Legal case: rent repayment orders – honesty the best policy

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A Rent Repayment Order (RRO) is an order that allows a tenant or local authority to reclaim rent or housing benefit where a landlord rents out an unlicensed property such as a house in multiple occupation (HMO).

Rent Repayment Orders are obtained through a residential property tribunal (RPT). Whereas tenants can now apply for a RRO direct to the tribunal, local authorities can only apply for a RRO where tenants pay their rent with the assistance of housing benefit.

In order to avoid evicting all the tenants when a HMO landlord is successfully prosecuted by a local authority for operating without an HMO licence, potentially creating a chaotic situation, the RRO was introduced in the Housing Act 2004 Act. This allows a compromise situation: the Act specifies that tenants’ contracts in an unlicensed HMO must continue to operate, and tenants must continue to pay rent. However, they could then have the right to a rent repayment from their landlord.

In The Housing and Planning Act 2016, the RRO legislation was amended and expanded to include the following situations:

• Breaches of improvement orders and prohibition notices and of licensing requirements under the Housing Act 2004
• Violent entry under the Criminal Law Act 1977
• Unlawful eviction under the Protection from Eviction Act 1977
• Breach of Banning Orders (new in this Act)

The case

In the Leibel v Baird case (May 2021), an application for a RRO was made by one tenant in respect of an unlicensed HMO property, and she included in her application a Rule 13* costs application.

Ms Leibel was one of five tenants in the HMO property, on a tenancy agreement made with Mr Baird, the property owner. The property did not have an HMO license to operate and Ms Leibel realised this was illegal and applied to the Tribunal for an RRO in the sum of £5382. The landlord Mr Baird’s defence was based on his argument that the property did not need a licence as there were only four occupants.

Submitting evidence before the hearing, Mr Baird had sent in a copy of a tenancy agreement which was signed by only four tenants. In response to this Ms Leibel sought and was given permission to submit additional witness statements from two of the other tenants, stating that there were 5 tenants in the property. When the tenancy commenced all the tenants had signed the agreement together and Mr Baird took the document away.

Mr Baird at the hearing gave evidence, insisting that there were only four tenants and he was very unpleasant to Ms Leibel in cross examination. Mr Baird was then asked to produce at a further hearing the original copy of the tenancy agreement, along with his bank statements showing rent payments. He was reminded that he might seek legal assistance given his evidence was being challenged.

The crunch

On day two, around three weeks later, Mr Baird was represented by Mr Des Taylor of “Landlord Defence” who said he had sent in a copy of the tenancy agreement and the relevant bank statements. He said he hadn’t realised that the Tribunal needed the original copy of the agreement, but in fact Mr Baird had destroyed it, which he claimed he did routinely after scanning.

Mr Taylor went on to say that the bank statements showed payments from five people and that his client now realised that he was operating a property which should have been licensed as an HMO.

The Judge asked if Mr Baird now accepted that he had committed the offence alleged of running an HMO without a licence and that he was liable for a RRO? Mr Taylor said his client was no longer relying on the evidence he had originally filed and was withdrawing it, including all his statements and documents filed, save for the bank statements. He stated that his client now accepted that a RRO should be made out in the sum claimed of £5,382.

The Judge asked Mr Taylor to confirm that his client was admitting the criminal offence of operating without an HMO license and that the Tribunal should make out a rent repayment order in the sum of £5382. Mr Taylor confirmed.

Rule 13 costs

The Tribunal then turned to matter of the Rule 13 costs application, made on the basis that Mr Baird had acted unreasonably in defending or conducting the proceedings: lying about the number of tenants in the property, putting forward a false account, forging a tenancy agreement and aggressively cross examining the claimant.

Mr Taylor tried in vain and at length to defend some of Mr Baird’s actions but the Judge reminded Mr Taylor he had on behalf of his client already admitted the offence. Mr Taylor accepted this but questioned the amount of the legal costs (£22,000) being claimed. He suggested it was not reasonable to apply such high costs to the claim of £5832 and that the solicitor’s hourly rate was excessive.

The Tribunal made out the RRO in the sum of £5,832, plus a £300 application fee. In respect of the Rule 13 costs, the Tribunal found that Mr Baird had deliberately obfuscated matters and in signing the statement of truth he had deliberately misled the Tribunal – “It would now appear that there is nothing within Mr Baird’s statement which can be said to be true… and Mr Baird has treated the Tribunal with contempt.”

