Is a ‘let only’ agent responsible for HMO licensing?

Many letting agents still take the view that licensing a property is something for landlords to worry about and they can simply leave it up to them. But managing agents who consider that ensuring that any required HMO or selective licence is in place is not their responsibility are quite simply wrong.

Even if an agent’s terms of business clearly state that they do not take on the responsibility for licensing and the landlord agrees to obtain any necessary licence, the Housing Act 2004 places responsibility for licensing a property on anyone who meets the statutory definition of person having control or person managing. This duty is enforced through criminal prosecution and financial penalties. Where a company is involved, their directors can also be personally prosecuted sometimes.

The legal definitions of “person having control” and “person managing” are highly technical and not easily summarised, but the key point for agents is that anyone who receives the rent on behalf of the landlord will be a person managing.

The law has generally been understood to place a duty on agents acting on a ‘rent collection’ or ‘property management’ basis since they will be collecting the full rent and then passing this to the landlord (after deducting their fees and commission). This creates an obstacle for agents who want to collect the rent without otherwise being involved with the property particularly those offering an online-only service; the entire ‘rent collection’ business model does not sit easily with the agent having a responsibility for licensing and property conditions – the agent is not being paid to look after or inspect the property, but they still face criminal liability if something goes wrong.

In the ‘let only’ business model an agent would typically market a property, collect the first month’s rent and deposit form the tenant, arrange signing of a tenancy agreement, and then when the tenants have moved in, that is the end of their involvement. The agent deducts their fees and passes any balance to the landlord, and rent is subsequently paid by the tenants to the landlord directly.

Is a let only agent responsible for licensing?

In a recent prosecution, in which Anthony Gold acted, the London Borough of Camden prosecuted an agent who had received the initial month’s rent and was holding the tenancy deposit in accordance with an insurance based tenancy deposit scheme. Camden argued that the receipt of the first month’s made the agent a person managing for the whole of the term of the tenancy arranged by the agent. They also argued that that merely holding the deposit would also make the agent a person managing. The agent argued that one receipt of rent before the start of a tenancy did not make the agent a person managing later on – and the deposit was held on a ‘stakeholder’ basis and therefore not received as agent or trustee for the landlord.

In the event the deposit question was not ruled on in this case because District Judge Newton, sitting at Highbury Corner Magistrates Court, accepted Camden’s argument that the receipt of the first month’s rent was enough to make the agent a person managing for the whole of the fixed term of the tenancy.

The District Judge’s decision in this case is important, and is likely to influence local authority enforcement activity, but the judge’s interpretation of the law will not be binding on other criminal courts. No appeal was brought in this case but we fully expect these issues to be the subject of an appeal to the High Court in due course.

There is nothing in Housing Act 2004 which make clear for how long after a receipt of a single payment of rent, and agent could continue to be a person managing. As noted in the write-up of the case in Local Government Lawyer, even if the interpretation of the law reached in this case is applied again, it is not clear whether a ‘let only’ agent would continue to be responsible for licensing after the fixed term of a tenancy they arranged has expired. Since the statutory periodic tenancy arising at that point is a new tenancy, is that agent now off the hook?

It is notable that although the Judge convicted the agent for breaches of the Management of Houses in Multiple Occupation (England) Regulations 2006, absolute discharges were given for these offences (although fines were imposed for the failure to licence). Absolute discharges are usually only given where the judge considers the defendant to be technically guilty but in reality blameless. The underlying logic of District Judge Newton’s decision appears to be that an agent who is not collecting rent and has not ongoing management role cannot reasonably be blamed for failures in management. However, a failure to acquire a licence which was needed at the start of the tenancy is a different matter.

Implications for the Let Only business model

The decision in this case and issues raised by Camden do threaten the viability of let only business model. We have often advised ‘let only’ agents to avoid leaving tenancy deposit protection to landlords to deal with because they remain potentially liable to tenants under if the landlord fails to properly protect a deposit. If a letting agent is involved, is usually in the interests of tenants for the professional agent to make sure a deposit is properly protected before they hand control back to the landlord. If Camden’s argument about the deposit is upheld by later courts this will provide an incentive for let only agents to stay away from dealing with the deposits.

There will be cases where an agent could defend prosecutions by relying on a defence of reasonable excuse: perhaps if a property on became licensable after they were no longer involved because more people moved in, or a new licensing scheme was introduced. However, a professional agent would struggle to defend a prosecution if they had made a mistake or failed to adequately train staff. It would also be for the agent to prove their ‘reasonable excuse’ because if the basic elements of the offence are proved, the presumption of innocence does not apply – the defendant must prove that they have a reasonable excuse.

All agents will need to have systems in place to ensure that a suitable licence is in place whenever they arrange a tenancy, even if they are not collecting rent or managing the property. The increasingly broad definition given to “person managing” by the courts means that blaming the landlord is not likely to amount to defence.

If agents are concerned about properties which have become licensable due to changes in occupation or the changes to mandatory licensing they should take advice – it may be that they have a reasonable excuse at the moment, but failing to take prompt action would make it more difficult to rely on that defence.

The Housing and Property Disputes team advises landlords and agents on all regulatory issues relating to the private rented sector including data protection, trading standards and the law relating to houses in multiple occupation. Please contact Robin Stewart to make any enquiries.