Guidance on setting fees for HMO and Selective Licensing
This guide focuses on the way in which local authorities can set the fees payable by landlords for licences for houses in multiple occupation and selective licences, along with any other licensing or registration scheme which may be applicable such as Rent Smart in Wales. These fees must be related to the cost of operating the scheme. They cannot be picked out of the air. Potentially, the cost could include things such as staff time, premises, travel, publicity and materials, such as stationery, and equipment needed, such as use of telephones and computers. Additionally, within local authorities there are often central re-charges such as the cost of the Finance Department relative to the scheme, human resources or legal services. It appears that it is in order for these overheads to be included provided they directly relate to processing the application. Any costs that they cannot recover from the licence holders will have to be met from their general funds, i.e. the Council Tax payer.
The component parts of running a licensing scheme can be broken down into the following:
- Set up costs.
- Actual processing of applications.
- Monitoring licence holders.
- Enforcing against unlicensed landlords. This is regarded as being of benefit for licence holders to avoid unlicensed operators undercutting those with licences.
Questions also arise as to when and how fees can be charged. There are also potential issues about challenging fees and what happens if fees are overpaid.
Firstly, you have to look at the legislation setting up the scheme to see how far this authorises the recovery of these fees. There are also certain restrictions on fees which can be recovered for authorisation schemes under the European Services Directive (ESD). This may cease to apply in due course because of Brexit but it still in force in the meantime.
Fixing fees has been brought to the fore as the Supreme Court has now decided that the ESD does not prevent the recovery of enforcement costs against unlicensed operators. At the same time the Court has confirmed that the licensing authority must not make a profit. Fees must be reasonable and proportionate.
HMO licensing and selective licensing fees are different to most fees charged by authorities, which are normally payable annually. Licensing schemes run for five years. Furthermore, although the mandatory HMO licensing scheme is ongoing, additional licensing schemes and selective licensing schemes are set up for a fixed period of five years and, if they are to carry on, a new scheme has to be set up for a further four years. This can give rise to uncertainties around the charging of fees payable under the regime.
We consider set up fees from the initial creation of a scheme, to be unrecoverable, but there is no Court decision on this point.
Fees must be reasonable and proportionate. It is for the Council to fix the fees; not the Courts. The Courts can and will lay down the correct legal principles which the Council must follow when fixing fees. The way to challenge a fee is by way of an application for judicial review but the Court of Appeal indicated that the three month time limit does not apply. Claims for overpayments of fees are a restitutionary remedy.
We now have the decision of the Supreme Court overturning the earlier decisions by lower Courts. Previously, Westminster City Council could not recover the costs of enforcement against non-licensed sex shops as part of the licence fee. This is the case of Hemmings v Westminster City Council. The saga still has a way to go. Due to the Supreme Court decision, enforcement costs can now, in principle, be recovered from HMO and selective licence holders. In any event the costs of monitoring licence holders can be included in the licence fee. The Supreme Court referred a question relating to the timing of charging for enforcing the scheme against unlicensed persons to the European Court of Justice (ECJ). The ECJ has now issued its judgment - see below. This now goes back to the Supreme Court who will have to give a final ruling in the light of ECJ decision.
The Courts below had upheld the right of the Council to recover the cost of processing the application and the cost of monitoring licence holders. This was not challenged before the Supreme Court. Instead, there was a challenge under the European Services Directive as to the recoverability of the cost of pursuing unlicensed operators. In the Westminster case the annual cost to each licence holder was around £2,700 for processing the application and some £27,000 per annum for enforcing the scheme against those without a licence. In arriving at their decision, the Supreme Court drew a distinction between the actual licensing process on the one hand and fees which were then payable as a condition of holding a licence which would include enforcement costs against unlicensed operators. It held that enforcement against unlicensed operators was for the benefit of those who held a licence.
