Confiscation of Rent: HMOs and the Proceeds of Crime Act 2002

Most of the criminal offences which relate to houses in multiple occupation (“HMOs”) fit into either of two groups. The first group is offences under the Housing Act 2004 – which are connected to licensing and management of HMOs. The second group is offences relating to planning control, and including breaches of enforcement notices.

Landlords who commit any of these offences can be convicted and fined in the criminal courts. Councils can also impose civil penalties of up to £30,000 for Housing Act offences. In addition, landlords can be ordered to pay back rent – sometimes to the tenants, and sometimes into public funds.

In this blog post I will explain when the Proceeds of Crime Act can be used to confiscate rent from landlords, and discuss some of the recent case law which deals with how much rent a landlord can be required to repay.

Managing an unlicensed HMO

Landlords of who do not hold a licence (and have not made a valid application for one) will be committing an offence under s72(1) Housing Act 2004 if their property is a licensable HMO (subject to any defence).

The Court of Appeal held in R v Sumal and Sons (Properties) Ltd [2012] EWCA Crim 1840 that rent received by a landlord during the period when a property was unlicensed could not be the subject of a confiscation order under the Proceeds of Crime Act 2002. (Technically Sumal and Sons related to selective licensing rather than HMO licensing, but it was confirmed in R v Siaulys [2013] EWCA Crim 2083 that the same principles apply to HMO licensing.

One reason for that conclusion in Sumal is that the Housing Act 2004 specifies that tenancy agreements remain valid and enforceable contracts despite the absence of a licence. The Court of Appeal held that provision is “inconsistent with the notion that the landlord is unlawfully obtaining rent as a result of or in connection with his breach of [the legal obligation to apply for a licence]”.

The second reason given by the court was that there was already a power for rent to be reclaimed by tenants or local authorities: rent repayment orders. Tenants (or local authorities where the tenants have received Universal Credit to pay their rent) can apply for a refund of up to one year’s rent if the landlord does not apply for a licence. The Court of Appeal was also troubled in Sumal by the idea that if confiscation of rent was allowed under the Proceeds of Crime Act 2002 (“POCA”) as well as via rent repayment orders, this represented a form of “double jeopardy or double recovery”.

In cases where the landlord is convicted of failing to obtain a licence under the Housing Act, the position is clear – rent can be reclaimed through a rent repayment order, but not in confiscation proceedings in the Crown Court.

Breaches of Licence Conditions

Councils have succeeded in getting around the Sumal decision where the property in question was licensed, and then subject to conditions under that licence. The London Borough of Brent successfully argued that confiscation proceedings should be allowed to proceed against joint landlords where various licences or tenancies had been granted in breach of the terms of an existing selective licence. Following the landlords’ conviction for breaches of licence condition, a judge sitting at Harrow Crown Court accepted that in those circumstances a financial benefit was derived by the landlords from their criminal conduct (see ‘Housing: recent developments’ in Legal Action magazine, April 2018).

Breaches of the HMO management regulations – R v Bajaj

The Management of Houses in Multiple Occupation (England) Regulations 2006 impose obligations on the ‘managers’ of HMOs. The scope of ‘manager’ includes landlords and property managers who collect rent, and the obligations relate to proper management of a property. Local authorities sometimes try to bring confiscation proceedings after securing a conviction against a landlord for a breach of these regulations.

In R v Bajaj [2020] EWCA Crim 1111 Islington Borough Council had obtained convictions for various breaches of the management regulations against a landlord, and the prosecutor sought confiscation in the sum of £917,000. When the Council inspected the property in question, they had found twenty occupiers, but the lawful maximum occupancy was only eight. After securing convictions, Islington advance an ambitious argument: the landlord should be required to pay the cost of lawfully accommodating the twenty people who were found living in the property; they argued that the landlord had avoided a cost by not having done so, meaning the costs of doing this would be the benefit obtained from the offending.

In the Crown Court the judge had rejected this approach – the landlord was not under a duty to accommodate those individuals, so it was not correct to calculate a ‘cost saving’ from not having done so lawfully as the benefit of offending. Instead, the judge suggested, the benefit was the rents obtained during the period of offending. However, the convictions related to circumstances on one day (presumably when the Council inspected), so the parties agreed that the result of the judge’s decision was that confiscation would be for one day’s rent. This was just £200.

On appeal by the prosecuting local authority, the Court of Appeal upheld the decision of the Crown Court. Avoiding an expense was capable of being a ‘benefit’ under the POCA, the Court confirmed, but it was “wholly artificial <…> to attribute to [the landlord] as a pecuniary advantage the notional cost of acquiring or building property with a view to properly housing those 12 occupants, when he had no obligation to house them”.

The Court noted that that the costs of putting the property into a lawful state of condition and repair for the eight authorised occupants could on the face of it amount of ‘benefit’ and there was some suggestion that this should be assessed at £14,305. However, the Council had not expressly suggested this as a fall-back argument, and the Court did not feel that it could substitute that figure when it had not been properly considered by the original judge. This meant that the confiscation order of £200 was upheld. The Court stated that being limited to one day’s rental receipts appeared to be an error in the drafting of the charges, but it said it had no power to correct that.

