The Upper Tribunal has overturned a £24,500 penalty issued to a landlord by Waltham Forest Council, ruling she was not in legal control of a property operated unlawfully as a house in multiple occupation (HMO).
The case centred on the interpretation of ‘rack rent’ under section 263 of the Housing Act 2004, which determines who is legally responsible for HMO control. The term typically refers to receiving at least two-thirds of a property’s rental value.
Management agreement dispute
Dr Noshaba Khiljee received a fixed £3,400 per month from management company We Invest (WIL) under an agreement that explicitly prohibited HMO use. However, WIL operated the property as an HMO, collecting between £7,000 and £10,000 monthly from tenants after the property’s HMO licence expired.
The First-tier Tribunal initially upheld the council’s penalty, calculating that Dr Khiljee received at least two-thirds of the property’s rental value based on an estimated £5,000 per month for a single-family home.
Tribunal reverses decision
The Upper Tribunal overturned this decision, ruling that the calculation should have been based on the property’s actual use as an HMO rather than its value as a single-family dwelling. The judge concluded Dr Khiljee was not receiving the relevant ‘rack rent’ and therefore could not be classified as a ‘person having control’ of the HMO.
The ruling has implications for buy-to-let investors using management agreements, particularly those with properties that could potentially be converted to HMO use. The case follows a period of increased scrutiny on HMO operations, with regulatory enforcement action against landlords becoming more common across England.
The decision clarifies that councils must assess rental income based on actual property use when determining HMO control, rather than theoretical valuations for alternative uses.