Domestic law allowing fees to be charged
To decide whether an item can be included as part of the licence fee you must first look at whether domestic law in the United Kingdom allows fees to be recovered. If it does, then the European Services Directive may restrict this right of recoverability. In the case of sex establishments, the relevant legislation states that the applicant for a licence shall pay a reasonable fee determined by the appropriate authority.
In the case of HMO and selective licensing (including discretionary HMO licensing) the relevant provision states that "when fixing fees the local authority may take into account all costs incurred by the authority in carrying out their functions under this Part". This means that the part of the Act which deals with HMO or selective licensing is the appropriate basis for establishing fees. There is a separate Part for each.
It is clear that, as the legislation falls under a separate Part of the Act, the costs of administering the Housing Health and Safety Rating System (HHSRS) are not recoverable as part of the licence fee.
For both HMO and Selective Licensing, the Housing Act provides that applicants must comply with such requirements as the authority may specify. Furthermore, the authority "may, in particular, require the application to be accompanied by a fee fixed by the authority". There is provision for the Government to make regulations fixing a maximum fee but no such regulations have ever been made. We take the view that in the case of additional HMO licensing schemes each scheme is separate and stand alone when it comes to fixing fees. Likewise for each selective licensing scheme.
There seems to be no argument that the licence fee (for both HMO and selective licensing) under domestic law can include action against unlicensed persons because this is clearly one of the functions of the Council under the legislation.
The EU Services Directive
The Supreme Court looked at the underlying purpose of the Directive to decide whether it restricts recoverability; namely preventing national Governments, authorities and professional bodies putting up barriers to the establishment of businesses.
The relevant part of the Directive states "Any charges provided for by a competent authority which applicants may incur under an authorisation scheme must be reasonable and proportionate to the cost of the procedures and formalities of the scheme and must not exceed the cost of those procedures and formalities". The Supreme Court accepted that enforcement costs against unlicensed operators fall within this prohibition but then sidestepped it.
The argument in the lower Courts had been about whether the cost of enforcement against unlicensed operators could be said to be part of "the cost of the procedures and formalities of the scheme". The Supreme Court got around this issue by holding that they related to the stage after authorisation is granted.
The Supreme Court had no hesitation in deciding that the enforcement costs against unlicensed operators are not part of the cost of the procedures. What the Supreme Court said was that this provision was not concerned with subsequent fees paid (e.g. annually) for the possession, retention or renewal of a licence, once the authorisation stage is satisfactorily past. Instead, fees of this nature are payable by successful applicants for the licence so they could be charged for this cost. The Supreme Court said, therefore, that there was nothing in the relevant provision of the European Services Directive which "precludes a licensing authority from charging a fee for possession or retention of a licence, and making the licence conditional upon payment of such fee". As a result, fees merely had to be proportionate. The Supreme Court said "There is no reason why it (i.e. the fee) should not be set at a level enabling the authority to recover from the licensed operators the full cost of running and enforcing the licensing scheme, including the costs of enforcement of proceedings against those operating establishments without licences".
Fees for enforcement are only payable by successful applicants
However, there is a rather interesting side show which emerges. Only "successful" applicants can be made to pay the fee for enforcement against unlawful operators. Unsuccessful applicants cannot, although they can of course be made to pay the fee for processing their applications. These can be made non-refundable if the application is refused.
The Supreme Court upheld the principle that only successful applicants would have to pay the enforcing costs against non-licensed operators. There is a case to argue that this should extend to the cost of monitoring existing licence holders.
Westminster City Council operated a scheme under which the unsuccessful applicant was refunded the element relating to enforcement against unlicensed operators. Two different types of scheme were identified:
Type A - applications for licences are made on the terms that the applicant must pay -
- On making the application the costs of the authorisation procedures and formalities and
- On the application being successful a further fee to cover the cost of enforcement of the licensing scheme against unlicensed operators.
Type B - applications for licences are made on the terms that the applicant must pay -
- On making the application, the cost of the authorisation procedures and formalities
- At the same time, on the basis that it is refundable if the application is successful, a further fee to cover the cost of the running and enforcement of the licensing scheme.
