Kumar v Kolev & Ors (2024) UKUT 255 (LC)

An Upper Tribunal appeal of a rent repayment order made by the FTT. At issue was whether Mr Kumar was the direct landlord of the applicant tenants. If he was not, then as per Rakusen v Jepsen (2023) UKSC 9  (our note), no RRO could be made against him.

The situation was not, on the face of it, an unusual one. Mr Kumar was the freeholder of the property. He had granted a tenancy to Like Minded Living Ltd, in a rent to rent arrangement, and LML in turn granted sub-tenancies to the applicant tenants. The property amounted to an unlicensed HMO as in breach of their tenancy terms (surprise!) LML had put in 5 sub-tenants. As such, apparently a straightforward Rakusen v Jepsen situation.

However, what persuaded the FTT that it could make an RRO against Mr Kumar was that LML had granted subtenancies for a term longer than the unexpired portion of the term of its own tenancy (that term ended in September 2019 and it had granted sub-tenancies for terms ending in February and September 2020.

It is settled law that grant of a sub-tenancy that is longer than the term of the head tenancy takes effect as the assignment of the head tenancy to the sub-tenants. As the UT put it:

There is a long established principle of English property law, exemplified by the decision of the Court of Appeal in Milmo v Carreras (1946) 1 KB 306, that where a tenant grants a sub-tenancy for a term equal to or longer than the remaining term of their own tenancy, the purported grant takes effect as an assignment of the tenancy by operation of law; no relationship of landlord and tenant is thereby created between the tenant and the sub-tenant and the sub-tenant instead becomes the direct tenant of the head landlord, whether the parties know it, or want it, or understand it.  The same principle applies where the tenant grants a sub-tenancy of part of the premises demised to them for a term equal to or longer than their own term; the effect is the same as an assignment of the head tenancy in relation to that part of the premises (Grosvenor Estates v Cochran (1999) 2 EGLR 83).

The FTT applied this to find that the applicants were indeed the direct tenants of Mr Kumar, as the head tenancy had been assigned to them.

Further Mr K was a person in control as he received a rent from LML which was the rack rent, and he would have received the applicants’ rent if it were not for the arrangement with LML. (The FTT had further held Mr Humar was a person managing the HMO, but didn’t explain and it was agreed by both parties to the appeal that this was wrong.)

There was also an issue with the FTT’s approach to ‘reasonable excuse’ and whether Mr Kumar had advanced that defence.

Mr Kumar appealed the RROs made (for 60% of rent paid by the applicants), arguing

(1) That Mr Kumar was not a landlord of the respondents within the meaning of section 40, 2016 Act, and received no rent from them so the FTT had no jurisdiction to make a rent repayment order against him.

(2) That Mr Kumar could not commit an offence under section 72(1), 2004 Act, because he was neither a “person having control” nor a “person managing” the House within the meaning section 263, 2004 Act.

(3) That the FFT had failed to deal properly with the defence of reasonable excuse.

(4) That the FTT had wrongly based its calculation of the amount of rent to be repaid on the amount received by LML rather than on the amount received by Mr Kumar, and had wrongly taken account of conduct by LML which could not be relevant to an award against Mr Kumar.

On ground 1, Mr Kumar argued that i) it was undisputed fact that the applicants had continued to pay rent to LML after Sept 2019, not to Mr Kumar. Applying Rakusen, this was not rent paid directly to the landlord, so no RRO could be made; and ii) While the assignment of the head tenancy in respect of each room took place, such that the covenants in the head tenancy became binding on the applicants and vie versa with regard to Mr Kumar, the obligation to pay rent (or the profit rent) to LML was an ongoing contractual obligation. Payments to LML were not therefore payments to Mr Kumar; and iii) that payments of rent to Mr Kumar by LML after September 2019 created an implied periodic tenancy on the terms of the head tenancy, so the applicants remained the direct tenants of LML.

The UT held

It is therefore a sufficient and complete answer to the application for a rent repayment order that nothing was paid by the respondents to Mr Kumar so nothing can be ordered to be repaid by him to them.

But in any event

By continuing to pay rent to LML the respondents must be taken to have acknowledged LML’s entitlement to let to them. Additionally, the payments of rent by the respondents were inconsistent with the requirements of the Headlease (both as to the recipient and as to the amount of rent) and the proper inference from their continuing to pay their own rent to LML, thereby recognising it and not Mr Kumar as their immediate landlord, is that new implied periodic tenancies of their individual rooms came into existence. Any rights the respondents might unknowingly have had under the Headlease were surrendered by operation of law. It was those implied tenancies which conferred the respondents’ rights of occupation, and not a statutory continuation of the Headlease after its contractual expiry (see section 5(4), Housing Act 1988 which provides that an assured periodic tenancy will not arise on the expiry of an assured tenancy for a fixed term if the tenant is entitled to possession of the same dwelling by virtue of another tenancy).

Mr Kumar was therefore not the applicant’s landlord. The appeal succeeded

The UT declined to consider whether there could be more than one person ‘having control’ under ground 2.

On reasonable excuse – ground 3 – the FTT’s assessment of facts was incomplete and inadequate.

It should, in terms, have addressed the question whether Mr Kumar had a reasonable excuse. The answer to that question had nothing to do with whether he was familiar with the obligations of a landlord in relation to licensing an HMO. The facts which Mr Kumar was entitled to rely on were, first, that he had let the whole property to an apparently reputable tenant on the recommendation of an agent whose judgment he trusted; secondly, that he had included a provision in the tenancy agreement that the property was not to be made available to more than four occupiers (and so would not be an HMO required to be licensed); thirdly, that the apparently reputable tenant had breached that provision without Mr Kumar’s knowledge; and finally, that for part of the period during which the offence was said to have been committed, 20 September 2019 to 1 April 2020, he had been abroad and, at the end of the period, was unable to return due to Covid restrictions.

And on the amount of the RRO, this did not arise, given the success on ground 1.

Comment

I think the first leg of ground 1 – Mr K did not receive rent payments from the applicants – is pretty solid in view of Rakusen v Jepsen at para 31

“Those words naturally refer to the landlord repaying the rent paid to the landlord by the tenant or, put another way, repaying the rent received directly from the tenant. Repayment of rent paid most naturally refers to a direct relationship of landlord and tenant. It is forced language to say that a superior landlord would be repaying rent to a tenant from whom it had never received any rent. In our example, Z has paid rent to Y not X and it is Y, not X, that may be required to “repay” that rent to Z.”

I am however less convinced by the ‘implied periodic tenancy and surrender by operation of law’ involved in the UT’s findings on the second leg of ground 1. Paying rent to someone else, who is in turn passing on a proportion of that rent to the landlord does not necessarily amount to a ‘surrender by operation of law’ as an act incompatible with the relationship of landlord and tenant. Paying rent to a letting agent springs to mind.

But in any event, it is likely that the shortly forthcoming Renters’ Rights Bill will overturn Rakusen v Jepsen and make superior landlords potentially liable for RROs. So this may be shortly an historic issue.

The warning to property owners is do not fall for ‘rent to rent’ set ups without a lot of due diligence. Note how Like Minded Living Ltd casually breached their agreement with the landlord and turned the property into an unlicensed HMO for profit. In the near future, that will also be the property owner’s problem.