Unlicensed HMO Penalties: Selling a Shared House Over Its Licence Limit
This is a made-up example. The people, places and numbers are not real.
HMO fines now reach £40,000 and rent repayment orders two years' rent. How one landlord made his shared house legal for six and sold it on its real income.
- Category
- Regulatory: an HMO licensed below its actual use
- Property
- Five bedroom Victorian semi let as a shared house
- Area
- East Midlands university town
- Main problem
- Licence for five, seven living there, two rooms under the minimum size, no planning for seven
- Time to complete
- 5 months
- Value added
- About £14,500
01The Situation
The fines for an unlicensed HMO, or one with more people than its licence allows, went up on 1 May 2026. A house in multiple occupation (HMO) is a home shared by three or more people from more than one household, who share a kitchen or bathroom. If yours is over its limit and you want to sell, you can, but buyers price the problem in unless you fix it first.
Graham Holt had let a five bedroom semi as a shared house since 2009. The council's licence allowed five people. In 2022, when rents were rising, his builder split the large ground floor back room into two and turned a box room at the top of the stairs into a seventh bedroom. Seven people now lived there, each paying £560 a month including bills.
By 2026 Graham was 67 and wanted out. His agent warned him that any buyer's solicitor would compare the licence with the tenancy agreements, and the house would not get past the first round of questions.
02The Diagnosis
Which Houses Need a Licence
Mandatory licensing in England covers any HMO with five or more people from two or more households, whatever the number of storeys. Councils can also bring in additional licensing for smaller shared houses, usually three or four people, across a whole area. Some also run selective licensing for ordinary lets. A licence lasts up to five years.
The Offences
Under section 72 of the Housing Act 2004 there are three. Running an HMO that needs a licence and does not have one is section 72(1). Knowingly letting more people live there than the licence allows is section 72(2). Breaking a licence condition is section 72(3). Graham was committing the second.
Prosecution or a Fine from the Council
In court, the fine has no upper limit. Instead of prosecuting, the council can give a civil penalty of up to £40,000 per offence, for offences from 1 May 2026, when the Renters' Rights Act 2025 changes started. It used to be £30,000. A conviction can lead to a banning order, and the council can decide the landlord is not a fit and proper person, which follows him to every other house he owns.
Rent Repayment Orders
If a house has no licence at all, the tenants or the council can ask the tribunal to make the landlord pay back rent. For offences from 1 May 2026 that is up to two years' rent, up from 12 months, and no conviction is needed. It can now be made against a landlord further up the chain too. Running over the limit of a licence is not on the list for rent repayment, so Graham's risk was the fine, prosecution and losing the licence.
The Defences
For a house with no licence, it is a defence that a valid application had been made and was still being dealt with. For being over the limit, the only defence is a reasonable excuse. Graham did not have one.
Rooms Too Small to Sleep in
Licence conditions in England set minimum bedroom sizes: 6.51 square metres for one adult, 10.22 for two, 4.64 for a child under 10. Floor where the ceiling is under 1.5 metres high does not count. The split rooms measured 5.9 and 6.2 square metres. The box room was 6.6, so it was fine on size.
Planning as Well as Licensing
A shared house for three to six people is use class C4. Seven or more unrelated people needs its own planning permission. The town brought in an Article 4 direction in 2013, so new shared houses of any size need permission. Graham's house was a shared house before that date, so six was lawful. Seven was not, and the council's policy turns down new large shared houses in streets where more than 10 per cent of homes are already shared.
No Quick Way Out by Time
Since 25 April 2024, a planning breach in England only becomes safe from action after 10 years, not four. Three years of seven people gave no protection.
Tenants Who Could Not Just Be Asked to Leave
Since 1 May 2026 every tenancy is periodic and section 21 is gone. Bringing the numbers down had to happen by agreement, or by a court-backed ground, not by a simple notice.
03The Value
Buyers who know shared houses value them on the rooms that can legally be let, not on the rooms in use. As a family house it was worth about £360,000.
