The Upper Tribunal has overturned a £24,500 penalty issued against a landlord after ruling she was not receiving the ‘rack rent’ of a property that was being unlawfully operated as an HMO by a management company.

The case hinged on the meaning of ‘rack rent’ under section 263 of the Housing Act 2004, which is used to determine who legally counts as having control of an HMO.

In basic terms, ‘rack rent’ means the majority of the rent from a property — normally defined as at least two-thirds of its rental value — which can lead to the recipient being treated as the person in control of the HMO.

Licence expired

According to Local Government Lawyer, Waltham Forest Council originally issued the penalty against landlord Dr Noshaba Khiljee after her property, which was managed by We Invest (WIL), continued operating as an HMO after its licence expired.

Under the management agreement, WIL paid Dr Khiljee a fixed £3,400 per month and collected all rental income itself. The agreement stated the property was not to be used as an HMO.

WIL, however, operated the property as an HMO, collecting between £7,000 and £10,000 per month from its tenants.

The First-tier Tribunal then upheld the penalty, concluding Dr Khiljee was receiving at least two-thirds of the property’s rent, based on an estimated £5,000 per month for a single-family home.

Upper Tribunal disagreed

The Upper Tribunal, though, disagreed, ruling the First-tier Tribunal was wrong to base its calculation on the rental value of a single-family home rather than the property’s actual use as an HMO.

The judge ruled Dr Khiljee was not receiving the relevant ‘rack rent’ and therefore was not legally a “person having control” of the HMO.