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Repayment by superior landlord

24/11/2020

Rakusen v Jepsen (HOUSING – RENT PAYMENT – whether a rent repayment order may be made against a superior landlord) (2020) UKUT 298 (LC)

In Goldsbrough & Anor v CA Property Management Ltd & Ors (HOUSING – HOUSE IN MULTIPLE OCCUPATION) [2019] UKUT 311 (LC) (our note here) the Upper Tribunal had held that Housing and Planning Act 2016 rent repayment order applications did not have to be against the immediate landlord alone, but could be against both the immediate landlord and a superior landlord, so long as both had committed the relevant offence. In this Upper Tribunal appeal, the limits of the Goldsborough decision were tested.

Mr R was the leaseholder of a flat on the Finchley Road in London. He had granted a tenancy of the flat to Kensington Property Investment Group Ltd in 2016, for KPG to sub-let (a ‘rent to rent’ set up, sadly not uncommon these days).

Later in 2016, and at different times, KPIG entered into separate written agreements with the three respondents, each of whom was granted the right to occupy one room in the flat.  The documents were described as licence agreements and made provision for the payment of a licence fee.  The aggregate sum paid by the three respondents was £2,297 per month.

This was a licensable HMO. No license was obtained by KPG. In May 2019, KPG’s tenancy ended. In September 2019, three tenants of the flat applied for an Rent Repayment Order against Mr R for totalling £26,140 on the basis of him being in control or management of an unlicensed HMO. Mr R asked the FTT to strike out the application on the basis that there was no reasonable prospect of it succeeding, and that an RRO could only be made against the immediate landlord, and that alternatively, he had a reasonable excuse defence. The FTT decided to take the ‘immediate landlord’ point as a preliminary issue. Before that was heard, the decision in Goldsborough was made. The FTT therefore found against Mr R on the ‘immediate landlord’ issue, but granted permission to appeal.

The Upper Tribunal confirmed Goldsborough.

The language of Section 40 Housing and Planning Act 2016 did not limit an RRO to the immediate landlord. The reference was to ‘a landlord’ and ‘a tenant’, not the landlord and the tenant. While s.40(2) referred to the tenant being ‘repaid’, this did not restrict it to persons who had received rent directly from the tenant.

As a matter of language there is nothing incongruous in referring to a sum being “repaid” by a person who was not the original payee.  The essence of a repayment is that it is a sum paid back to the person who originally made the payment.  I do not regard it as indispensable that the person making the repayment should be the same person as received the original payment, or that only two parties should be involved, although both may often be the case.

All of the offences under s.40(3) were capable of being committed by a superior landlord, not just the immediate landlord.

This included ‘being in control’ of an unlicensed HMO as s.263(1) Housing Act 2004 set out that a person in control of the premises was a person who received the rack rent for the property. In Urban Lettings (London) Ltd v LB Haringey (2015) UKUT 104 (LC), it was accepted that more than one landlord could be in receipt of rack rent at the same time. As per Lord Reid in London Corporation v Cusack-Smith [1955] AC 337:

“A, the freeholder, may let to B for a rent of £100 which is a rack-rent at the date of B’s lease, and later B may sublet to C for a rent of £200 which is a rack-rent at the date of C’s lease. It appears to me that then both A and B are entitled to receive a rack-rent of the land. … I am therefore of opinion that there can be more than one “owner” under the first limb of the definition, and that if the freeholder lets at a rack-rent he is and remains an “owner” no matter what his tenant may do.”

So, the superior landlord, as someone receiving a rack rent for the property from the immediate landlord, was a person in control for the purposes of s.263(1).

Therefore, overall

The conclusion I have reached, therefore, is that the FTT does have jurisdiction to make a rent repayment order against any landlord who has committed an offence to which Chapter 4 applies, including a superior landlord. There is no additional requirement that the landlord be the immediate landlord of the tenant in whose favour the order is sought. That appears to me to be the natural meaning of the statute and is consistent with its legislative purpose. The only jurisdictional filter is that the landlord in question must have committed one of the relevant offences, and before an order may be made the FTT must be satisfied to the criminal standard of proof that that is the case.

The matter was remitted to the FTT to deal with the ‘reasonable excuse’ defence.

