From HMOs to licences to occupy: sham or legit?

When the Renters’ Rights Act came into force on 1 May 2026, fixed term tenancies and Section 21 “no fault evictions” were abolished, and landlords lost the ability to require tenants to pay rent in advance. This has caused some operators of HMOs to look at the “licence to occupy” approach as a possible loophole or escape route.

Whilst on paper a genuine licence to occupy sits outside the Housing Act 1988, as amended by the Renters’ Rights Act, the word “genuine” is key.

Unless the arrangement truly lacks exclusive possession and is run with service akin to a hotel, the licence is likely to be treated as a tenancy, with the licence being seen as a sham.

To add to this, the Digital Markets, Competition and Consumers Act 2024 (DMCCA) came into force on 6 April 2025, replacing existing Consumer Protection from Unfair Trading Regulations 2008 (CPUTRs), and introduced heavy civil penalties for unfair commercial practices.

This blog post explores what a “licence to occupy” means, when it tips into a sham, and why the legal and planning risks are high for investors who are considering this approach.

>> Related Post: Guide for HMO landlords

>> Related Post: Guide to the successful management of HMOs

What is a licence to occupy?

A licence to occupy gives someone permission to occupy premises for a period of time in return for rent, but they do not have the right of exclusive possession. It does not give rights under the Housing Act 1988, and is not an “assured periodic tenancy” under the Renters’ Rights Act.

Classic examples are hotel rooms, hostels and a lodger living in a house with a resident landlord. The owner or someone acting on their behalf can enter at will, move guests between rooms and deliver regular services such as cleaning and linen.

The leading authority is the 1985 House of Lords case Street v Mountford. This was a period when the Rent Act 1977 was in force, before the introduction of the Housing Act 1988.

A certain Mr Street granted Mrs Mountford a licence to occupy two furnished rooms in a house in Boscombe, a suburb of Bournemouth, subject to termination by 14 days’ written notice. The agreement was called a “licence” and the money payable by Mrs Mountford a “licence fee”. The agreement contained the wording: “I understand and accept that a licence in the above form does not and is not intended to give me a tenancy protected
under the Rent Acts”.

Lord Templeman confirmed that labels and explicit exclusion clauses are irrelevant: “Words alone do not suffice. Parties cannot turn a tenancy into a licence merely by calling it one”. 

What counts is the objective intention inferred from the rights that were actually granted, and not what the document says.

What is an assured periodic tenancy?

The Renters’ Rights Act amended the Housing Act 1988 on 1 May 2026, and created a new assured tenancy under Section 4A HA88, which we refer to as an assured periodic tenancy or APT.

Here is an explanation of what constitutes an APT:

• The tenant is one or more individuals (not a company), and one of whom occupies a “separate dwelling” as their “only or principal home” (Section 1 Housing Act 1988).
• The landlord is not resident, e.g. where the tenant is a lodger in the landlord’s house and they share facilities.
• It is not a holiday let, i.e. a “tenancy the purpose of which is to confer on the tenant the right to occupy the dwelling-house for a holiday”.
• The annual rent is not over £100,000.
• It is not a low rent tenancy, i.e. the annual rent is more than £1,000 in London and £250 outside of London.
• It is not a long lease.

This is subject to the proviso that the tenant must have exclusive possession, and have a right to quiet enjoyment.

>> Related Post: Guide to the Renters’ Rights Act Assured Periodic Tenancy

Licence to occupy vs tenancy: what’s the difference?

The difference between a licence to occupy and an assured periodic tenancy comes down to who controls the accommodation, not what the paperwork says.

If an arrangement looks like the left-hand column but the paperwork calls it a licence, the courts will consider it a sham licence, and treat it as a tenancy. This means that the rules in the Renters’ Rights Act / Housing Act 1988 will need to have been complied with.

The label on the agreement itself counts for nothing: what matters are the rights actually granted.

What does “exclusive possession” mean?

In Street v Mountford, Lord Templeman said: “The tenant possessing exclusive possession is able to exercise the rights of an owner of land, which is in the real sense his land albeit temporarily and subject to certain restrictions. A tenant armed with exclusive possession can keep out strangers and keep out the landlord unless the landlord is exercising limited rights reserved to him by the tenancy agreement to enter and view and repair”.

