[2023] UKUT 306 (LC)

The offence created by section 72(1) of the 2004 Act is of managing or having control of an HMO that is required to be licensed and is not. Only a person managing or having control of the premises can commit it. The definitions of a person “having control of” and “managing” a property are set out in section 263 of the 2004 Act:

“(1)

In this Act “person having control”, in relation to premises, means (unless the context otherwise requires) the person who receives the rack-rent of the premises (whether on his own account or as agent or trustee of another person), or who would so receive it if the premises were let at a rack-rent.

(2)

In subsection (1) “rack-rent” means a rent which is not less than two-thirds of the full net annual value of the premises.

(3)

In this Act “person managing” means, in relation to premises, the person who, being an owner or lessee of the premises–

(a)

receives (whether directly or through an agent or trustee) rents or other payments from–

(i)

in the case of a house in multiple occupation, persons who are in occupation as tenants or licensees of parts of the premises; and

(ii)

in the case of a house to which Part 3 applies (see section 79(2)), persons who are in occupation as tenants or licensees of parts of the premises, or of the whole of the premises; or

(b)

would so receive those rents or other payments but for having entered into an arrangement (whether in pursuance of a court order or otherwise) with another person who is not an owner or lessee of the premises by virtue of which that other person receives the rents or other payments;

and includes, where those rents or other payments are received through another person as agent or trustee, that other person.”

At paragraph 5 above I set out a simple example. The freeholder, A, in that case was the “person having control” of the premises because A received the rack-rent from the occupiers and so fitted squarely within section 263(1). Section 263(1) is also apt to describe a managing agent who receives the rack-rent. For that reason the Tribunal (the Deputy Chamber President, Martin Rodger KC) in Cabo v Dezotti [2022] UKUT 240 (LC) at paragraph 44 said:

“To be a person having control, the person receiving the rent need not be entitled to keep it for their own benefit: an agent or trustee who receives rent will be a person having control. In short, the person having control is the rent collector, whether they are collecting on their own account or on behalf of someone else.”

The rent in question so far as section 263(1) is concerned is a rack-rent. Although the appellants say that they were paying a rack-rent the FTT made no finding to that effect. The respondent’s representatives in written submissions argued that the appellants were not paying a rack-rent and indeed that the payments made by the appellants were a licence fee and therefore could not have been a rack-rent. I make no comment on that argument and I approach the appeal on the basis that it is not known whether or not the appellants were paying a rack-rent. As will be seen, it does not matter.

Section 263(3) defines a person managing the property, and in the context of section 263(3) the rent need not be a rack-rent. Although the opening words seem to indicate that the person managing the premises will always be an owner or lessee of the property, the final proviso (beginning “and includes” after sub-paragraph (b)) indicates that they may be an agent or trustee receiving rent and passing it on to an owner or lessee.

The FTT considered first whether CCG was the person managing the property. It is the freeholder, and it would have received the rent or other payments from the guardians had it not entered into an agreement with Lowe, and Lowe received the guardians’ payments by virtue of that agreement (paragraph 55 of the FTT’s decision). (Footnote: ¹) But Lowe was found by the FTT to have been a lessee of the property (and there is no cross-appeal from that finding) and therefore that element in the requirements of section 263(3)(b) was not satisfied. CCG was not a person managing the premises.

However, the FTT found that CCG was a person in control of the premises.

The FTT was referred to the Explanatory Notes to the legislation, which include the following comment on section 263(1):

““Section 263 defines for the purpose of the Act that “person having control” is the person who receives (directly or as an agency or trustee) the market rents from the tenants for a given premises or is otherwise entitled to receive the rents if the premises were let (i.e. an owner) “Person Managing” is someone who receives the rents directly from the occupier (but “rent” includes ground rent), so such a person could be a managing agent.”

The FTT said:

“67… As we have found, the CCG let the property to Lowe on a lease; but it clearly did so not at a rack-rent (indeed, we think, not at a rent at all). That then raises the hypothetical proposition in the second part of section 263(1). Where a property is let, but not let at a rack-rent, the (or a) person having control is the person “who would so receive [the rack-rent] if the premises were let at a rack-rent”. 68. In our view, the person who would have received the rack-rent, had the property been let at a rack-rent, is the CCG. This conclusion, which seem clear to us on the words of the statute, is supported by the explanatory note we quote at paragraph [21] above. That describes the hypothetical proposition as applying to a person who “is otherwise entitled to receive the rents if the premises were let (i.e. as an owner).” It uses the term “entitled”, which we think is what the drafter means by referring to the person “who would so receive”; and the note says “i.e.” the owner, not “e.g.” the owner. The note suggests to us that the very point of the hypothetical proposition is to include an owner who could let premises at a rack-rent, but does not. 69. It follows that the CCG was a person in control of the property, and that, as a result the building is not an HMO.”

