Beware the elephant traps when buying HMO property for investment

When purchasing a portfolio of residential properties, ordinarily your property solicitor would seek to obtain a clear title. However, if the portfolio incorporates homes in multiple occupation, then the would-be investor may face a range of problems that will affect the viability of the investment and their negotiating position.

Natalie Samuel, property solicitor with Ingram Winter Green, discusses the issues which need to be considered when purchasing homes in multiple occupation (HMOs), taking a recent transaction as a case study.

‘A recent transaction involving a portfolio of HMOs serves as a useful lesson to landlords, highlighting a number of elephant traps that could lay waiting for them,’ explains Natalie.  ‘In this case we uncovered tenancy agreements galore with evidence of service of the prescribed information (see below) a distant thought at worst, and a managing agent’s fail at best.  The key issues for the landlord to beware of were as follows.’

The protection of a tenant’s deposit is generally sacrosanct.

The tenant’s deposit

The protection of a tenant’s deposit is generally sacrosanct. The regulations have been in place since April 2007, and have been tightened up by subsequent legislation in the passing of the Localism Act 2011 and the Deregulation Act 2015. The implications of failing to comply with the statutory provisions are severe:

  1. landlord cannot validly serve a section 21 notice to obtain possession; and
  2. such failure constitutes a strict liability offence and the court must order that a compensation payment be made to the tenant equivalent to between 1-3 times the deposit, (such sum at the court’s discretion and dependent on the circumstances of and seriousness of the breach).

Any purchaser will inherit this liability.

Prescribed information

Additional fear comes from the many other elements of the regulations, and the difficulty in proving that they have been complied with. Landlords and managing agents have become wise to the rules, ensuring that they obtain the tenant’s signed confirmation that the “prescribed information” has been served on them. That includes confirmation that:

  1. the deposit has been protected;
  2. details of the deposit and the scheme in which it has been protected have been served on the tenant; and
  3. details of the landlord have been served on the tenant.

These requirements were extended by the 2015 legislation, which meant that landlords could not validly serve a section 21 notice if no gas safety certificate or EPC had also been served on the tenant prior to commencement of the letting.

However, in many cases, there is no evidence that the prescribed information has been validly served save for the selling landlord’s confirmation. For investors who are purchasing properties where their long-term goal is to obtain vacant possession and re-develop, the idea that vacant possession cannot be obtained without prolonged court proceedings and associated legal costs is highly unattractive.

Practically speaking, it is likely to be extremely difficult to confirm the validity of a section 21 notice in the absence of clear evidence that the prescribed information was served.

A further consequence of not being able to serve a section 21 notice arises if the tenancies are periodic i.e. outside their original fixed term. That is often the case and there were many periodic tenancies in this acquisition. In that situation, the landlord may face difficulty increasing the rent to a market level, where the tenants are savvy and refuse to enter into new agreements. In such circumstances the existing agreements at the prior rent levels continue unless the landlord is willing to incur significant time and expense in applying to the First-tier Tribunal for a rent increase pursuant to Section 13 of the Housing Act 1988.

Old tenancies

Another issue that arose in this case was that several of the tenancies had been granted before the implementation of the Deregulation Act 2015. There is uncertainty as to how the courts will treat a section 21 application for possession, where the tenant has a pre-2015 tenancy and has not received the prescribed information.

A landlord cannot be certain whether they will successfully obtain vacant possession in respect of such tenancies, even though the requirements were not in place at the time the tenancy was granted.

Any application to evict the tenant pursuant to the section 21 procedure may fail as a result of such information not being served on the tenants, regardless of the fact that it was not required at the time of letting. Buyers may take a view on this, but it may impact the price they are willing to pay.

Immigration issues

Another point to remember is that landlords are required to take steps to confirm that tenants have the right to rent in the UK i.e. that their immigration status allows them to do so. When acting on the purchase of a buy to let portfolio, or even a single property, you should obtain evidence, not just confirmation from the seller’s solicitor, that the relevant information evidencing the tenant’s right to rent has been obtained. It’s important to obtain that evidence as a landlord may need to rely on it in the future.

Landlords are required to take steps to confirm that tenants have the right to rent in the UK

Landlords should diarise a date to check, in the event of any visa expiry, that the tenant continues to have the right to rent in the UK. The sanction for renting property in England and Wales to someone who you know or had reasonable cause to believe didn’t have the right to rent is that you could be sent to prison for five years or receive an unlimited fine. You can also be fined if you rent your property to someone who isn’t allowed to stay in the UK, and you can’t show that you checked their right to rent.

HMO considerations

Last, but by no means least, are the HMO considerations. An HMO licence is not assignable. Consequentially on the day of completion, and likely for several days if not weeks afterwards, the property will be unlicensed.

The implications of not having an HMO licence are severe. Aside from the fact that no section 21 notice can be validly served on a tenant who occupies an unlicensed HMO, renting a property without an HMO licence is a criminal offence.  As an alternative to prosecution, the local authority can seek to impose a penalty of up to £30,000, the tenants can obtain a rent repayment order i.e. for a refund of rent paid whilst the property was let without licence, and any landlord could be subject to a banning order.

The implications of not having an HMO licence are severe.

If the local authority is aware that steps are being taken to obtain a new licence, it is unlikely such sanctions will be imposed, and if you have applied for a licence, the making of such an application is a defence, (pursuant to section 72 of the Housing Act 2004)  to any enforcement action that may be taken for operating a unlicensed HMO. It is therefore imperative that the application for a licence should be submitted as early as possible.

The local authority has a number of additional requirements that it is entitled to impose as a condition of the licence. These often relate to repair of the property, and the existing licence may give an indication of the works that will be required, which again may influence the purchase price a buyer is willing to pay. Non-compliance with the licence conditions runs the risk of criminal prosecution with a fine of £5,000 or cancellation of the licence.

There may also be an issue when applying for an HMO licence following completion if the property is not at the required standard. Alongside the risk that there is no HMO licence on completion, there is also a risk that the local authority won’t grant the HMO licence thereafter, and that is a position that no landlord wants to be in.

Natalie is a property solicitor at Ingram Winter Green LLP, a UK200 member firm. For further information on the potential pitfalls of buy to let portfolios, you can contact Natalie on 020 7845 7456 or

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.