It contrasts with the position of someone with a licence to occupy: “A licensee lacking exclusive possession can in no sense call the land his own and cannot be said to own any estate in the land. The licence does not create an estate in the land to which it relates but only makes an act lawful which would otherwise be unlawful”.

With a licence to occupy, the landlord or manager doesn’t provide services that require unrestricted access such as changing bed linen and daily housekeeping.

In an HMO, an occupier will usually have exclusive occupation of their bedroom and perhaps an en suite bathroom. They will be able to lock the door to their bedroom and the landlord or manager could only enter if there was an emergency. The landlord would not be able to reallocate them to another room without their permission.

They will not have exclusive possession to the common parts and landlord may arrange for cleaning of the common parts, particularly if this is a larger HMO let on a room only basis.

It’s worth pointing out that even a hotel room without any cooking facilities can be subject to a tenancy, and not a licence to occupy, if the occupant has exclusive possession of the room and is living there as their home – see the House of Lords case Uratemp Ventures Limited v. Collins (2001).

>> Related Post: Landlord guide to the successful management of HMOs

Definition of a “sham licence”

In Street v Mountford, Lord Templeman said that the courts should “be astute to detect and frustrate sham devices and artificial transactions whose only object is to disguise the grant of a tenancy”.

The Competition and Markets Authority defines a “sham licence” as where “a landlord purports to give a ‘licence to occupy’ a room within a property when in fact the terms of the contract create a tenancy. The terms of the agreement then attempt to exclude tenants from the rights they ought to enjoy when they enter into what is in fact an assured [shorthold] tenancy”.

The CMA says sham licensing is “a particular concern where property is let on a ‘per room’ basis. We heard that these licences often purport to allow the landlord and/or letting agent to move the tenant to another room with little or no notice given to the tenant. They may also purport to allow a tenant’s belongings to be sold by the
landlord or agent if payment of rent occurs a few days late and sometimes include provisions that any legal costs incurred must be covered by the tenant in the event of a dispute”.

In determining whether a licence is a sham, the courts look first at control: if the operator can enter at will, move people between rooms or impose genuine sharing, the grant is usually a licence. If that control is missing, the courts will then consider whether hotel-style services nevertheless keep possession in the operator’s hands (e.g. regular housekeeping and linen). 

Where, as with most HMO room-lets, the occupier can lock the door and services are limited to cleaning the common parts, they would fail both tests and be considered a sham licence, and treated as a tenancy under the Housing Act 1988.

Islington Council successfully prosecuted an estate agent at Highbury Magistrates Court in 2017 for issuing “sham licences” that suggested occupiers had no right to challenge eviction and gave no statutory protection for deposits. Green Live Estate agents were fined £11,000 for two breaches and had to pay a further £6,000 in compensation to the two victims.

The legal risks of a sham licence

How Digital Markets, Competition and Consumers Act 2024 (DMCCA) regulates sham tenancies

Since it came into force on 6 April 2025, Chapter 1 of Part 4 of the DMCCA has prohibited “unfair commercial practices”.

For instance, Section 226 of the DMCCA has made it an offence to give false or misleading information capable of influencing a consumer’s decision, known as misleading actions.

This would include giving a false impression that the consumer did not have rights under the Housing Act 1988 on the grounds it is a licence to occupy, where they did have rights, as this is a “sham device”, to echo Lord Templeman’s words from Street v Mountford.

There are also concepts of “honest market practice” and “the general principle of good faith” in Section 229.

The CMA has the power to impose substantial penalties if a landlord breaches the rules.

How does a sham licence to occupy breach the Renters’ Rights Act?

