An Upper Tribunal ruling has overturned a £24,500 civil penalty issued by Waltham Forest Council, after finding the landlord was not legally in control of a property being run as an unlicensed HMO.

The case turned on the meaning of “rack rent” under section 263 of the Housing Act 2004. The landlord, Dr Noshaba Khiljee, received a fixed £3,400 a month from a management company under an agreement that barred HMO use. That company then ran the property as an HMO and collected much higher rents after the licence had expired.

Tribunal says actual use matters in rack rent cases

The First-tier Tribunal had backed the council’s penalty by estimating what the house would have been worth as a single-family let. But the Upper Tribunal said the test had to be applied to the building’s actual use at the time – in this case, an HMO producing between £7,000 and £10,000 a month.

That mattered because the law links control to whether a person is receiving at least two-thirds of the relevant rental value. On the Upper Tribunal’s reading, the landlord was not. The penalty was therefore set aside.

For landlords, the ruling does not weaken HMO licensing law. It does, however, draw a clearer line around who councils can pursue when a management arrangement goes wrong. Owners who hand over a property under a fixed-rent deal may still face scrutiny, but councils will now have to show that the legal test matches the property’s real use rather than a hypothetical alternative.

Judge Johns KC, sitting in the Upper Tribunal (Lands Chamber), concluded that the rack rent calculation had to be based on the premises as they were actually being used, not on the rent that might have been achieved if the property had been let as a single dwelling.

This follows Residential Landlord’s report on Charnwood rewriting selective licence terms after a tribunal challenge, and its recent coverage of Propertymark’s call for clearer and fairer housing offence rules. Together, the cases show how much now hangs on fine legal definitions once councils move from policy to enforcement.

Implications for landlords using guaranteed rent and management deals

Landlords using guaranteed-rent or rent-to-rent structures should not treat the ruling as a shield. If the paperwork is loose, the owner may still be exposed on other grounds, especially where licensing, safety standards or planning controls have been ignored.

• Check agreements clearly ban unauthorised HMO use
• Set inspection rights and reporting duties in writing
• Act quickly if occupation changes from single let to multi-let

The wider message is practical rather than political. Councils remain active on HMO enforcement, but this decision may make them more careful about who they target where an operator sits between the owner and the occupiers. That matters for professional landlords outsourcing day-to-day management.

The case is summarised in Estates Gazette’s note on Khiljee v Waltham Forest London Borough Council, which records the Upper Tribunal citation as [2026] UKUT 171 (LC).

Opinion

This looks like a technical ruling, but technical points are exactly where expensive landlord penalties are won and lost. Councils will not welcome the judgment, yet they may have brought some of this on themselves by stretching HMO control tests too far. Landlords using management companies should read it as a warning to tighten contracts before the next dispute lands.