That is a misconstruction of section 263(1).

The definition of a “person in control” in section 263(1) of the Housing Act 2004 is relevant not only to rent repayment orders but in a number of other contexts, for example in defining the correct recipient of an improvement notice under Chapter 2 of Part 1 of the 2004 Act. The definition has long roots; the same words, with very minor and immaterial variations, have been used in a number of statutory provisions beginning with the Towns Improvement Clauses 1847 which provided in s 3:

“The word “owner,” used with reference to any lands or buildings in respect of which any work is required to be done, or any rate to be paid, under this or the special Act shall mean the person for the time being entitled to receive, or who, if such lands or buildings were let to a tenant at rackrent, would be entitled to receive, the rackrent from the occupier thereof”

The defined term in the 1847 Act and other early provisions is “owner”, but in later statutes the defined term is “person in control”, but the defining words are the same. They are consistently used to identify a person responsible for complying with statutory obligations and occasionally to identify the recipient of a statutory benefit. In Pollway Nominees Limited v Croydon London Borough Council [1987] 1 AC 79 the House of Lords had to identify the “person having control” of a building, such a person being the correct recipient of a notice served by the local authority under section 9(1A) of the Housing Act 1957 requiring them to carry out repairs. Section 39(2) of the Housing Act 1957 defined the person “having control of the house” in terms identical to those found in section 263(1) of the 2004 Act. Lord Bridge of Harwich referred to a number of provisions that had used the definition since 1847 and observed:

“In all these cases the rationale of the use of the formula to designate the person upon whom the relevant obligation is cast is surely plain. The owner of that interest in premises which carries with it the right, actual or potential, to receive the rack rent, as the measure of the value of the premises to an occupier, is the person who ought in justice to be responsible for the discharge of the liabilities to which the premises by reason of their situation or condition give rise.”

In Pollway Nominees the building in question comprised a number of flats let on long leases at ground rents, some but not all of them being sub-let to tenants paying a rack-rent. It was argued that the person in control in those circumstances was the freeholder because the freeholder alone was in a position to let the whole building at a rack-rent although in reality it had not done so. Lord Bridge referred to Truman, Hanbury, Buxton & Co. Ltd v Kerslake [1894] 2 Q.B. 774, where the issue was liability to remedy a statutory nuisance. The premises were let on a long lease and sub-let at less than a rack-rent. The case was an appeal from a criminal conviction by the head-lessees against a conviction for failing to comply with a notice requiring them to remedy a nuisance (pursuant to the Public Health (London) Act 1891); liability to comply fell upon the “owner”, defined as the person receiving the rack-rent or who would receive it if the premises were let at a rack-rent. Kennedy J, giving the judgment of the Divisional Court allowing the appeal said this:

“It appears to us to be impossible to treat as the person who would receive the rack rent, if the premises were let at a rack rent, persons who, at the time when the 'owner' of premises, as defined by section 141, has to be found, have not such an interest in the property that, if it was let at a rack rent, they would receive such rack rent. The words of the section in our judgment, in the case of there being no one who in fact receives a rack rent from the actual occupier, designate as 'owner' the person who 'rebus sic stantibus,' that is to say, with the interests in the premises as they then are, would, if they were let to an occupier at a rack rent, receive that rack rent.” In this case, whilst the sub-lease to Aslett subsists, that is to say, for the next 30½ years and until a date only 11 days anterior to the expiring of the appellants' own interests, the appellants could not let to any one. The only person who could let the premises at a rack rent, the only person whose interest in the premises places him in a position to receive a rack rent, is Bishop, the assignee of the sub-lease to Aslett. His interest as assignee of that sub-lease gives him the power of so letting; and if the premises were so let, he is the person who would receive the rack rent. He chooses, it is true, to occupy the premises himself; but we see nothing to prevent the same person being both occupier of the premises and the 'owner' within the meaning of this section."

To summarise Kennedy J’s explanation: there was no rack-rent being paid. As things stood, neither the freeholder nor the long-lessee had the power to let the premises at a rack-rent because the premises were sublet to Mr Bishop. Only Mr Bishop satisfied the definition because he was the only one who could, as things stood, let the premises at a rack-rent.

To continue with Lord Bridge’s analysis in Pollway Nominees: he also referred to London Corporation v. Cusack-Smith [1955] A.C. 337 which unusually conferred a benefit on the person who received the rack-rent, or would receive it if the premises were let at a rack-rent, namely the right to serve a purchase notice on a local authority under the Town and Country Planning Act 1947. Lord Keith of Avonholme said:

“"I cannot accept …that the definition can be divorced so far from actuality as to cover the case of a person who could have let the land in the past at a rack rent, if he had not chosen to let it at less than a rack rent. The natural way to construe the definition in its application to an actual case is, in my opinion, to ask, who is entitled to let the land at a rack rent as things are today?”