If a landlord enters into a licence to occupy with a tenant, which is a sham, and in reality an assured periodic tenancy, it is likely that they have breached the following duties and obligations (perhaps more), each of which could lead to a civil penalty of up to £7,000:

• Purporting to let for a fixed term period (s.16E(1)(a) HA88).
• Failing to serve the Written Statement of Terms before the tenant enters into the tenancy (s.16D HA88).
• (Possibly) asking for or accepting rent in advance before the tenancy is entered into (s.9 RRA).
• Once launched, failing to have an active entry on the PRS Landlord Database (Chapter 3 of Part 2 RRA).
• Once launched, failing to join the PRS Ombudsman (Chapter 2 of Part 2 RRA).
• If the landlord asks the tenant to leave, purporting to end a tenancy by a notice to quit (s.16E(1)(b) HA88).

>> Related Post: Renters’ Rights Act Guide: The 12 key provisions

>> Related Post: The rules banning rent in advance in Renters’ Rights Act

How the Renters’ Rights Act increases councils’ powers to investigate

Local housing authorities now have extensive rights to investigate breaches of rented accommodation legislation, so long as it is for a permitted purpose, by requiring anyone to provide documentation. The legislation includes:

• Sections 1 and 1A of the Protection from Eviction Act 1977: Harassment and illegal eviction.
• Chapter 1 of Part 1 of the Housing Act 1988: Assured tenancy rules, security of tenure, orders for possession, rent increases.
• Chapter 3 of Part 1 of the Renters’ Rights Act: Discrimination in the rental market.
• Part 2 of the Renters’ Rights Act: Landlord Redress Scheme and PRS Database.
• Parts 1-4 and 7 Housing Act 2004: HHSRS, HMO licensing, selective licensing.
• Section 83(1) or 84(1) of the Enterprise and Regulatory Reform Act 2013: publication of letting agent fees, membership of letting agent redress scheme.
• Sections 21-23 Housing and Planning Act 2016: Breach of banning order, offences by companies and those committed with the consent, connivance, or neglect of a director, manager etc.

They are also able to enter premises with and without a warrant, including residential premises.

Councils therefore have extensive powers to investigate whether a licence is a sham, with the consequence that the landlord is in breach of any of the above laws, and subject to large civil penalties of up to £7,000 for a single breach and £40,000 for continued or repeated breaches.

>> Related Post: The investigation and enforcement powers of councils in Renters’ Rights Act

>> Related Post: Renters’ Rights: Landlord fines and penalties explained

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Planning hurdles to pivoting from HMO to licence to occupy

If an HMO for 3-6 occupants from two or more households sharing facilities is in an Article 4 area, they will need Class C4 planning permission. Larger HMOs (7 or more occupants) are sui-generis.

Serviced accommodation traditionally falls under Class C1 (hotels/guest houses), although the government has been considering introducing a new C5 class for short-term lets that are not used as someone’s sole or principal home.

Moving from C4 or sui-generis HMO to C1 (or C5 once created) would be a material change of use that needs planning permission unless a specific permitted-development (PD) right applies.

Most councils treat the intensification of transient stays as a material change even within Class C3. This blog post from Wright Hassall summarises the current approach and notes that decision-makers weigh factors such as length of stay, amenities and comings-and-goings.

Final thoughts

With a new piece of legislation, there will be test cases to push at the boundaries and see whether there are any loopholes.

Switching an HMO to a “licence to occupy” model will only work if the operation is genuinely run as hotel-style serviced accommodation, without long-term occupiers who consider it to be their home. If not, the arrangement is likely to remain a tenancy. The occupiers will gain the enhanced rights in the Renters’ Rights Act, and the landlord risks significant sanctions.

Any HMO landlord wishing to test a licence to occupy model as a loophole needs to be aware this is a high risk strategy.

As someone who worked as a solicitor for 25 years, my advice has always been to comply with the spirit and intent of the law, and not look for loopholes. Unless of course you’re happy spending lots of time and emotional energy, not to mention high legal fees, on being a test case.

Running genuine serviced accommodation is not something to take on lightly, as it involves considerable management. I used to be an Airbnb Superhost of a flat in Cambridge, and although I had a management company to run it on my behalf, it was a complete hassle.

Finally, if you are thinking of changing your HMO to serviced accommodation, do check that this won’t breach the terms of your mortgage.

Any questions? You can ask me at twice-monthly livestreams at my membership, The Independent Landlord Hub.