Comment

It is good to have this clearly and firmly confirmed. It hopefully narrows the options for a certain group of very iffy landlords who try to hide from both criminal liability and rent repayment orders by inserting dodgy companies as intermediate landlords, which company of course, folds up its tent and vanishes when faced with any trouble or demands. As the UT noted

if only the immediate landlord may be the subject of an order, the grant of a short-term tenancy to an insubstantial intermediary through which the premises would then be sublet would remain a route for avoidance of the enforcement of rent repayment orders. A company with no assets other than a short-term lease, which may be not much longer than that granted to the occupational sub-tenants, is not likely to be a promising target for enforcement of a substantial rent repayment order.

And of course, it simply confirms once again that ‘rent to rent’ is a recipe for disaster for sub-tenants and often superior landlords, and the area has a large population of incompetents, shysters and greedy ignoramuses. (Note KPG a) not getting an HMO licence, and b) giving the tenants ‘licences’.)

 

 

Giles Peaker is a solicitor and partner in the Housing and Public Law team at Anthony Gold Solicitors in South London. You can find him on Linkedin and on Twitter. Known as NL round these parts.

25 Comments

  1. Greg Robbins

    Given the demise of Camelot earlier this year (enjoyed your coverage – TYVM) and the disrepair claims in some cases against them and their directors, this could mean significant embarrassment for councils and housing associations that used them. It hardly seems fair.

    Reply
    • Giles Peaker

      Largely not for councils – council owned properties don’t require HMO licences, for example, and this doesn’t apply to disrepair claims.

      Reply
      • Guy Morris

        What Greg is perhaps referring to is the use by councils of Guardianship Companies: Councils have been found to lease empty properties to such companies but turn a blind eye to licensing requirements. This worked in the cosy world pre- The Housing and Planning Act 2016 (HaPA), when councils had to prosecute first in order for tenants to Get Rent Back. Not any more and it is unravelling up and down the country as a casework tells.

        Reply
        • Giles Peaker

          Yes, I know what he was referring to. It remains that properties owned by a local authority do not require HMO licensing.

      • Greg Robbins

        You don’t say it, but the same would seem to apply to (most) housing associations under schedule 14 of the 2004 Housing Act. I had forgotten (or hadn’t realised) that damages for disrepair did not count technically as rent repayment. Could this not also still create a liability if the intermediary had disregarded the requirements of the Protection from Eviction Act or carried out an illegal eviction though ? That could still create a risk for the superior landlord, surely. (I would agree that prohibition notices, banning orders or improvement notices would be unlikely unless there was confusion about a property’s status.)

        Reply
        • Giles Peaker

          Yes, quite possibly HAs too.

          Yes, potentially illegal eviction could count.

          Disrepair damages are for loss of amenity – the assessment against the rent is merely a matter of assessing scale of damages, it is not ‘rent back’.

  2. Ian Narbeth

    Giles, whilst I share your disdain for most rent to rent merchants, this case establishes that a superior landlord may be a “person in control” not that he always will be.

    s263 Housing Act 2004 says: ““person having control”, in relation to premises, means (unless the context otherwise requires) the person who receives the rack-rent of the premises “. The words, beloved of lawyers, “unless the context otherwise requires” are important. It appears from the case report that CA Property Management was not fully in control because the terms of its lease did not give it sufficient control of the premises. It therefore could not obtain an HMO licence. The lease appears to have been drafted by a non-lawyer but it expressly contemplated subletting.

    Consider now the case of a letting by a freeholder to an unconnected single tenant or couple for owner occupation under an AST which forbids subletting. The freeholder retains certain duties but, I submit, does not in the relevant sense control the property. The freeholder cannot enter without the tenant’s permission and cannot grant rights of occupation to third parties. The freeholder cannot install smoke alarms, fire doors and door closers unless the lease reserves the right to do so. In other words the freeholder in my example is not able to obtain and HMO licence and is not the most appropriate person to be the licence holder. If the tenant in breach of the lease sublets and creates an HMO and is not licensed, the context requires that the freeholder is not treated as in control for the purpose of an RRO claim by the subtenants.

    An anomaly which the court in Goldsbrough did not address is that if the freeholder is liable to the occupational tenants he may also be liable to (in that case) CA Property Management. That would like a scene in Alice Through the Looking Glass!

    I share the concern that owners might evade liability by setting out worthless intermediate companies but when we are talking about criminal liability the law’s net should not be cast too widely even against landlords and where the freeholder is an innocent party he should not be penalised for the unlawful acts of his tenant.