Costs were awarded on an indemnity basis, the Judge stating that the legal costs were reasonable and costs of £21,512 was ordered.

The Lessons:

By trying to hoodwink the Tribunal and defend the indefensible in this way Mr Baird’s conduct exacerbated matters and brought down the wrath of the Tribunal on his head.

The case shows not only the importance of being honest in these matters, but of following the rule of the law in the first place, and of keeping and producing accurate documentary evidence. Rule 13 costs on RROs are not commonly applied by claimants. This claimant it seems was very well advised.

*Rule 13 permits the Tribunal to make an order for costs if a claimant or defendant has acted unreasonably in bringing, defending or conducting proceedings. The rule was introduced under the new First Tier Tribunal (FTT),lifting the previously capped costs ceiling of £500.

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Jail threat for wealthy landlord who ignored demolition order

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A landlord must demolish two penthouses that he built without planning permission – or face a four-month jail sentence.

Munjit Dulay, whose company MB Estate owns property worth millions of pounds, bought St Clement Court in Fosse Lane, New Parks, Leicester, in 2012 and turned the former old people’s home into 74 flats, Leicester County Court heard. He then built two penthouse flats on top of the buildings without permission and ignored a notice from the city council, followed by a court order, to remove them in May 2019. Leicestershire Live reports that instead of evicting the tenants, he re-let both penthouses – at least once – continuing to collect £455 per month on one and £600 per month on the other.

Bad advice

Representing himself, Dulay, 55, said he had taken bad legal advice and failed to demolish the apartments because his previous team of solicitors had advised him they could get the demolition order overturned. He said: “I wish we would have complied with the order but unfortunately that’s not the case.”

Last August he admitted that MB Estate had breached the injunction and that he had committed contempt of court by ‘breaching undertakings’. Dulay was given a four-month jail sentence, suspended for the next six months. MB Estate was fined £25,000 for breaching the injunction and Dulay was ordered to pay costs of £4,129. Judge Richard Hedley told him the flats must be gone by 17th July or the jail sentence would be activated.

Poor standard

Deputy city mayor, councillor Piara Singh Clair, says: “This was a very poor standard of development, built without planning permission in a flagrant breach of planning control. This case shows that ignoring and seeking to evade enforcement proceedings will lead to consequences such as large fines and potentially a prison sentence if the council’s requirements are not followed.”

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Right to rent checks go digital for British and Irish tenants

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Landlords and letting agents will soon be able to carry out quicker right to rent checks on British and Irish citizens.

From 6th April, Identification Document Validation Technology (IDVT) can be used to conduct the checks, allowing people to verify their identity remotely and prove their eligibility to rent. Digital identity checking platforms should simplify the process by removing the need for landlords to check and record copies of original documents. Tenants and applicants will be able to upload images of their personal documents to IDVT, instead of presenting physical documents. Landlords can secure an excuse against a statutory penalty by recording the outcome of a check made using an approved system.

Real-time checks

Overseas nationals with an immigration status are issued a share code which can be used to carry out real-time checks on their eligibility using Home Office systems. However, although COVID-19 restrictions currently allow everyone to undergo a check based on hard copy documents via video call, this was not considered a sufficiently robust system going forward. A consultation demonstrated the need for a remote solution for British and Irish citizens, particularly because of the difficulty in persuading tenants to attend in-person checks, according to Arla Propertymark.

Game-changer

Minister of State for Media, Data, and Digital Infrastructure, Julia Lopez, says: “Trusted and secure ways for people to confidently verify themselves online will be a game-changer and offer an alternative to time-consuming and complex paper-based processes.”

The most up-to-date government guide can be found here: Right to Rent Checks: A user guide for tenants and landlords.

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Supply shortage holding back housing market and pushing inflation

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A continued shortage of new properties being listed for sale, despite a rise in new buyer enquiries, is still preventing a pick-up in sales volumes and house prices continue to increase, according to the December 2021 RICS UK Residential Market Survey.

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Surge in the number of landlords using limited companies

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According to a recent report by estate agents Hamptons, over the last four years the number of landlords operating their buy to let business through a limited company has doubled.

