Legal Director, DLA Piper
A 2012 mega transaction has brought up legal questions about renting to students.
Editor's note: Global business law firm DLA Piper concluded a major transaction last summer in student housing in the United Kingdom. The firm guided the sale of the Nido Student Living business, which consists of three high-rise London buildings, to Round Hill Capital for more than £400 million (approximately $630 million), which was the largest deal in the U.K. student sector to date. One of the issues that came up for the firm during this transaction is how the legislation that regulates "houses in multiple occupation" (HMOs) could have an unintended effect on the sector.
One of the fastest growing areas of British student housing is direct let, where operators enter into direct agreements with individual students, and where the operator - rather than a university - owns and manages the housing. DLA Piper reports that operators in the U.K. need to be aware that these arrangements may technically qualify as an HMO. It is a criminal offense to operate an unlicensed HMO, and according to the firm, it is doubtful that many in the sector understand the risks they are unintentionally running. Here, Ben Taylor, legal director at DLA Piper, explores the problem in more depth.
The law of unintended consequences - HMOs and the student accommodation sector
Many student housing providers are now adopting the "direct let" model for their developments, particularly in areas with a large and varied student community, including foreign students.
Not many of those providers know that by operating the "direct let" model in their U.K. developments, they might trip over the requirements of the Housing Act of 2004, which requires houses of multiple occupation (HMOs), as defined, to be licensed.
The Legal Position
Under the 2004 act, residential accommodation qualifies as an HMO if (in broad terms) it consists of accommodation occupied by more than one household and where one or more of certain basic amenities are shared. For example, toilets, washing and cooking facilities.
Physically, most historic student housing stock would satisfy this test. The only exception would be a student development that was wholly arranged in studio flats and where each flat had its own amenities. Even high-end accommodation may be wholly or partly built as "clusters" of rooms, and therefore qualify as an HMO.
To qualify as an HMO, the relevant accommodation must be occupied as a sole or main residence, and the relevant occupation must constitute the only use of that accommodation. The act expressly states that this requirement will be satisfied where the accommodation is occupied by students for the purpose of undertaking a full-time course of further or higher education (even though the student may go home for vacations).
There are slightly different rules for converted buildings although it is still a requirement that the accommodation does not consist wholly of self-contained flats.
So why has the HMO legislation not been on the radar of most student housing providers? The answer mainly lies in schedule 14 of the Act. A building will not be an HMO, though physically arranged as such, if it is occupied solely or principally by full-time students and where the person managing or having control of the premises is a "specified person." A "specified person" is a university or college that has been accredited in relation to those premises under an appropriate Code of Practice for the student accommodation sector. For example, the ANUK/UNIPOL Codes of Standards for Larger Developments for Student Accommodation.
However, any accommodation not managed or controlled by an educational establishment cannot qualify under the exception. A private operator cannot be a "specified person."
If the relevant accommodation is configured and occupied as an HMO and the schedule 14 exception does not apply, the accommodation is covered by mandatory HMO licensing. The person having control of the accommodation must therefore obtain an HMO license from their local authority. Failure to do so is a criminal offense attracting fines of up to £20,000 (approximately $31,200).
Student accommodation developers will of course need to be conscious of building regulations when undertaking developments. Most developments will comfortably exceed the minimum standards. Developers using the "direct let" model may therefore be surprised at the requirement to obtain an HMO license as well.
The driver behind the Housing Act 2004 would have been to maintain and bring up to an acceptable standard accommodation within the private sector that is used principally for social housing, or for "amateur" landlords letting converted houses to students and others. Modern, high-end student developments are unlikely to be, and should not be, the focus of the relevant local authorities. We are aware of direct let operators who have approached their local authority only to be told by return that licensing is not relevant to them. Unfortunately, in our experience, the approach of local authorities to this issue has not been consistent.
For those operators who choose to become licensed, again there are inconsistencies between local authorities both in relation to the fees charged for a license and the procedure to be followed in obtaining one. A local authority may, for example, charge a fee per unit of accommodation, which may be affordable for the small-time landlords targeted by the legislation, but an onerous burden for a large development.
Operators are left in a difficult position because they clearly do not want to be engaged in a criminal act, and will be concerned as to how a breach, however technical, would be seen by their boards, funders and future purchasers. On the other hand, there will be a reluctance on the part of operators to enter into a lengthy and expensive licensing process with a local authority that does not believe that a license is even necessary but is happy to take an operator's money if offered.
The solution is to make it possible for any person, whether or not an educational institution, to be a "specified person" for the purposes of the legislation, if they adhere to one of the Codes of Practice already recognized by the Act. In our experience, accreditation under the Codes is seen as a valuable indication of quality for students and should provide adequate incentive for operators to maintain standards well in excess of the HMO minimum. Reform would also place direct let providers on the same competitive footing as educational institutions.
This small but important piece of deregulation would surely help the UK's thriving student accommodation sector to develop further.
— Ben Taylor, legal director, DLA Piper