    Reply
    • Giles Peaker

      Hi Ian. I think if you read Rakusen, you’ll see that the UT was not concerned about the extent of rights or responsibilities under the intermediate landlord’s lease. Control is not a matter of rights of access, or being able to grant rights of occupation. You are mixing up control and management. The context (which is properly the wording of the offence or other part of the statute, not the factual context) does not ‘require’ otherwise.

      If the property is unlicensed, the superior landlord commits an offence, regardless of whether the intermediate landlord (or letting agent, or whoever) might be the more appropriate person to be the licence holder.

      The superior landlord might just conceivably be liable to the intermediate landlord for a failure to licence, but unless it was a contractual requirement, any award would take into account the conduct of the tenant (here the intermediate landlord), and thus their own failure to licence. One would suspect an award of nil.

      Reply
  3. Ian Narbeth

    Giles, if you are right that leads to the conclusion that even if a lease forbids subletting, the superior landlord is liable to an RRO because he has committed an offence. No mens rea, no actus reus is required. The superior landlord would be guilty if his tenant, in breach of the lease, creates an HMO which is not licensed. A defence under s72(5) may be difficult because the landlord has to have a “reasonable excuse” for having control of the unlicensed house but if “having control” simply means being in receipt of the rack rent what is the reasonable excuse for being in receipt of the rent? The context requires that control means rather more than just receiving a rack rent.

    The Tribunal in Rakusen said: “.. Part 2 of the 2016 Act “is about rogue landlords and property agents” and the extension of rent repayment orders provided for by Chapter 4 is one of a battery of measures intended to discourage and penalise the activities of such landlords.” and “the policy of the whole of Part 2 of the 2016 Act is clearly to deter the commission of housing offences and to discourage the activities of “rogue landlords” in the residential sector by the imposition of stringent penalties”.

    In what sane world could it be said that the landlord in my example is a rogue? I would distinguish Rakusen and Goldsbrough because the leases allowed subletting.

    Reply
    • Giles Peaker

      Hi Ian
      Yes, that is the case, I think, at least for a s.72(1) offence. There may be a defence of reasonable excuse, of course. ‘I expressly didn’t permit this and didn’t know about it’ might well – if evidenced – succeed.

      By my broader point – that ‘unless the context requires otherwise’ refers to the statutory context, not the factual one – stands.

      Reply
    • Greg Robbins

      It is my (unqualified) belief that the quality of the drafting of guidance, regulations and legislation is falling somewhat, but Ian Narbeth’s first comment does touch on another concern I have with this situation. Giles Peaker says that property owned by a council is not subject to HMO licensing. The wording of the legislation states ‘managed or controlled, however. Ian Narbeth suggests the superior landlord might be judged to be no longer ‘in control’ (or therefore, presumably, managing), which could mean that the exemption might no longer apply. It would seem tautologous to say that the council could be in breach for allowing an intermediary to operate an unlicensed HMO when the reason that there was no HMO licence exemption was that the council was not in control, but this being 2020 I won’t be putting any money on it either way.
      Full disclosure – we’re doing some work on clarifying issues for shortlife housing co-operatives who manage otherwise vacant private, RSL and council properties with a view to reassuring housing officers that model agreements with established co-ops will minimise any possible risk. This thread is therefore of interest, but somewhat troubling.

      Reply
      • Giles Peaker

        If the council/HA receive a rent, from the guardian company, then exempt, as per Schedule 14, as controlling. Arguably even if they don’t receive a rent still in control, as guardian company doesn’t have a tenancy, just a permission to grant licences to occupy.

        Established co-ops fall under 2B of Schedule 14, surely.

        Reply
        • Greg Robbins

          I only have a couple of guardian contracts to look at, though I don’t necessarily follow the distinction you’re making – or don’t know that I would recognise it in an agreement, more to the point.
          Regarding schedule 14, old established co-ops may be exempt if they were formed in the days of HAG funding and registered with the Housing Corporation as social landlords. Over many years the regulator has preferred larger organisations and while there has generally been benevolent neglect, has not exactly gone out of its way to register small organisations – the general impression is that they would like to be rid of them. Curiously the addition of certain types of housing co-ops to schedule 14 to exempt them from HMO status specifically states that they must be general meeting run with all decisions taken at meetings all members must be invited to. This is somewhat contrary to the impetus of governance preferred by both the mutuals register and the regulator, both of which would recommend a committee be formed for all but the very smallest of groups. We may need to register new sets of model rules to facilitate this, even though it is not the model we would recommend unless we see a way round it (sub-co-ops under a secondary or carefully worded so officers are officers of the general meeting – there will always be decisions taken that are not taken at meetings).
          So the reality is that only co-ops over twenty five years old are likely to be registered, any that have deregistered are not likely to be covered. Genuinely general meeting housing co-ops are very rare, unless they have only a single house. And of course probably half of housing co-ops are companies limited by guarantee rather than I&P / Coop/ComBen Societies so not covered either.
          They tell me life would be boring if it was straightforward, but right now that sounds pretty attractive.
          This isn’t hijacking the thread is it ? It’s sort of related.