There were 47,400 new buy-to-let companies incorporated in 2021 right across the UK, the figures being derived from Companies House data – that’s the highest number since the changes to the tax system under the then chancellor George Osborne resulted in landlords paying more income tax.

Higher rate taxpayers

In particular, higher rate taxpayers with rental income, in addition to a salary, lose out because rental income is simply added to their employment income before the deduction of costs and this determines your tax band. On the other hand, owning properties through a limited company benefits certain people, so many higher rate taxpayers find it more tax-efficient than owning property as a private individual.

The chancellor’s tax changes were introduced through what’s known as “Section 24” which came into effect in 2017. It applied increasing tax liabilities on a sliding scale as investors with properties in their personal names had their ability to claim mortgage interest as an expense gradually reduced over a 4-year period to 2021.

Individual buy to let landlords are now effectively taxed on turnover, whereas company landlords are taxed on profit – they can deduct full expenses. It has meant that it’s often more tax efficient to buy new rental properties through a limited company, or even transfer existing owned properties into one.

Growth in number of incorporations slowing

Hamptons thinks that the number of new buy-to-let incorporations in 2021 is now probably close to its peak, with the trend expected to decline in 2022. This may be as a result of last years’ stamp duty holiday which to some extent boosted new buy to let investor numbers. In addition, those investors who could transfer properties from a personal to a company name have had a full five years to do so since the 2017 tax hike.

The number of buy-to-let companies now in operation in the UK topped the 200,000 mark as the country emerged from the first lockdown, says Hamptons, but by 2021 this figure rose to a new total of 269,300. Approximately 40% of these buy to let companies existed before the introduction of the new tax regime, so well over half have been registered since.

Small-scale landlords still dominate the sector

With small-scale landlords still dominating the sector – as opposed to larger institutions – with an estimated 4.4 million privately rented households in England. It’s a sector that’s doubled over the last 20 years. Hamptons estimate that around half of all new landlord purchases last year used a company to hold their buy to let. 40% of these new purchases went into a limited company that was less than a year old.

The bulk of new buy-to-let companies set up in 2021 were in London and the South East, with the two regions together accounting for 45% of all new incorporations. That’s not surprising as by far the bulk of all UK buy to lets reside in the south east of the country.

These two regions have long dominated the incorporation trend. Considerably higher average rents has meant that the tax advantages from incorporation are generally more favourable in these regions. Only the North East (-6%) saw fewer buy-to-let companies set up in 2021 than in 2020 according to Hamptons.

The other side of the coin is that while the number of new buy-to-let incorporations has continued to grow, around 15,200 limited companies were shut down or made dormant in 2021. This would equate to around 6% of all buy-to-let companies still operating. The average buy to let property company closes after 5.8 years. This figure has continued to fall in recent years while at the same time the number of incorporations has increased.

Easy to set-up a new company

Setting up a new buy-to-let limited company is inexpensive and can be done easily online through Companies House in a few minutes. But before going down this route you should seek advice from an accountant, legal advisor or financial planner as everyone’s situation is different and using a limited company for buy to let investments does not benefit everyone.

One major advantage of owning through a limited company is that it’s simpler to transfer ownership than if properties are privately held. In this case the property does not change owners but remains under the company’s ownership, which may protect the transaction from Stamp Duty, Inheritance Tax and Capital Gains Tax (CGT). This is useful tax planning aid when property and estates are being passed on from one generation to the next.

Profits can be retained within the company when properties earn income and when they are sold, helping the owners protect themselves against certain tax liabilities because income can be taken as dividends, and on a sale there’s technically no capital gain. It can help provide more capital for expansion.

Limited liability gives protection of your personal assets like your home, but it can make mortgage applications more difficult – you may need to give personal guarantees. The main drawback to incorporation is having to pay stamp duty and capital gains tax if you want to sell your existing investments into your company.

Always seek professional advice before making important decisions like investing through a limited company.

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Should I hang tight on lease extension?

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I own a leasehold property with 85 years left on the lease. I am aware of proposed changes to the law around leases, but the changes haven’t been enacted by parliament yet.

The question is should I press ahead now and negotiate an extension with the freeholder

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Should I sell, pay the CGT and take my tenant?

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Hi All, I am looking for some advice. Firstly, I will explain my situation. I have a leasehold flat that I have let for about 4 years to a good tenant. I am now getting major issues with the Residential Management Company and their managing agent

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