Upper Tribunal confirms that property guardianship companies must licence premises as HMOs

28 Sep 2022

Housing, Licensing

The Upper Tribunal has delivered judgment in Global Guardians Management Ltd and others v LB Hounslow and others [2022] UKUT 259 (LC).

In this important decision the President of the Lands Chamber, Fancourt J., dismissed appeals by two property guardianship companies and their director. Confirming that the companies and director had committed the criminal offence of operating an unlicensed HMO under s.72(1) of the Housing Act 2004, he upheld civil penalty notices issued by Hounslow imposing fines totalling £18,000, and Rent Repayment Orders totalling £36,000 made in favour of nine ‘guardians’.

The background is set out in this summary of the first instance decision.

In short, the case concerned a vacant office block converted into temporary residential accommodation and occupied by up to 30 people, whose presence in the building as ‘guardians’ was intended to offer security by deterring trespassers and vandals. Hounslow and the occupants contended that the building was subject to regulation as an HMO pursuant to Part 2 of the Housing Act 2004. The two companies which managed the operation disagreed. The proceedings gave rise to two important questions:

  1. Are premises occupied by guardians caught by s.254 and therefore licensable as HMOs?
  2. If yes, are guardianship companies persons ‘in control of’ or ‘managing’ the premises within the meaning of s.263 and therefore liable for any failure to licence?

The Upper Tribunal has now confirmed that the answer to both of these questions is yes, albeit with some caveats.

 

Licensable as HMOs

The companies argued the premises did not satisfy the HMO Standard Test because the guardians’ occupation was not “the only use of that accommodation” within the meaning of s.254(2)(d). They argued that the guardians’ security function offered a second ‘use’.

The Deputy President, Martin Rodger KC, recently dismissed an identical argument raised by one of the same companies in Global 100 Ltd v Jimenez [2022] UKUT 50 (LC). Given the purpose and intent of Part 2, the actual usage of the premises takes precedence over the landlord’s contractual intentions when allowing people to occupy the building. In any event merely providing a security service (such as patrols or watchmen) was not a ‘use’ of a building, and the guardians’ contracts forbid them from making any use of the premises other than residential.

Global 100 Ltd has now been given permission to appeal Jimenez to the Court of Appeal. In those circumstances Fancourt J held there was no basis to depart from the Deputy President’s conclusions and dismissed this ground for the same reasons, in express anticipation of the Court of Appeal’s further consideration of the issue [40-43].

 

‘In control of’ and ‘managing’

After much dispute, this decision and the related judgment in Laleva v Global 100 Ltd [2021] EWCA Civ 1325 now clarify the nature of various contractual agreements used at this premises:

  • The freeholder, NHSPSL Ltd, entered into an agreement with Global Guardians Management Ltd (‘GGM’) to provide a guardianship service. GGM assumed responsibility for repairs and maintenance, controlled access to the building and covered all costs. In return, GGM paid NHSPSL £600pcm. Fancourt J confirmed the FTT’s conclusions that this arrangement was in fact a tenancy agreement [50-51].
  • GGM then entered into an agreement with Global 100 Ltd (‘G100’) – a sister company with whom it shared a sole director – which permitted G100 to grant licences to the individual ‘guardians’, and to collect their licence fees. Fancourt J considered the companies’ agreement was itself also a licence rather than a tenancy or agency/services contract [71-72].
  • As confirmed in Laleva, G100 then granted licence agreements to the individual occupants. It collected up to £15,000pcm in licence fees. It was clear that at least some of those funds were passed on to GGM, but the companies refused to disclose any details of their internal financial arrangements.

Against that background, Fancourt J held that GGM (but not G100) was a ‘person managing’ within the meaning of s.263(3)(b) because it was a lessee and “would have received” licence fees but for its agreement with G100. That was so even though the occupants’ licences were granted by G100, and GGM never had any contractual entitlement to receive them [65-68].

G100 was not a ‘person managing’ because it was not an owner or lessee of the premises, nor an agent or trustee of such persons. Section 263(3) does not apply to mere licensees [73].

However G100 was a person ‘in control’ within the meaning of s.263(1) because it received the “rack rent” as defined by s.263(2). The companies accepted that “rack rent” as defined by the Act could include licence fees, and there was sufficient evidence to show that £15,000pcm amounted to at least two-thirds of the net annual value of the premises given its condition at the material time [86]. There was no distinction between the rack rent of the premises as a whole versus the aggregate rack rent of the 30 rooms let to occupants [92-93].

In contrast, the Tribunal could not be satisfied that GGM was a person ‘in control’ because of the absence of evidence that it received all of the rack rent, either directly or through G100 acting as an agent or trustee: receiving only some of those funds was not enough [95-98]. Despite many requests for disclosure of the companies’ financial records, the companies’ duty to cooperate with the Tribunal did not require them to adduce incriminating evidence [58].

These conclusions were sufficient to render both companies liable for the failure to licence the premises. In turn, that meant their director also remained liable pursuant to s.251.

 

Conclusion

Although ostensibly concerned with the complex corporate arrangements at this particular premises, Fancourt J’s reasoning is of clear relevance to other guardianship operations and indeed to any HMOs operated by interlinked companies.

Notably, the Deputy President reached almost identical conclusions about similar points of law on different facts in Cabo v Dezotti [2022] UKUT 240 (LC), a recent decision not cited before Fancourt J.

GGM and G100 now have 28 days in which to seek permission to appeal; if granted, these proceedings could be conjoined with Jimenez before the Court of Appeal. It appears likely that the courts will yet have more to say about the regulation and management of guardianship operations.

Tara O’Leary successfully represented the London Borough of Hounslow, instructed by Baljeet Virdee of HB Public Law.

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