Upheld HMO designation puts guardianship model in doubt

Property guardianship has become increasingly popular in recent years – with the government estimating there being between 5,000–7,000 guardians in the UK – and it is not difficult to see why. 

Property guardianship effectively involves individuals occupying parts of otherwise vacant properties, in return for the payment of a below-market 'rent'. 

It gives property owners the security and comfort that they will not fall victim to squatters, and thus the costly and frustrating process of eviction and repairing any damage caused.

At the same time, it offers guardians accommodation at a price well below what it would cost to rent in the conventional residential market.

However, a recent Court of Appeal decision has drawn attention to the potential risks to be considered when using property guardianship services.

The court's recent combined decision in Global 100 Ltd v Jimenez & Ors [2023] EWCA Civ 1243, on two appeals from the Upper Tribunal, highlights the risk of a property under a guardianship agreement being classified as a house in multiple occupation (HMO), with potentially serious and costly consequences. 

The licence agreements each contained certain requirements as to the number of nights a week the guardians needed to occupy the relevant properties; however, as the court noted, in neither case were the guardians employed to carry out security functions, nor were they expected to confront trespassers.

The local authority, the London Borough of Hounslow, inspected both properties. The inspections were prompted by complaints from guardians, including that they were unable to use and live in one of the rooms because it was filled with office equipment.

Following the inspections, the council determined that the properties were occupied as main residences by the guardians, each property consisting of more than one household, with those households sharing basic amenities, with the result that the properties were classified as houses in multiple occupation (HMOs).

For these purposes, the relevant legislation is section 254 of the Housing Act 2004, which concerns buildings designated as HMOs. Section 254(2) lists criteria by which a building is considered an HMO, with section 254(2)(d) in particular requiring that the 'occupation of the living accommodation constitutes the only use of that accommodation' for a building to be so categorised. 

If a property is designated as an HMO, the property owner must comply with applicable regulations and licensing requirements.

If a property owner, or in this case property guardianship firms, are found to be operating an unlicenced HMO, they may be subject to rent repayment orders (RROs) or financial penalties being made against them.

In this case, having classified the properties as HMOs, the councils consequently issued financial penalty notices against Global under section 72 of the 2004 Act for failing to obtain an HMO licence.

Both the First-tier and the Upper Tribunal held in favour of the respondent property guardians and the local council on the basis that:

• they did not occupy in order to provide protection or security
• any safeguarding of the building was a side-effect of their occupation
• the occupiers were simply entitled to use the accommodation as their only or main residence, which is a factor of the standard test for defining a property as an HMO, per section 254 of the 2004 Act.  

The tribunal has the power to make an RRO where it is satisfied that a relevant offence has been committed under section 40(3) of the Housing and Planning Act 2016, as it was in this case. Such offences include having control of, or managing, an unlicensed HMO.

An RRO then requires repayment of any rents by the immediate landlord, including fees made under a licence up to a maximum of 12 months' equivalent of rent.

This was because occupation was not the guardians' sole use of the property, the main purpose of their role being to protect and secure it, in part relying on the terms of the licensing agreement between Global and the property freeholder, which included express provisions that Global were granted possession to provide security for the property. 

The respondents – that is, the guardians themselves and the local authority – disagreed, arguing that even if the appellants could safeguard the property through occupation by the guardians, the latter's sole use of the property was as living accommodation.

Unfortunately for Global, and for property owners more generally, the Court of Appeal similarly found in favour of the guardians and local council, stating it was clear that the sole use of the property was as their main residence, and that as property guardians they had no responsibilities save to live there.

The court also noted that section 260 of the 2004 Act presumes that the 'sole use' condition is met unless the contrary can be shown.

To minimise the risk that a building using guardians is designated as an HMO, property guardianship companies could look to stop charging their guardians licence fees, so the building will not satisfy section 254(2)(e) of the act that rent or another consideration is provided by at least one guardian in relation to their occupation.

The likely consequence of this would be that the cost of guardianship rises as companies try to collect the shortfall in licence fees from property owners.

Guardianship companies may instead look to include in their licence agreements explicit reference to additional uses by guardians, such as securing property, so as not to fall victim to the sole-use condition.

Presumably, any licence fees paid would then be reduced in consideration of the fact that the guardians are effectively providing an express service beyond use of the property for accommodation.

Again, it would be logical for companies to try to increase the cost of providing their guardianship services to a property owner to make up any loss.

They would also be liable to having RROs made against them if they were found to have breached these regulations.

An RRO can result in huge costs for property owners and guardianship companies, and this alone is reason enough for both parties to do all they can to ensure they are not found to be operating an unlicensed HMO.

While the Court of Appeal's decision is unhelpful for owners and companies, it is unlikely to destroy the guardianship model entirely.

However, it may well change to address the court's findings and minimise the risk of a property occupied by guardians being classified as an HMO.