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A house in multiple occupation (HMO) is a residential property rented by at least three people who are not from one household but share facilities such as the kitchen and bathroom.
HMOs can be a desirable housing option for both landlords and tenants.
Many landlords choose to invest in HMOs because they can be higher-yielding assets, as rent is collected from a higher number of tenants.
Many tenants choose to rent in HMOs because the rent can be more affordable, which is attractive for young adults and students.
Landlords should consider the location and type of property and the impact these factors will have on the supply and demand for HMOs.
We have also identified factors below to consider, which should form part of your solicitor's investigations when you instruct them to act for you in purchasing an existing HMO or a property you intend to convert into a HMO.
It would help to inform your solicitor of your intentions with the property you are buying.
Things to consider if you are buying a HMO:
Existing tenants
If you are buying a HMO with a tenant in situ, your solicitor will review the rental agreements that are currently in place and check that deposit protection schemes are in place.
Landlords have a duty to their tenants to ensure that the property is safe for their tenants. Your solicitor will also obtain copies of the latest landlord gas safety and electrical system certificates.
Gas safety certificates should be commissioned every year, and electrical safety certificates should be commissioned at least every five years, so these should be available and produced by the seller's solicitors.
HMO properties will also usually require written fire risk assessments.
If the completion of your purchase does not complete on a rent payment date, the rent due from the tenants will be apportioned by the solicitors to ensure that you benefit from the rent from completion.
Planning Permission
Planning permission may be required if a property lies within an area subject to an Article 4 Direction.
An Article 4 Direction removes permitted development rights for change of use from Class C3 (dwellinghouse) to C4 (HMOs).
Planning permission is required if you want to change the use of the property from a standard property to a HMO.
Your solicitors will obtain property searches, and the local authority search will reveal if an Article 4 Direction is in place.
If it is, your solicitor will investigate whether the property has the correct planning permission for its current use, which is imperative for you to continue renting out the property.
HMO Licencing
A HMO licence from the local authority is generally required for properties with five or more occupants and if these occupants form 2 or more separate households.
HMO licences are usually valid for a maximum of 5 years; after this period, the landlord must apply for a new licence and pay the relevant fee.
HMO licences are not transferrable, so although the current landlord may have a valid licence, you will need to apply for a licence in your own name or, if you are purchasing in your company's name, in the company's name.
This involves the local authority assessing that you are a 'fit and proper' landlord. However, an existing HMO licence may give you confidence that a new HMO is likely to be granted.
When a licence is granted, several licence conditions must be adhered to, and the licence can be revoked if you, or the landlord or any letting agent you appoint, are not fit to manage the property.
It is important to note that continuing to rent the property without a valid licence is a criminal offence subject to significant fines or even criminal convictions.
You may also be asked to pay back the rent you have received during the period the property was not licenced.
There may be leeway from the local authority if you can provide evidence that your application is in the process following the completion of your purchase, but you should not rent out the property until you have all the paperwork in place.
Your mortgage
If you are obtaining mortgage finance to fund the purchase, your solicitor will report the details to your mortgage lender, and your lender's valuer will consider whether the investment you are making stacks up financially and whether the HMO property and existing tenancies adhere to the law.
Your solicitor may need to produce copies of the existing tenancy agreements, and certain lenders require you to enter into new tenancy agreements direct with the tenants.
Your solicitor will confirm this to you if that is the case and will report to you generally on the lender's conditions.
If you are buying a HMO with tenants in situ, you will likely need a lender that will allow the renting of rooms to individual tenants from different households.
You should disclose this to the lender at the mortgage application stage.
Covenants
As part of your solicitor's title investigation, they will review and report to you any covenants or restrictions to which the property may be subject.
Some covenants restrict business use or restrict who can occupy the property, and importantly, there may be a covenant stipulating that the property must be used as a private dwellinghouse for the occupation of a single-family only.
This would mean that using the property as a HMO would breach this covenant.
Again, it is therefore important when you instruct your solicitor that you make it clear at the outset that the property is a HMO or that you intend to use it after completion.