The Upper Tribunal has delivered a significant ruling on the interpretation of “rack-rent” under the Housing Act 2004, overturning a £19,600 financial penalty and providing fresh clarity over who can be held responsible for operating an unlicensed HMO.
In a judgment likely to have implications for councils, landlords and property managers involved in HMO enforcement cases, the Tribunal ruled that “rack-rent” must be assessed based on the property’s actual use as an HMO, rather than on a hypothetical valuation based on how the property could lawfully be used.
The case centred on a landlord, Dr Noshaba Khiljee, who had handed management of her property to a management company under an agreement paying her a fixed monthly sum of £3,400. Unknown to the owner, the management company let the property as an HMO, generating between £7,000 and £10,000 per month in rent.
Although the management company had initially secured an HMO licence, the licence later expired and was not renewed.
The London Borough of Waltham Forest subsequently imposed a financial penalty on the owner, arguing she was a “person having control” of the unlicensed HMO under section 263 of the Housing Act 2004 because she was receiving the “rack-rent” from the property.
Under the legislation, a person having control is someone receiving rent equal to at least two-thirds of the property’s “full net annual value”.
The council argued that because the property did not have planning permission for HMO use and no longer held a valid HMO licence, the “lawful” use of the building should be treated as a single-family dwelling. On that basis, the council calculated the rack-rent at around £5,000 per month, meaning the landlord’s £3,400 monthly payment exceeded the two-thirds threshold.
The First-tier Tribunal accepted that interpretation.
However, the Upper Tribunal overturned the decision, holding that the property’s actual use as an HMO could not be ignored when determining who controlled it.
Judge Johns KC rejected the idea that councils could apply a hypothetical “lawful use” valuation instead of looking at the real income being generated from the property.
In its decision, the Tribunal warned that the council’s approach would create unnecessary complexity and uncertainty, potentially requiring costly valuation evidence and planning disputes simply to determine who was liable for an offence.
The ruling also noted that the First-tier Tribunal’s interpretation effectively created two competing “rack-rents” for the same property — one based on actual rental income and another based on a hypothetical lawful use — despite no such distinction appearing in the legislation.
The Tribunal further held that using actual HMO income to assess rack-rent did not prevent councils from taking enforcement action. It pointed out that landlords could still potentially be pursued under the separate statutory definition of a “person managing” an HMO.
In this case, however, no findings had been made on whether the owner fell within that category, and the council had not appealed on that point.
The Upper Tribunal ultimately allowed the appeal and cancelled the £19,600 penalty.
The decision is expected to be closely watched across the sector because it clarifies that enforcement action involving unlicensed HMOs must be based on the factual reality of how a property is being used, rather than on hypothetical assumptions about lawful occupation.
It may also reduce the likelihood of lengthy disputes over planning status and valuation evidence in future HMO enforcement cases.
Harley Ronan acted for the appellant landlord.