        • getrentbackblog

          Housing co-ops gain exemption under the Localism Act 2011: https://www.legislation.gov.uk/ukpga/2011/20/part/7/chapter/6/crossheading/houses-in-multiple-occupation/enacted

          Regarding Council control: for the cases we have been involved in the council has relinquished control to guardianship companies via a lease agreement…in which the Local Authority (LA) are paid the princely sum of £1 per year.

          It is our opinion, a commercial lease of the type issued to guardianship companies (GC), of the sort we have that we have seen, would mean that the properties need to be licensed by the same GCs as they clearly have control. That the council may receive a peppercorn rent does not mean it is in control nor that the building is thereby exempt.

          The GCs always come back at us with “but it’s owned by the council so it’s exempt”, as Giles also suggests above. However “ownership” is not in the legislation. Indeed for good reason, one could argue, “ownership” is not really a reliable concept in British property law as all property ultimately belongs to the Queen.

        • Giles Peaker

          Oh not the ‘all owned by the Queen’ thing, please.

          I’ve never seen any £1 per year leases for guardian companies. Not saying they don’t exist, just they are not at all common these days. The market has gone thoroughly elsewhere.

          Whether a GC has control is also – as per this decision – going to depend on a lot of factors. I’d be surprised if the GC does have a full repairing obligation, for example. Granted, absent a rack rent, it is not straightforward and subject to argument…

          PS – the Localism Act co-op exemption is the same as the HA 2004 exemption, because it is the amendment to the 2004 Act.

  4. getrentbackblog

    I promise not to mention the Queen again…if you promise not to say exemption is by OWNERSHIP of a LA.
    Which it seems you no longer do.
    The £1 contracts I referred to were signed in 2018. Many properties taken on by GCs require extensive sub-division into residential units, installation of (very basic) amenities etc: all at the cost of the GC. The arrangements are also often time-limited, e.g pending redevelopment. So it’s not surprising that leases allow the GC to keep the lion’s share of the rent. I don’t believe this is rare.
    Localism Act: yes, of course this is an amendment of the HA 2004. You wrote “Established co-ops fall under 2B of Schedule 14, surely” so I was pointing to the more relevant and specific exemption provided under the Localism Act amendment

    Reply
    • Giles Peaker

      Localism Act – it is not a ‘more relevant and specific exemption’ – it is the same one!! That part of the Localism Act amends schedule 14 Housing Act 2004 to include that provision.

      I didn’t say these £1 leases didn’t exist, but I have never seen one. They are certainly not the usual agreement.

      Reply
  5. Al Mcclenahan - JFT

    Justice For Tenants were representing the tenants in this UT appeal and we were very glad with the way this decision was written.

    The Goldsbrough case precedent was not appealed in such a way that it gave Judge Cooke of the UT the opportunity to give a fulsome decision with rigorous analysis of the legislation. Judge Rodger QC very helpfully used the fact that such detailed arguments on the wording of the statute were submitted by both parties (and argued very clearly by both parties’ barristers) to give a very rigorous breakdown of the reason why Goldsbrough was upheld.

    It is hoped that this settles the matter going forward, which would not necessarily have been the case if the decision had been a 4 pages rather than 16 pages.

    It is the case that a landlord will still have a Reasonable Defence argument according to 72(5) HA 2004. This decision does not change that, it just ensures that the Applicant has the right to name a superior landlord as a Respondent in an RRO. This is a necessary step in a sector of the PRS parasitised by Rent-2-Rent agencies who will usually dissolve or be forcibly liquidated when the CCJs build up, only to rise from the ashes as a new company with new directors, in the same office, with the same staff, and the same landlord clients.

    After an RRO, it will now fall to the superior landlords often to chase those R2R agencies for financial recompense, rather than tenants. It is a sad fact that there are many landlords who are legally perpetrators, but also, to varying degrees, victims. I raised the possibility of joint working with the NRLA on a set of guidelines to alert landlords to red flags regarding R2R companies at a recent Property Ombudsman meeting.