Westminster City Council's application for licences were Type B.
The way in which local authorities currently operate is that the full licensing fee is payable irrespective of the outcome. However, they do not usually seek to recover these enforcement costs against unlicensed landlords at the moment
The Supreme Court held that the relevant provision of the Directive under consideration did not prohibit a Type A scheme. It said that once a licence is successfully obtained, any renewal of a licence may be subject to payment of a further fee to cover enforcement costs. Once accepted, the Directive permits a licensing authority to levy a fee on a successful applicant, in respect of the possession of retention of a licence, an authority can recover the full cost of running an enforcement scheme.
However, in the case of Type B, there was a difference of opinion among the Judges, as to whether a requirement to pay upfront, was permissible, even when it was refundable or incurred for the benefit of successful applicants. The Supreme Court categorised this as a requirement which attaches to the application not to its success and therefore Type B schemes were referred to the European Court of Justice to decide whether this infringes the relevant provision of the Directive.
HMO/Selective licensing fees and enforcements against unlawful operators.
All of this raises a rather interesting question in relation to HMO and selective licensing, particularly bearing in mind that unusually this is a five year licence, normally, relating to the timing of payment towards the cost for enforcement against unlicensed operators.
Firstly, it would seem that it is now mandatory for a local authority to specify separately and properly calculate on the one hand the cost of processing the application and on the other enforcement costs against unlicensed operators. The second element is not payable by unsuccessful applicants.
Secondly, there is a question mark as to whether the drafting of the Housing Act 2004 allows the local authority to recover the second element for enforcement costs if it only has to be paid once a licence has been granted? In light of the ECJ's decision this may not be possible. The Housing Act 2004 says that the local authority may require the fee to accompany the application. It could be argued that there is no other recovery provision. The Supreme Court talks of payment of a fee for enforcement against unlicensed operators being a condition of the grant of the licence. The Housing legislation provides that a licence may include such conditions as a local housing authority consider appropriate for regulating the management use and occupation of the house. You could argue that this does not extend to matters relating to fees. Regrettably, however, there is a way around this for the Government because the Fourth Schedule of the Act which prescribes mandatory licence conditions can be amended by a Ministerial Order so that such a condition could be added.
Make up of the fee
Normally, fees for HMO and selective licensing can be broken down into the following:
- Set up costs for the creation of the scheme where it is an additional HMO licensing scheme or a selective licensing scheme.
- Fee for actual processing of the application
- Overheads (central costs, rent for offices, etc)
- Monitoring costs for supervising existing licence holders
- Cost of enforcement against unlicensed operators (now permissible in the light of the Supreme Court decision).
We would argue that the set up cost predates the scheme so it cannot even be said to be part of the authority's functions. These functions only arise once the scheme is set up. This may be supported by the Supreme Court's view because they clearly look at individual stages in their judgment. It can also be argued that they have nothing to do with the procedures and formalities of the scheme, again because they pre-date the scheme.
The view of the RLA had been that in determining fees, the cost of processing an application for a licence would not include costs other than those incurred by the local authority in connection with the processing of the application. They could therefore not exceed what was needed to cover the actual costs of the leading up to the issue of the licence and would not extend to overheads. This view was based on a judgment of the European Court over authorisations issued in Spain to establish shopping centres. On the basis of this particular ruling, the fees should not have included the Council's overheads.
However, it is apparent from the Hemmings decision that the European Court itself was not prepared to follow this case. Instead, it has cited with approval another case in Denmark in relation to the setting of fees to register companies. Although this is not directly a decision under the Services Directive it appears to allow overheads to be included so long as these directly relate to processing applications for licences. The European Court has now said that the licensing authority is entitled to take into account the salary costs and various material costs necessary for carrying out the licensing transaction. In addition, they are also entitled to take into account a proportion of the authority's overheads which can be attributed to those costs.
At the same time the European Court has ruled that costs taken into account may not include the expenditure linked to the local authority's general supervisory activities as they are termed.
