Upper Tribunal considers meaning of ‘rack rent’ in HMO dispute

The Upper Tribunal (Lands Chamber) overturned a decision by the First-Tier Tribunal (Property Chamber) and set aside a penalty notice.

His Honour Judge Johns KC said the case “raises an important question about the meaning of ‘rack-rent’ in s.263(1) of the Housing Act 2004”.

The London Borough of Waltham Forest imposed a £24,500 penalty on Noshaba Khiljee, who owns a property managed by We Invest (WIL) under an agreement for it to pay her £3,400 per month.

Under their agreement, WIL was to collect all rental income and the property was not to be let as an HMO.

Despite that, it was used as an HMO, with WIL collecting rent of £7,000 to £10,000 per month from the occupiers.

Waltham Forest granted a one year HMO licence but this use continued beyond the expiry date and so the council imposed penalties on both Dr Khiljee and WIL.

Dr Khiljee appealed to the FTT arguing she was not a person having control of, or a person managing, the property within s.263 of the Act.

The FTT upheld the penalty, though reduced it to £19,600, noting the maximum rack-rent for a single family dwelling in the area was £5,000 per month, and so concluded that Dr Khiljee was a person having control of the property as her £3,400 per month was at least two-thirds of the rack-rent.

Dr Khiljee appealed the Upper Tribunal on the ground that the FTT was wrong in deciding she was a ‘person having control’ in s.263. 

HHJ Johns said: “Given the statutory provisions, and that practical approach to rack-rent, I consider that the FTT was wrong to find that Dr Khiljee was in receipt of the rack-rent and was therefore a person having control of the property.”

The judge found eight reasons in support of his conclusion, which included: “It would be surprising if the nature of the property as an HMO were suddenly to be ignored when approaching s.263 and the meaning of rack-rent.

“The question s.263 is answering is, who is in control of this HMO? Clear words could be expected to be used if the intention was that the fact the property was an HMO was to be ignored for the purposes of arriving at an answer.”

He said the property was used as an HMO and s.263 contained “no express disregard of that reality…had Parliament required the reality to be ignored, it might be expected to have done so expressly”.

HHJ Johns said Dr Khiljee was found to have committed an offence on evidence that the rack-rent was £5,000 per month, with her receipts of £3,400 representing 68% of that figure.

Given the definition of rack-rent in s.263(1) is at least two-thirds of the net annual value received, “her liability for a serious offence might well have depended on a question of valuation where a difference of just a few hundred pounds in the monthly value would mean liability or not.

“Parliament is unlikely, in my judgment, to have intended such difficulties of workability and such uncertainty. That is particularly so in view of the statutory definition here of rack-rent as meaning not less than two-thirds of the full net annual value.

“That definition promotes workability and certainty by avoiding fine distinctions between the sum actually received and the full value.”

He cited a variety of other reasons and concluded: “I take a different view of the meaning of rack-rent in s.263(1) of the Act than the FTT. The appeal is therefore allowed and the penalty notice and order of the FTT will be set aside.”

Mark Smulian