    It has been the case that there are some landlords who bought their council property via the Right-To-Buy scheme, list it on Gumtree or similar when they decide to rent it, get approached by a R2R company and are seduced by a no-brainer offer of guaranteed rent, no voids and no maintenance costs. Sometimes they end up having to pay tens of thousands to the council in CFPs, the same to tenants in RROs, and the R2R company knows they will get no more business from this landlord, so they stop paying the rent and deny access for as long as possible.

    It is a sad reality that it takes criminal prosecutions and a well-funded coordinated long-term approach to root out these practices on a wider scale than individual local authorities taken isolated action. The flow of money at the expense of suffering and risk of tenants has too strong a current for piecemeal enforcement to dam the tide.

    I certainly think that there is an element where landlord advocates and tenant advocates see themselves in opposition over this matter. The reality is that there are many landlords who know or are wilfully ignorant to unlawful letting going on in their properties as they believe they can’t be held legally liable. However, the reality is also that many landlords are only guilty of being a bit greedy, or simply lacking knowledge about these matters and failing to do appropriate research. I don’t think any landlord advocates would defend a landlord’s right to allow their property to be unlawfully overcrowded to make more money.

    It is unfortunate that many landlords whose only crime is a lack of due diligence and oversight receive what may be seen as disproportionate financial penalties, but I fail to see the alternative that prevents the supply of properties being given to R2R companies. You are up to 16 more likely to die in an unlicensed HMO as a tenant, so this is not just a question about money. EVERY advisor at JFT has had the experience of talking to a tenant who has lost a friend, mother, father, child or sibling in a fire in an unlicensed HMO that would likely not have been fatal if the property was licensed as that would mean it has:
    – Interlinked fire detectors for an early warning
    – Fire safe door so if the tenant is trapped in their room they have at least 30 minutes protection to call the fire brigade
    – Fire safe windows that can open wide to allow the tenants to be rescued by the fire brigade

    It is for these reasons that breach of 72(1) HA 2004 is a criminal act, because it leads to more dead tenants, who are only dead because, as Dr Julie Rugg stated in Journeys in the shadow Private Rented Sector:
    “Tenants in the shadow PRS are more likely to be economic migrants and their unfamiliarity with the UK housing markets often makes them uncertain about exercising their housing rights. Landlords and letting agents in the shadow PRS deliberately target the most vulnerable tenants, and consciously undertake multiple breaches of tenancy and housing law in order to maximise their rental profit.“

    A brief list of red flags when giving to a potential R2R agent:
    -The company been in operation for less than 5 years
    -The Directors are linked to many other property companies
    -The company doesn’t hold any HMO licenses in this local authority
    -The company will not assent to an inspection at 3 months, 6 months, then every 6 months afterwards
    -The company offers a lump sum (X months rent) upfront
    -The company promises an instant payment upon signing their agreement
    -Probably the clearest one is: It seems like a great deal for yourself as a landlord, but it is unclear how the agency actually makes money. If it’s too good to be true, please at least do more research as a landlord.

    Al
    Justice For Tenants

    Reply
  6. Sam

    The judges in the appeals court who know the law have spoken and provide an important lesson to JFT and other ambulance chasers that it is unfortunate but the truth hurts.

    The decision was announced today and is very interesting reading and more importantly puts everything in perspective.

    See link: https://www.landmarkchambers.co.uk/not-just-any-landlord/

    To JFT, please at least do more research.

    Reply
  7. Sam

    LOL 😂 😂
    I should indeed, got carried away in all the excitement and couldn’t resist.
    Thanks for the link Giles.

    Reply
  8. Wasim

    “After an RRO, it will now fall to the superior landlords often to chase those R2R agencies for financial recompense, rather than tenants.”

    From above cooment it would seem the recent rakusen decision doesnt really impact tenants able to get the rro.. Previously the superior landlord would have to chase the R2R agencies, as you put it, which seemed totally okay.. Now the tennats get the award directly, so it will be more efficient.

    Reply
    • Giles Peaker

      The reverse. As R2R set ups will generally fold rather than pay. So tenants likely to recover nothing. (and if the R2R setup folds, that will generally leave the superior landlord facing losses in unpaid rent, costs of regaining possession etc etc)

      Reply
  9. Wasim

    thanks for the clarification giles.. is this being appealed in the supreme court, and is there a realistic chance of getting this overturned.

    Reply

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