Failure to comply with planning enforcement notices

The largest confiscation orders against landlords tend be made after convictions for breach planning enforcement notices. Planning enforcement notices are served when councils have established that there is a breach of planning control, and they require the person who was served with the notice to stop carrying out the unauthorised use of the property.

Landlords who convert houses into multiple flats without proper obtaining permission to do so from the local planning authority can be served with enforcement notices. The Courts have held that rent collected in breach of a planning enforcement notice is a benefit obtained as a result of or in connection with that breach, meaning that all of the rent collected after the enforcement notice has been breached up until the breach ends can be confiscated. Landlords can be required to pay very large sums if they have been breaching an enforcement notice for several years.

The Court of Appeal has recently dealt with several planning enforcement cases where, as in R v Bajaj the conviction relates to events occurring on a single day.

In 2019 in in R v Panayi [2019] EWCA Crim 413 the Court of Appeal held that a summons alleging breach of an enforcement notice had charged the defendant by reference to a single day of breach, and as a consequence his ‘benefit’ for the purpose of the application for a Confiscation Order was limited to a single day of rents received – in that case £58.

In 2020 the issue arose again in R (LB Haringey) v Roth [2020] EWCA Crim 967. This time the Court of Appeal upheld a confiscation order of £527,887.55, distinguishing the wording of charge in that matter from the wordings considered in Panayi.

Most recently in Barnet London Borough Council v Kamyab [2021] EWCA Crim 543, the Court of Appeal again rejected a ‘single day’s rent’ argument made on behalf of landlord. In a detailed judgment Lord Justice Edis held that the Crown Court had been “wrong to conclude that the summons was confined to the commission of an offence on a single day, and therefore wrong to limit the confiscation order to one day’s receipt of rent from the flats”. The conclusion was reached in part because the Court did not accept that the summons (which sets out the details of the offence alleged) did in fact only cover one day. The Court also considered that the effect of sections 8 and 76 of POCA were that that dates in a summons or indictment would not constrain the Crown Court when dealing with confiscation, suggesting that the close analysis of the dates of offending specified in summonses might have been a red herring all along.

The way forward for prosecutors in planning enforcement notices is now clear – careful drafting of summonses will likely leave landlords little or no room to argue the ‘single day’s rent’ point, and the very large confiscation orders in planning enforcement prosecutions will resume.

Where does this leave local authorities prosecuting Housing Act offence?

The result Barnet v Kamyab suggests, on the face of it, that the confiscation of only one day’s rent in Bajaj might be erroneous – in R v Bajaj the parties were aware of the ‘single day’s rent’ decision in Panayi and the prosecutor conceded that they could not seek more than one day’s rent.

After the treatment of Panayi in subsequent cases, prosecutors are now more likely to attempt to recover rent over a longer period. However, some complications remain – the Court of Appeal commented in Bajaj “one would have thought that the proper target would have been the rents received during the period of the infringement of the Regulations”, but where the offence is not complying with management regulations and the granting of the tenancies was not itself unlawful, it is not obvious that the rent itself is benefit obtained as a result of or in connection with criminal conduct (which is required in order to bring it within the scope of confiscation under POCA). It would be difficult for a landlord to resist an order along the lines of the £14,305 order considered, though not actually made in Bajaj, but rent is rather different.

And further, while it is very easy to demonstrate that a breach of planning enforcement notice has taken places over an extended period of time, breaches of the HMO management regulations cannot so easily be assumed to have taken place over a range of dates. This might make it difficult for prosecutor to obtain the evidence they would need to support recovery of rent over a longer period of time when the allege offences are breaches of the management regulations.

However, to make things more complicated still, even just partial success on recovering rent or other ‘benefits’ might be enough for prosecutors to meet the threshold to demonstrate that landlords meet the criteria for having a “criminal lifestyle”. Where the conditions under section 75 of POCA are met, the court will deem a defendant to have a criminal lifestyle, and this bring dramatic procedural changes to the confiscation proceedings. Essentially, all income received by the offender in the preceding six years will be presumed to be the benefit of criminal conduct unless they can demonstrate a legitimate source for that income. This is an enormous task, because, unusually for criminal proceedings, the burden of proof lies with the Defendant.

For tenants, rent repayment orders will remain the preferred approach where there is a failure to licence an HMO. While in theory the law permits tenants to bring private prosecutions, and then to start confiscation proceedings after conviction, this is for various reasons likely to remain a niche approach.

Local authorities do have the resources to mount more complex legal proceedings, and while the quick results which financial penalties under the Housing and Planning Act 2004 can provide will be tempting, to obtain very large fines and confiscation orders, it will be necessary to prosecute in the criminal courts. The recent cases in the Court of Appeal demonstrate that it is still possible for local authorities to obtain very large penalties against criminal landlords as long as prosecutions are prepared carefully.