test is on the ‘use’ made by property guardians of their living accommodation, not the companies’ subjective purpose or intention when allowing them into occupation. It is irrelevant that the presence of guardians has the effect of deterring trespassers; they were permitted to live in the buildings but not to carry on any other business, and were not trained or allowed to act as security guards.

This part of the judgment is significant because it effectively confirms that most premises occupied by multiple guardians should be licensed as HMOs. Although it remains necessary to look to the individual facts and circumstances of every case, the Court did not think the unique nature of guardianship in itself made any difference to the application or interpretation of the Standard Test. It is thus clear that guardianship companies, the freeholders who contract with them, and local housing authorities responsible for enforcing private sector housing standards, should all be alive to this issue.

‘Persons managing’ the HMO – tenancy vs licence

Secondly, Global Guardians Management (GGM) challenged the conclusion it was a ‘person managing’ the premises at Stamford Brook within the meaning of s.263(3)(b). It did so by challenging findings that the freeholder of the premises had granted it a tenancy of the building rather than a mere licence, meaning that it was an ‘owner or lessee’ for the purposes of ss.262 and 263(3).

The Court of Appeal plainly thought this conclusion was uncontroversial [57]. It was obvious that the agreement had provided for a term and payment of rent, and there was sufficient evidence before the FTT to support its finding that GGM had been given exclusive possession. That was the case even though the written agreement had been drafted using language more consistent with a service agreement or licence.

As such, property guardianship companies and freeholders may wish to revisit their contractual documents and should be wary as to whether the substance of their arrangements actually confers exclusive possession on guardianship operators.

Persons ‘in control’ of the HMOs – meaning of ‘rack-rent’

Thirdly, Global 100 challenged the conclusion it was a person ‘in control’ of the Stamford Brook premises within the meaning of s.263(1). It argued there had been insufficient evidence for the FTT to be satisfied to the criminal standard of proof that it was in receipt of the ‘rack-rent’ of the premises, defined by s.263(2) as “a rent which is not less than two-thirds of the full net annual value of the premises”.

The FTT and UT had both been satisfied that the revenue Global 100 was able to generate from the property – i.e. the monthly licence fees which guardians were willing to pay for rooms advertised on the open market – was sufficient evidence of the annual value of the premises. The Court of Appeal dismissed [63] Global 100’s argument that this was no evidence at all and that expert valuation evidence was required. There was nothing to suggest that higher sums could have been obtained and Global 100 was a commercial operator, not a charity.

This part of the ruling will offer comfort to FTT panels asked to determine disputes about the value of ‘rack-rent’ as part of HMO disputes. Respondents to appeals against CPNs and RRO applicants should robustly resist any suggestion that expert evidence is required to make out the s.72(1) offence.

Finally, at the hearing the appellants also conceded that ‘rack-rent’ could be comprised of licence fees as well as rent falling due under a tenancy [60]. This is significant insofar as it follows that precarious occupants such as property guardians and other licensees are just as entitled to the protection of the 2004 Act as those holding statutory tenancies.

Ranjit Bhose KC and Tara O’Leary are barristers at Cornerstone Barristers. They acted for the successful local authority, instructed by Baljeet Virdee of HB Public Law.