Lord Reid said, at p. 360:

Accordingly, in Pollway Nominees the House of Lords held that the expression “person having control” applied collectively to all the long lessee - because they either received the rack-rent or would receive the rack-rent if they chose to sub-let their units. Their lordships rejected the argument that the person in control was the freeholder, as the only person able to let the whole building at a rack-rent. It had chosen to let the premises at less than a rack-rent and the court was not required to move into the imaginary world where it had let the premises at a rack-rent.

It is important to note that although more than one person comprised “the person in control” in Pollway, those persons were the group of people who were each either receiving the rack-rent or were (as things stood) entitled to let the premises for a rack-rent. The freeholder was not among that group since it could not let any of the flats at a rack-rent. It did retain the common parts but that was not relevant since, as Lord Bridge put it a 95A-C, the freeholder “thus retains only a reversionary interest which confers no right of occupation which he can either enjoy for himself or let to anyone else”.

R v London Borough of Lambeth ex p Clayhope Properties Limited [1988] QB 563 was a decision of the Court of Appeal, again about section 9 of the Housing Act 1957. It concerned a building comprising flats all let on long leases, some but not all being sub-let at rack-rents. At 568H Glidewell LJ said:

“In the present case it is common ground that the 14 flats the subject of long leases, were not, and are not, let at rack-rents but if they were to be let at rents exceeding two-thirds of the full net annual value of the house, the person who would be entitled to receive that rent would in each case be the leaseholder. The person having control of the house is thus, as far as the leasehold flats are concerned, the leaseholder. In respect of the six other flats, the subject of the controlled tenancies, it is the applicants [the long lessees of those flats], because they do, or they did at the material time, receive rack-rents from their tenants.”

The decisions in Pollway Nominees and Clayhope were referred to by the Tribunal (the Deputy President, Martin Rodger QC) in Hastings Borough Council v Braear Developments Limited [2015] UKUT 415 (LC) where the issue was who was the “person in control” of a building comprising five flats, all let on long leases and some of them sub-let, where the freeholder’s reversion included the common parts. At paragraph 44 the Deputy President said:

“Four of the five flats in the Building are let on assured tenancies by the lessees. Although there is no specific evidence on the point there seems no reason to doubt that the tenancies are at market rents and that, in aggregate, the rents received for the units which are let exceeds two thirds of the annual value of the units as a whole. A fifth flat is not let, but if it were, the recipient of the rack-rent would be the lessee. Looking at the Building as a whole, the person in control in the sense of the person(s) in receipt of the rack rents are the lessees. It seems to me wrong in principle to ascribe a notional rack-rent to the common parts of the Building, when there is no realistic possibility of such a rent being received. That is consistent with the approach taken in Clayhope and in Pollway …

45.

It seems to me to be clear that the persons in control of the Building are the lessees of the five flats.”

Two propositions are therefore clear from the authorities. One is that if the premises are currently let at a rack-rent then the person in control is the person who receives that rack-rent. The second is that the person “who would so receive it if the premises were let at a rack-rent” is not a person who might have let at a rack-rent but has in fact let the property (or part of it) for less than a rack-rent; it is the person who as things stand at present, with all the current lettings in place, could if they chose grant a lease at a rack-rent. It is therefore not the freeholder if the freeholder has already let the property, or parts of it, at less than a rack-rent, even if the freeholder retains common parts. The FTT’s construction of section 263(1), and its reading of the explanatory notes, was incorrect on this point.

Therefore in the present case CCG cannot be the “person in control” for the purposes of section 263(1) of the Housing Act 2004. If the appellants were in fact paying a rack-rent, CCG was not receiving it; if the appellants were not paying a rack-rent then because CCG had granted a lease of the property to Lowe it was not in a position to grant a lease of the property at a rack-rent, and so was not the person “who would so receive it if the premises were let at a rack-rent.”

And as the FTT found, CCG was not the person managing the property because it had let the building to Lowe, so that the condition in section 263(3)(b) failed; Lowe is a lessee so it is not the case that CCG “would have received the rents or other payments [from the guardians] but for having entered into an arrangement … with another person who is not an owner or lessee of the premises by virtue of which that other person receives the rents or other payments” (emphasis added).

So although the FTT’s interpretation of Schedule 14 paragraphs 1 and 2 to the 2004 Act was correct, in fact those paragraphs were not relevant because CCG was neither in control of the premises nor managing them. That is the case whether or not the appellants were paying a rack-rent.

The appeal succeeds therefore on the second ground.