In her article entitled 'Out of Control? “Rack-Rent” and Liability for the Unlicensed HMO', Trinity Housing, Property and Public Law barrister, Alice Richardson, considers the Upper Tribunal decision of Khiljee v London Borough of Waltham Forest [2026] UKUT 171 (LC).
Rent-to-rent and guaranteed rent arrangements have become a common feature of the private rented sector. The owner hands the property to a company in return for a fixed monthly payment, and the company lets it on. Where the property is then operated as an unlicensed house in multiple occupation (HMO), the question of who is liable to prosecution or a civil penalty turns on the definitions of “person having control” and “person managing” in section 263 Housing Act 2004.
In Khiljee v London Borough of Waltham Forest [2026] UKUT 171 (LC) the Upper Tribunal (Lands Chamber) considered how the “rack-rent” is to be assessed where the property’s actual use is unlawful, and held that it falls to be assessed on the property’s actual use as an HMO rather than on a hypothetical lawful use.
The statutory framework
By section 72(1) of the 2004 Act, a person commits an offence if they have control of or manage an HMO which is required to be licensed but is not. The local housing authority may prosecute, or, in England, impose a financial penalty under section 249A as an alternative. Both routes require the respondent to fall within one of the two definitions in section 263.
A “person having control” is the person who receives the rack-rent of the premises, whether on their own account or as agent or trustee, or who would receive it if the premises were let at a rack-rent (section 263(1)). “Rack-rent” means a rent not less than two-thirds of the full net annual value of the premises (section 263(2)). A “person managing” is, in broad terms, an owner or lessee who receives the rents from the occupiers, directly or through an agent, or who would receive them but for an arrangement under which another person receives them instead (section 263(3)).
The practical approach to rack-rent under section 263(1) is now well established. In Global Guardians Management Ltd v Hounslow LBC [2023] EWCA Civ 1243 the Court of Appeal confirmed that the sums actually received from the occupiers may be used as the evidence from which the rack-rent of the premises is found, without the need for separate valuation evidence. In that case, however, the property’s actual use and its lawful use did not diverge. What has not previously been decided was how the definition applies where they do: where the property is in fact operated as an HMO, but its only lawful use, absent a licence and planning permission, would be as a single dwelling let for considerably less. That was the question in Khiljee.
The facts
Dr Khiljee owned a house in Walthamstow. By a written agreement dated 22 April 2019 she engaged a management company, We Invest Ltd (“WIL”), to manage it. WIL was to collect all rental income and pay her a fixed £3,400 per month, and it covenanted at clause 3.7.7 that the property would not be let as an HMO.
Despite that covenant, WIL let the property as an HMO and collected between £7,000 and £10,000 per month from the occupiers. The council had granted a one-year HMO licence in February 2022, the short period reflecting the absence of planning permission for HMO use, but the HMO use continued after the licence expired. In December 2024 the council imposed financial penalties on both WIL and Dr Khiljee. Her penalty was £24,500.
The FTT decision
Dr Khiljee appealed to the First-tier Tribunal, contending that she was neither a person having control nor a person managing, and, in the alternative, that the contractual prohibition on HMO use gave her a reasonable excuse. The FTT upheld the penalty, reduced to £19,600. Its route to liability was a novel one. It held that the rack-rent calculation had to be based on the lawful use of the premises. Let lawfully as a single family dwelling, the property would command a maximum of around £5,000 per month. Dr Khiljee’s guaranteed £3,400 represented 68 per cent of that figure, and so at least two-thirds of it, with the result that she was in receipt of the rack-rent and a person having control. To hold otherwise, the FTT reasoned, would allow her to benefit from her own wrongdoing. The FTT also rejected the reasonable excuse defence, taking the view that she should have ensured WIL was acting in accordance with her instructions and lawfully.
The appeal
Dr Khiljee was granted permission to appeal on the single ground that the FTT was wrong to treat “rack-rent” as the rack-rent of the property let as a single dwelling, being its lawful use. The scope of the appeal was therefore narrow. Dr Khiljee did not appeal the finding on reasonable excuse, and the council did not seek to uphold the penalty on the alternative basis that she was a person managing (at [7]-[8]).