The European Court have now expressly prohibited upfront fees, accompanying the application or renewal of a licence, which relate to the management and enforcement of the scheme. This applies even where that portion of the application fee is refundable. This would include upfront fees for enforcing against unlicensed landlords for example.
Questions will arise as to the extent to which costs from other departments, such as the Council's legal department, can be included in the licence fee. Clearly the direct salary costs of the Council's staff engaged in the issue of the individual licences can be included, based on the time spent, together with the material costs such as producing the paperwork involved. It also seems that, in the case of support/administrative staff, a proportion of the costs directly related to the licensing process may also be included. Likewise, the Court now seems to have given its blessing to the incorporation of a reasonable proportion of premises costs, telephone charges, computers and the like insofar as these can be directly attributed to dealing with the applications for licences and the issue of licences.
Importantly, however, we must now wait to see what is the form of the final judgment made by the Supreme Court in the UK. The EU Court Judgment relates to a question referred by the UK Supreme Court: is an upfront charge relating to the enforcement of this scheme permissible, even if it is refundable in the event of the licence application being refused? The Supreme Court must now give a further judgment to implement the EU Court preliminary ruling.
All of this may become academic in time because of Brexit. The current UK regulations implementing EU law relate to the single market in services. If the UK leaves the single market then the Services Directive on which the UK regulations are based may well be revoked. In that case, the restrictions imposed in the Directive on calculating fees will no longer apply.
Scrutiny of fees
Clearly, all of this means that there has to be much greater scrutiny of local authority costs and procedures, even though it is now clear that, in principle, the costs in relation to unlicensed operators are recoverable.
In light of this judgement, local authorities will surely look at their charges again and seek to increase them to cover enforcement costs. Obviously this can apply to new applications but could it be back dated? The HMO/selective licensing regime is unique in the length of the period for which the licence is granted. The vast majority of other licences are granted on an annual basis and therefore it is quite easy for local authorities to alter charging; not so necessarily for HMO and selective licensing.
It is clear that fees should be transparent so that they can be properly scrutinised.
There is also an issue as to whether the monitoring element for existing licence holders should be regarded as part of the original authorisation process or something separate. If it is separate, the question will then arise as to the point in time at which this is recoverable bearing in mind that it should only payable by successful licensing holders.
Withdrawal of applications/early termination of licences
We refer to successful and unsuccessful applications throughout this guide. However, the reality is that there are not many unsuccessful applications, although it is not uncommon for applications to be withdrawn. We have frequent complaints that if a licence is cancelled part way through, e.g. because the property was sold, there is no refund of fees. Should a licence holder have to pay fees for ongoing enforcement work against licence holders, or indeed monitoring costs, once the licence has come to an end?
Variations of licences
Some authorities seek to enforce charges for variations of licences. There is a First Tier Tribunal Case holding that there is nothing in the wording of the legislation which allows for it.
Surpluses and Deficits
In the Hemmings case the lower Courts have indicated that any surpluses or deficits can be carried forward and charged for or credited subsequently. However, it would appear that if there is a challenge and fees are found to have been overcharged there must be a reckon up and a refund at that juncture. Discretionary licence fee schemes set up on an individual basis may also have issues. Specifically, it is unclear whether any surpluses or deficits can be carried from one scheme to another as they are separate schemes. A new scheme is created if the discretionary licensing scheme runs on. We believe at that stage a refund could be claimed and the Council would not be able to recoup any shortfall.
Even though a Council may have overestimated what the fees should be so long as that is a realistic estimate it appears that this is acceptable. However, the surplus should be carried forward and subsequent fees fixed to give the benefit of it. This would apply to mandatory HMO licensing which could perhaps be regarded as a continuous scheme, but not necessarily selective or additional HMO licensing fees because, as already indicated, each could be said to be a stand alone scheme. Equally, a deficit could then be claimed.
Whilst the Westminster Case answers one issue it undoubtedly means that landlords will have to pay higher fees. It does however leave a number of issues unresolved.