To be or not to be an HMO? The law requires local authorities to maintain a licensing scheme for HMOs.
HMOs are defined as those buildings which – and this is not an exhaustive list:
- Comprise three storeys or more;
- Are occupied by at least five persons; and
- Are occupied by persons living in two or more single households.
In some instances local authorities have been given power to create their own schemes.
Where there has been a failure by a landlord to obtain a licence, where required, it is an offence punishable by a fine of up to £20,000, something which highlights the importance the legislation puts on ensuring compliance.
To ascertain whether or not a cost is recoverable as part of a service charge, the starting point is to consider the lease of the relevant premises. The terms of the lease always need to be considered carefully.
The recovery of the costs of complying with changes in legislation was considered in Anchor Trust v Corbett  L. & T.R. 14, where the cost of meeting fire safety standards, which had increased by virtue of a 2005 order, were held to be recoverable. Costs associated with complying with the new HMO legislation would thus appear, prima facie, to be recoverable.
Arguably, once the landlord has made the building an HMO (eg through the subletting of flats to multiple households), he/she is legally responsible for ensuring the building complies with the HMO licensing scheme. It is also for the landlord to decipher whether they are entitled to recover the associated costs through service charges (in accordance with the lease) by levying the charge to the individual leaseholders.
Costs which are contractually recoverable as a service charge can only be taken into account in determining the amount of the charge “to the extent to which they are reasonably incurred” under section 19 of the Landlord and Tenant Act 1985, which tends to be fact-sensitive.
The two-stage test for the reasonableness of service charges is propounded in Veena SA v Cheong  1 E.G.L.R 175 (Lands Tribunal), which has since been applied in the Upper Tribunal in London Borough of Lewisham v Rey-Ordieres  UKUT 014 (LC).
The latter case may be of some relevance when costs associated with HMO licences are considered: “The question is not solely whether the costs are ‘reasonable’ but whether they were ‘reasonably incurred’, that is to say whether the action taken in incurring the costs and the amount of those costs were both reasonable.”
In Simpson v Burgess, only the basic HMO licence fee was in issue, and why it was required is not recorded. Although reference was made to the landlord’s reliance on specific lease provisions, the terms are not set out in the decision and do not appear to have featured in the First-tier Tribunal’s (FTT) reasoning.
In fact all that was said in relation to the HMO licence fee was the following: “The tribunal is satisfied that the applicant was obliged to respond to the requirement by the local authority that the subject property be licensed and that the cost is recoverable through the service charges.”
As a decision of the FTT, Simpson does not create any precedent – but even if it had, it would be very hard to discern what underlying principle it establishes. The recoverability of costs associated with HMO legislation as service charges is likely to arise again and may require more detailed consideration.