Joint Tenancy HMO: The New Normal

26 Mar 2024

In recent years, many landlords subject to a property licence have been engulfed by the House in Multiple Occupation (HMO) regulations with various possible outcomes: raise rents, reduce occupancy, or leave the sector altogether.

This is having a dramatic impact on rents and availability, but with the right advice, landlords can keep a profitable business and rents can be contained, ultimately infusing the market with the reassurance it needs.

The expansion of the HMO regulations

Until 2019, House in Multiple Occupation (HMO) were typically rented as individual tenancies to five or more unrelated people. These are the so-called Mandatory or Large HMOs providing rooms-only contracts, sometimes called bedsits.

Before 2019:

Since the HMO Licensing Reform Guidance of 2019, properties of any size with three or more sharers qualify as an HMO. This means that a large property rented to, say, eight sharers with individual contracts or a small house rented to, say, four sharers under a joint tenancy are both subject to the same HMO regulations. This is most confusing for landlords, their agents and their lenders.

However, even though individual tenancies and joint tenancies both qualify as HMO, they are not the same, for the following reasons:

Individual Tenancies - Each tenant has an individual contract and has oversight over their room, whereas the landlord is liable for paying council tax and utilities, and for cleaning all shared facilities. More importantly, since the communal areas are the landlord’s responsibility, the Fire Safety Order (FSO) 2005 and the Management of HMO Regulation 2006 apply, with somewhat onerous consequences in terms of management and safety measures. Overall, individual tenancies are more costly due to higher management and maintenance burdens, and they present higher risks in terms of income predictability and regaining possession. Yet the demand for these arrangements is high, and they are more lucrative for landlords, who can charge higher rents for all-inclusive contracts.
Joint Tenancies - All tenants are on a single tenancy, they are in charge of the communal areas and the bills, and the FSO 2005 and Management Regulation mentioned above do not apply. This is cheaper and easier for landlords of course, but it also benefits tenants, who are in charge of choosing their housemates or managing their bills. This arrangement is more inclusive and empowering for tenants who gain autonomy and responsibility over their dwelling. It is a win-win for both landlords and tenants

Since 2019:

In summary, it is not the property size or the number of tenants that determines the responsibilities involved anymore, it is the type of contract landlords have with their tenants. Therefore, landlords can choose to rent their HMO as joint or individual tenancies, with different implications in terms of revenues, costs and risks.

What is hindering the growth of joint tenancies, then?

Unfortunately, property licences and mortgage restrictions are both preventing the full development of joint tenancies in HMOs.

Property License - The new regulations allow councils to enforce their licensing schemes all over the UK, with more and more local authorities entering the race every month. Whilst councils achieve greater levels of compliance with this strategy, it is also restricting the availability of properties in the market when landlords choose not to apply for a licence.
Mortgage Restrictions - Many lenders impose a blanket ban on HMOs in their Buy-to-Let mortgages due to the risks involved. Arguably, HMOs rented as individual tenancies are riskier, and mortgages for these are more expensive for that very reason. As we have seen, these risks do not affect joint tenancies: sharers who are joint and severally responsible for all the clauses of their contract -including the payment of rent- are as safe as families in terms of risks. However, Buy-to-Let mortgages do not yet differentiate between joint and individual tenancies, affecting all HMOs irrespective of the type of tenancy in place. Without realising it, lenders are pushing landlords away and losing an otherwise profitable business.

Here is what is happening as a result

Increase rents. If landlords want to rent to three or more sharers, they must apply for a licence and switch to an expensive HMO mortgage, increasing their costs and driving rents higher.
Reduced occupancy / Families only. Landlords without a licence or with restrictive mortgages have only one option: reduce occupancy, rent to families and exclude sharers from their property altogether.
Leave the market. More often than not, landlords who don’t know how to navigate this will prefer to sell their properties and seek greener pastures elsewhere.

This whole situation is heavily constricting the supply of rented properties and increasing pressure on rents. However, with the right knowledge, landlords can adapt their contracts and find solutions that work for them, their tenants and their lenders.

What is there to do?

Landlords, their agents and their lenders all have a role to play in solving this situation.

Landlords & Agents must weigh the pros and cons of joint tenancies over individual tenancies in each case, highlighting the costs, responsibilities and risks involved. For example, with a property licence and the appropriate mortgage, a three-bedroom property that was initially rented to two sharers could be rented to three or four joint tenants, thus increasing the landlord's income whilst reducing the rent per capita.

Lenders must distinguish between joint and individual tenancies and offer mortgages based on the type of tenancies rather than the HMO definition. By taking this simple step, HMOs rented to joint tenants would classify as a low-risk investment and could be offered at the same rates as mortgages for families.

Each of the above measures can alleviate the pressure on landlords and tenants, restore the much-needed confidence in the market, and help unlock the supply of homes in Britain.

Boris Drappier

and the Management of HMO Regulation 2006