Seven Rooms Today
Two of the rooms could not legally be let, so any buyer priced on five, with a fine to come. Offers were around £340,000.
Six Rooms, Legal, at Today's Rents
Six rooms at £560 is £40,320 a year. Less bills of £8,600, management at 12 per cent, maintenance and safety checks of £3,200 and 5 per cent for empty rooms, about £21,700 a year is left. At the 5.7 per cent return local buyers expected, that is about £380,000.
Six Rooms at Local Rents
Comparable rooms let for £640 a month. Six rooms at £640 is £46,080 a year, leaving about £26,450 after the same costs. At 5.7 per cent that is about £464,000.
Most of the gap between £340,000 and £464,000 came from making the house legal for six, which only the owner could do before selling. The rest came from rents, which only a patient buyer could get, because rent can now only go up once a year by a section 13 notice, and the tenant can ask the tribunal to check it.
04The Execution
Month 1, Advice First
Graham paid a housing solicitor £1,200 to look at the licence, the planning history and the tenancies before anyone spoke to the council. The advice: get down to six by agreement, fix the rooms and the facilities, then ask the council to change the licence.
Month 1, the Tenants
One of the two tenants in the small rooms had already given notice to leave for a job. The other was offered the new larger room at the same rent once it was ready, and signed a new agreement. Nobody lost their home and no notice was served.
Months 2 and 3, the Works
Taking out the partition in the back room made one room of 12.1 square metres, for £1,900. The council's standard asks for a second bathroom once a house has more than five people, so a shower room went into part of the landing for £9,800. Fire doors with closers on every bedroom and the kitchen, and an upgraded linked alarm system, cost £4,600.
Month 3, the Licence
Graham applied to change the licence to six people. The fee was £450. The council inspected, measured every room and issued the changed licence four weeks later. It could still have fined him for the years over the limit. It chose not to, and no landlord should count on that.
Months 2 to 5, the Sale
Details went to buyers whose mandates covered shared houses with licensing problems. An operator with nine shared houses in the town offered £410,000, based on six legal rooms at current rents plus some of the rent rise, exchanging once the changed licence was issued.
What the Buyer's Solicitor Asked for
The licence and its conditions, proof the house was a shared house before 2013, the fire risk assessment, the gas safety record, the electrical report, the alarm test records, every tenancy agreement and proof each deposit was protected.
The Licence Does Not Move with the House
Section 68(6) says a licence cannot be passed to another person. The buyer applied for their own before completion, so a valid application was in place on the day they took over. That is a defence while the council decides.
If the Buyer Had Wanted a Family Home
A landlord selling to someone who will stop the shared use can ask the council for a temporary exemption notice, which lasts up to three months and can be renewed once. Each tenant would still need to leave by agreement or under ground 1A, with at least four months' notice.
After Completion
The buyer redecorated rooms as tenants changed, served section 13 notices at local rents over the next year, and every room settled at £640.
05The Outcome
Bought for
£410,000
Spent
£39,500 on stamp duty at the higher rates (£31,000), legal fees and a survey (£2,500) and redecorating (£6,000)
Worth After
About £464,000, licensed for six and let at local rents
Value Added
About £14,500
Graham spent £17,950 on advice, works and the licence fee, and sold for £70,000 more than the cash offers he had been getting. Most of the value went to the seller, because he fixed the problem before he sold. Five of the seven tenants stayed on, now in a house with a second bathroom and proper fire doors.
The Lessons
- Fines for HMO licensing offences are now up to £40,000 each, and a house with no licence can cost up to two years' rent back. Fix it before anyone complains.
- Count rooms the way the council does: measure each one against 6.51 and 10.22 square metres, and ignore floor under 1.5 metres high.
- Check planning as well as the licence. Seven or more people needs its own permission, and in an Article 4 area even six may not be lawful unless the use started before the direction.
- Buyers pay for legal rooms only. Fixing the licence before you sell is usually worth far more than it costs.
- The licence does not pass to the buyer. Make sure they apply before completion.
- This is general information, not legal advice. Check your own position with a housing solicitor.
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