His Honour Judge Johns KC allowed the appeal and set aside the penalty. Applying the practical approach in Global Guardians and the fuller discussion of Fancourt J in the same litigation in the Upper Tribunal ([2022] UKUT 259 (LC)), together with Urban Lettings (London) Ltd v Haringey LBC [2015] UKUT 104 (LC), the Judge held that the sums actually received from the occupiers are the evidence from which the rack-rent of the premises is found (at [12]). On that basis, what Dr Khiljee received under the agreement was only just over two-thirds of the notional rack-rent of the property even leaving HMO use out of account, and was well below two-thirds of the sums actually being collected.
The Judge gave a series of reasons for rejecting the FTT’s hypothetical approach. The subject of the section 72(1) offence is the HMO, and it would be surprising if the property’s character as an HMO were ignored when section 263 asks who controls it; had Parliament intended that the reality be disregarded, it could be expected to have said so expressly (at [14]-[15]). The hypothetical approach was also unworkable. It would require valuation evidence in many cases to decide whether a person was in receipt of the rack-rent, with liability for a serious offence potentially turning on a few hundred pounds’ difference in monthly value, and would open up satellite questions about planning permission, certificates of lawful use and the range of uses permitted under the Use Classes Order. That was the very uncertainty which the two-thirds definition of rack-rent was designed to avoid (at [16]).
The council’s construction also required two different rack-rents to exist simultaneously for the same premises: the actual receipts from the occupiers, founding WIL’s liability, and a hypothetical single-dwelling valuation, founding Dr Khiljee’s. The Judge could find no warrant for that in a section which refers to “the” rack-rent and “the” full net annual value (at [17]). Nor did assessing the rack-rent by reference to the sums actually received allow Dr Khiljee to profit from her own wrong: the relevant wrong was being in control of an unlicensed HMO, and it was WIL, not Dr Khiljee, that enjoyed the fruits of the HMO use (at [18]). The approach did not risk there being no person in control, a factor which had weighed with the tribunals in Urban Lettings and Global Guardians (at [19]). And an owner receiving payments indirectly through a manager would “ordinarily, or often” be liable instead as a person managing under section 263(3) (at [20]).
Finally, Rawlance v Croydon Corporation [1952] QB 803, on which the FTT had relied, did not support its conclusion; there the Court of Appeal had applied the definitions to the factual position, a rent-controlled rent, rather than to a hypothetical one (at [21]).
Comment
Subject to any appeal, the decision is a useful working-out of a definition that underpins prosecutions, civil penalties, rent repayment orders and, indirectly, banning orders. Three points are worth drawing out.
For local authorities, the identification exercise under section 263 must follow the actual flow of money. Where a guaranteed rent falls below two-thirds of the sums genuinely collected from the occupiers, the owner is unlikely to be a person having control. The “person managing” definition remains available, and Khiljee is a reminder to consider it, and to plead it where appropriate, from the outset: the council’s decision not to advance that alternative on appeal was fatal to the penalty (at [8], [20]). The investigatory powers in section 235 of the 2004 Act are the natural means of establishing who receives what.
For owners and their advisers, the decision is only a partial comfort. Falling outside the “person having control” definition does not mean escaping liability, because section 263(3)(b) is directed squarely at the owner who would receive the occupiers’ rents but for a diversion arrangement. It is also worth noting what did not succeed below. The FTT rejected the reasonable excuse defence notwithstanding WIL’s express contractual promise not to operate an HMO, on the basis that Dr Khiljee should have ensured her manager was acting lawfully, and that finding was not appealed. A prohibition in the management agreement, without any monitoring of compliance, is unlikely to be enough.
More generally, the case is a further illustration of the tribunals’ insistence that liability in this field follows the economic reality rather than the labels the parties have adopted. It sits alongside Global Guardians on property guardians and the recent line of authority on the meaning of “person managing”, including Cetin v Epping Forest DC [2025] UKUT 196 (LC) and Next Location Co Ltd v Haringey LBC [2025] UKUT 279 (LC).
As local authority enforcement continues to expand under the Renters’ Rights Act 2025, disputes over the correct target of enforcement action are only likely to become more frequent.
It is worth noting that at the time of writing, the London Borough of Waltham Forest has applied for permission to appeal to the Court of Appeal, which has not yet been determined.
Alice Richardson is a barrister at Trinity Chambers and the author of A Practitioner’s Guide to Housing Licensing and Enforcement. She frequently advises and represents local authorities, social and private landlords, agents and tenants at all stages of housing licensing, from designation through to prosecutions, appeals and judicial review.