Cambridge University announce plans to go online only for 2020-2021 academic year risking significant impact on HMO landlords and investors. As a HMO landlord/investor, what are your options?
What is a HMO?
‘HMO’ is short for ‘house in multiple occupation.’ It means any house or self-contained flat that is occupied by at least three people who are not all from the same household. A ‘household’ is best described as a couple or a group from the same family. Particular regulations apply to HMOs and a landlord requires a special licence from the local authority to let premises as a HMO.
Changes to the Student Letting Market
Students make up a significant number of the persons who rent accommodation within HMOs. The decision of Cambridge University to suspend in-person lectures for the 2020/2021 academic year raises the prospect that many students may be able to pursue their higher education remotely, without the need to rent accommodation in their university town or city. This obviously has a potentially significant impact on the market for HMOs.
The situations may not be as bleak as it seems. Cambridge’s announcement should be treated with some caution, given that the university has also confirmed that its smaller group teaching will continue to be in person, meaning that students will still need to reside within striking distance of their college or faculty. Furthermore, other universities have taken different approaches. The University of Bolton, for instance, intends to introduce “airport-style walk-through temperature scanners at every building entry” and make face masks compulsory in order to ensure that its campus is fully operation in the new academic year. The University of Manchester has suggested that students should live in ‘bubbles’ with others studying the same course. This may mean that more students are required to live in University halls of residence, and, in turn, may even lead to the universities themselves seeking to procure more private sector accommodation. It is also very likely, whatever approach the individual universities adopt, that there will be fewer overseas students, and a decline in the UK student population in 2020/21.
What particular challenges are landlords and investors in HMOs likely to encounter and what can be done to meet them?
Firstly, the rapidly developing situation may well lead people who have already signed up for a tenant/licence agreement to reconsider their options. In practice, most ASTs are only executed very shortly before they tenant goes into residence. However, it is not uncommon for there to be a pre-contract, with the potential tenant having paid a holding-deposit to the landlord or letting agent. Such deposits are often only returnable in exceptional circumstances if the tenant chooses not to take up the tenancy, and landlords should check the small-print in any holding agreement.
In the unlikely event that a tenant has already signed a tenancy or a licence agreement for the new academic year for a fixed period, that agreement may well be binding, at least to the extent that it can only be terminated by giving notice in accordance with its terms. Should a tenant breach a tenancy agreement by not entering into occupation or paying rent, a landlord may be able to recover damages for breach of the agreement and lost rent. However, the landlord must take reasonable steps to attempt to re-let the premises so as to ‘mitigate their loss’ before bringing any claim. As students do not generally own property or have extensive income or personal assets, recovering the money awarded under any money judgment may not be straightforward. In uncertain times such as these, obtaining properly referenced guarantors to underwrite a tenant’s obligations becomes particularly important.
Secondly, in the current academic year, with many courses going online and many of the service industry jobs that employ students drying up, it is likely that HMO landlords are encountering a pattern of increased and increasing rent arears. While there has been no rent moratorium from the government, the Coronavirus Act 2020 and a practice direction (PD51Z) issued to the civil courts have almost entirely removed a landlord’s ability to recover possession of a property through the courts in the case of rent arrears. Any possession action brought in a County Court is currently being automatically stayed (i.e. put on hold) until 25 June and it is rumoured that this period is likely to be extended. Furthermore, a landlord now has to provide a tenant with at least 3 months’ notice of any court proceedings seeking possession on the grounds of rent arrears (as opposed to 14 days prior to the passing of the Coronavirus Act). This does not prevent a landlord bringing a debt claim for rent arrears that are owed, as long as the landlord does not seek possession of the property at the same time. However, with the court system struggling to adapt to remote working, such an action, if defended, may not be dealt with for many months. The threat of court proceedings or a county court judgment may be enough to make a tenant or a guarantor make a payment of arrears if they possibly can. It is important that before any court proceedings are issued, the landlord writes to the tenant explaining the problem and offering to explore ways to resolve the dispute.
A further option, if a tenant is not paying rent and a landlord believes that they can re-let or put the property to better use is to attempt to agree a surrender of the tenancy. The incentive for the tenant is that they will be released from their future obligations under the tenancy and any rent that is yet to fall due. If they no longer need, or now have reduced need for the accommodation and are having difficulties meeting the rent, this may well be an attractive option. A surrender must be mutual, i.e. made by the tenant and accepted by the landlord. Usually a ‘deed of surrender’ is required, which means that the document must make clear that it is a ‘deed’ and the tenant’s signature must be witnessed. For a modest fee, a solicitor can assist making sure that the document will be effective. It is advisable for the terms of the deed to include arrangements for the tenant giving up the keys of the property deed and the keys handed back to the landlord or agent at the same time as execution, otherwise there is a risk that an unscrupulous tenant may remain in the property, forcing the landlord to take eviction proceedings. Securing early vacant possession of a property/room may well be more valuable than the right to rent arrears which a tenant with no guarantor might never be able to pay.
Thirdly, thought may need to be given to alternative business structures if there is a move towards online courses in the medium to long-term. If there is less demand for HMOs, the chances are that there will be less demand in the private rental sector in general. However, a landlord or investor may well consider that letting to single households is the way forward. This might be done by letting the property as one self-contained building to a single household, or converting the building into self-contained flats. Planning permission would be required for any increase in the number of units in a building. Similarly, a change from HMO use to a single family home may well constitute a change of use from Class C4 to C3 and thus require permission from the local planning authority. Landlords should be cautious when considering applying to change usage class as there is no guarantee that the local planning authority would grant permission to change the use back again, should the situation reverse in the future.
A landlord may also consider letting to a provider of social housing (likely to be a long-term commitment) or entering into an agency agreement for the use of the property provide temporary accommodation (which is generally more flexible). There is also always the option to sell, but the market is likely to be fairly saturated in student towns and it may be difficult to extract decent value from underlet properties.
As with many of the collateral effects of the Covid-19 pandemic, the situation is likely to continue to change rapidly. Like many sectors of the economy, the private rental and HMO sector is likely to face significant challenges and changes over the next 12 to 18 months. Taking steps to ensure that you are as insulated as possible (such as insisting on a guarantor where possible) and maintaining an open mind as to partnerships with other housing provides or the higher education institutions themselves, who may wish to exert more control over their students’ living environments, are likely to be important. If you are concerned about your legal rights and obligations, ensuring that you have the best protection in the circumstances, you may find it invaluable to discuss your options with a specialist solicitor.