Upper Tribunal clarifies meaning of “rack-rent” in important HMO decision

Khiljee v Waltham Forest LBC [2026] UKUT 171 (LC)

The Upper Tribunal has resolved an important question about the meaning of “rack-rent” in section 263(1) of the Housing Act 2004, holding that it should be calculated by reference to a property’s actual use as an HMO, not a hypothetical valuation based on its lawful use as a single family dwelling. The ruling overturns a £19,600 penalty and clarifies the test councils must apply when deciding who to hold responsible for an unlicensed HMO.

Facts

The Appellant owned a property she had handed to a management company. Under the agreement, the management company paid her a fixed fee of £3,400 per month. Without the Appellant’s knowledge, the management company let the property as an HMO, receiving between £7,000 and £10,000 in monthly rents. The company initially obtained a licence to use the property as an HMO under the 2004 Act, but this was not renewed.

The London Borough of Waltham Forest imposed a financial penalty on the Appellant. It contended she was a “person having control” of an unlicensed HMO, or alternatively, a “person managing”. A “person having control” of premises for the purposes of the 2004 Act is the person who receives the rack-rent of the premises: s. 263(1). “Rack-rent” is defined as “…a rent which is not less than two-thirds of the full net annual value of the premises”: s. 263(2).

The sums received by the Appellant were less than two thirds of the rent obtained by the manager. The Council, however, contended that the rack-rent in s. 263 means the rack rent of a “lawful” use of the premises. The Appellant’s property neither had planning permission for HMO use nor an HMO licence, such that it was “unlawful” and should only be used as a single family dwelling. Used as a single family dwelling, the rack-rent was c. £5,000 per month, and the Appellant received more than two thirds of that figure such that she was a “person having control” of an unlicensed HMO.

The Appellant appealed the penalty, but the FTT accepted that analysis of s. 263.

Decision

The Upper Tribunal has held that the FTT was wrong to do so. The Upper Tribunal held that the rack-rent should be determined on the basis of what the property actually is - an HMO - not on a hypothetical assumption that it is used lawfully as a single dwelling. Judge Johns KC gave eight reasons for that conclusion:

1. The legislation targets unlicensed HMOs, so it would be surprising if the property’s HMO character were suddenly ignored when identifying who controls it.
2. Parliament included no express direction to disregard the property's actual use.
3. The FTT's hypothetical approach would create serious practical difficulties and uncertainty: liability for the criminal offence in s. 72(1) could hinge on a valuation dispute of just a few hundred pounds, and councils would often need expert evidence simply to establish who committed the offence.
4. The FTT’s interpretation produced two simultaneous but contradictory “rack-rents” for the same property, one based on reality and the sums actually received in relation to HMO use, and another based on a hypothesis for the Appellant. That has no support in the statute.
5. It was not necessary to construe rack-rent as meaning the rack-rent of the lawful use of the property to prevent the Appellant “benefitting from her wrongdoing”. The agent was “enjoying the fruits” of being in control of an unlicensed HMO.
6. Assessing rack-rent by reference to actual receipts did not mean nobody was liable.
7. It was not necessary to strain the definition to impose liability on someone in receipt of some of the rents indirectly through a manager. Such a person would ordinarily (or often) be liable as within the definition of a “person managing” the HMO. In this case, the FTT made no findings that the Appellant was a “person managing”, and the Council made no cross-appeal on that issue.
8. The case law cited by the FTT did not support its conclusions.

The Upper Tribunal therefore allowed the appeal and cancelled the penalty.

Conclusion

This is an important ruling for enforcement against unlicensed HMOs. It confirms that “rack-rent” for the purposes of s. 72 is assessed factually, not on the hypothetical basis of the “lawful” use of the property. It also avoids complicated and expensive planning and valuation disputes in the FTT as to the “lawful” use of the property and the full net annual value of such a use.

For councils, it means that enforcement should be directed at the person receiving at least two thirds of the income from the HMO - or the owner should be pursued under the separate “person managing” definition in section 263(3).

Harley Ronan acted for the Appellant.