New rules mean expensive legal headache for landlords

Owners of larger properties will need a licence and meet a new set of safety criteria. James Daley reports

uy-to-let landlords facing falling rental yields were landed with another headache this week, with new rules that could cost the owners of some rental properties several thousand pounds in fees.

The new laws relate to House in Multiple Occupation (HMOs), which are defined as properties with three or more storeys or five or more unrelated people living inside them.

Since 6 July, all HMO owners have been obliged to apply for a licence from their local authority, which could cost landlords up to £1,100 depending on which council they deal with.

Licences will be handed out only to landlords whose properties meet a range of rigorous safety measures - such as having fire doors, alarms and emergency lights fitted in the house.

Although many landlords have taken the trouble to comply with safety standards in their properties, those who have not could find themselves forced to pay out several hundred pounds on improvements to each of their HMOs, as well as coughing up the fees for their licences.

Ray Boulger, the senior technical manager at mortgage advisers John Charcol, warns that local authorities have the right to class smaller properties as HMOs if they see fit - potentially snagging thousands more landlords for the new levy.

For those that do not comply, there are fines of up to £20,000. However, Boulger believes councils may be lenient in their use of penalties for the first few months. "In the early stages, I think the local authorities will have to be quite flexible, because the Government has not promoted these new rules at all," he says. "A lot of amateur landlords with one or two properties are just not aware of them."

The new rules have been introduced following warnings that the number of injuries in the home is much greater within rented properties than in flats or houses that are owned by the occupier.

Although the laws have been drawn up to improve standards in the rental sector, Boulger says there is a chance that they may have a detrimental effect on the prices of larger properties. "If you're buying an HMO, you're going to have to take into account the cost of the licence as well as the cost of any necessary upgrades to the property - and that's going to affect how much people are willing to pay for the property," he continues. "I'd expect HMOs to underperform the market in the short term, but in the long term it will iron itself out."

Nigel Terrington, the chief executive of Paragon, one of the UK's leading buy-to-let lenders, agrees that it may have a short-term effect on prices of HMOs. "It's not likely to have a massive affect on the whole market, but you might find that there are one or two landlords at the edges who will say, 'I really don't want to do this', or who decide to trade down to smaller properties," he says.

However, Terrington believes that improving standards in the rental sector can only help to improve demand in the longer run. "In the early 1980s, people didn't even want to consider renting if they could afford to buy, because rental properties were historically subject to underinvestment by the landlord community," he continues. "But things have improved a lot since then. The quality of rental property is much better, and if you can't afford to get on the housing ladder, it's now a viable alternative."

Although the cost of HMO licences will vary depending on the local authority, Terrington believes the fees will slowly move towards a median. "If the local authority is charging £1,000 in one town, and the town next door is charging £150, then landlords will simply go to the cheaper one if they can get the same rental yields," he adds.

Although HMO licences are another piece of paperwork for landlords, Terrington says prospects for the buy-to-let sector as a whole look promising at the moment, with strong demand for rental property.

However, Moneyfacts, the personal finance analyst, warns that buy-to-let regulation is increasing. Moneyfacts' Lee Tillcock says: "The next year will see the Housing Health and Safety Ratings System (HHSRS), Residency Property Tribunals, Empty Dwelling Management Orders, Tenancy Deposit Schemes and Local Housing Allowance all come into effect."

Let the seller be aware

Another piece of legislation due to shake up the property market over the coming year is the introduction of Home Information Packs (HIPs).

* As of 1 June 2007, all sellers of residential property will be required by law to provide an up-to-date HIP to potential buyers of the property.

* These will include all details of leases, local searches, planning permissions and the like, as well as a Home Condition Report (HCR) which will consist of a basic structural survey as well as additional details such as the property's energy efficiency. HCRs will have to be carried out by a qualified inspector.

* The Government estimates that the average cost of HIPs will be £600 to £700. However, the Conservative Party, which is campaigning against HIPs, says the cost could be £1,000.

* In addition to concerns about the cost and effectiveness of HIPs, some analysts fear they could hit the housing market, with homeowners reluctant to put property up for sale. A report from Oxford Economic Forecasting last week said the number of properties for sale could fall by up to 25 per cent.

* For more information about the packs, visit the Government website at www.home informationpacks.gov.uk.