The 'Licence to Occupy' HMO Loophole — Does It Actually Work?

What a Licence to Occupy Actually Is — and What It Isn't

A licence to occupy gives someone permission to use premises for a period of time in exchange for payment. That's it. Crucially, it does not confer exclusive possession — and that distinction is everything.

Under the Housing Act 1988, an assured tenancy requires exclusive possession. No exclusive possession, no assured tenancy. So the logic goes: if I call this a licence, my occupier doesn't get assured tenancy rights, and when the Renters' Rights Act kicks in on 1 May 2026, I'm outside the new regime. Section 21 abolition? Doesn't apply to me. New assured periodic tenancy under Section 4A? Not my problem.

On paper, that logic is sound. In practice, it fails for the vast majority of HMO landlords. The reason comes down to one word: genuine.

As solicitor Suzanne Smith wrote on The Independent Landlord (10 April 2026), a genuine licence to occupy sits outside the 1988 Act — but only if it truly lacks exclusive possession and is run with hotel-like services. That second part is where most landlords fall apart.

Street v Mountford (1985): The Case That Kills Most Sham Licences

This is the case every landlord attempting the licence route needs to understand, and most don't.

In 1985, a Mr Street granted a Mrs Mountford a licence to occupy two furnished rooms in Boscombe, Bournemouth. The agreement was explicitly called a licence. The payment was called a licence fee. The document even contained a clause where Mrs Mountford acknowledged she understood this was not a protected tenancy. Watertight, right?

The House of Lords disagreed. Lord Templeman was blunt: "Words alone do not suffice. Parties cannot turn a tenancy into a licence merely by calling it one." What matters is not what the document says — it's the objective reality of the rights actually granted.

The test Lord Templeman established: if the occupier has exclusive possession of a defined space, pays rent, and has it for a term, it's a tenancy. Full stop. The label on the contract is irrelevant.

He went further. Courts should "be astute to detect and frustrate sham devices and artificial transactions whose only object is to disguise the grant of a tenancy." That sentence was written in 1985. It applies today with the same force.

So when does a licence genuinely work? Classic examples are hotel rooms, hostels, and lodgers living with a resident landlord. The operator can enter at will, move guests between rooms, and delivers regular services — daily housekeeping, linen changes. The occupier never has exclusive possession of a defined space.

Most HMO room-lets are nothing like this. The tenant has a room with a lock. They control who enters. Services, if any, extend to cleaning the common parts. According to Suzanne Smith's analysis on The Independent Landlord, where an occupier can lock the door and services are limited to cleaning common parts, they fail both tests — no genuine lack of exclusive possession, no hotel-like services — and the licence will be treated as a sham.

The DMCCA 2024: Why the Downside Has Just Got Much Worse

Before April 2025, a landlord who got caught with a sham licence faced the usual enforcement routes — councils, tribunals, civil claims. Unpleasant, but manageable for many.

That changed when the Digital Markets, Competition and Consumers Act 2024 came into force on 6 April 2025, replacing the Consumer Protection from Unfair Trading Regulations 2008.

The DMCCA prohibits unfair commercial practices. Section 226 specifically makes it an offence to give false or misleading information capable of influencing a consumer's decision. Giving a tenant the false impression they have no Housing Act 1988 rights — because their contract says 'licence to occupy' when it's actually a tenancy — fits that definition squarely.

The Competition and Markets Authority defines a sham licence as exactly this: where a landlord purports to give a licence to occupy when the terms actually create a tenancy, then uses that label to strip tenants of rights they should have.

The penalties under the DMCCA are not trivial. A single breach can attract a civil penalty of up to £7,000. Continued or repeated breaches go up to £40,000. And that's before you layer on the Renters' Rights Act breaches that stack on top — failing to serve the Written Statement of Terms before the tenancy begins, purporting to let for a fixed term, failing to register on the PRS Landlord Database, failing to join the PRS Ombudsman.

Each of those is a separate breach. Each carries its own penalty of up to £7,000.

The Islington Council prosecution in 2017 — before the DMCCA even existed — resulted in Green Live Estate Agents being fined £11,000 for two sham licence breaches, plus £6,000 in compensation to two victims. That was under the old, weaker regime. Under the DMCCA, the exposure is materially higher.

Councils now have significantly expanded powers under the Renters' Rights Act to investigate whether a licence is a sham. This isn't a theoretical risk. It's an enforcement environment that's actively getting tougher.

The Planning Problem Nobody Mentions

Even if you somehow constructed a genuinely compliant licence to occupy — proper hotel-style services, no exclusive possession, the works — you'd still face a planning problem most landlords haven't thought about.

Serviced accommodation traditionally falls under Class C1 (hotels and guest houses). Your HMO is almost certainly in Class C4 (three to six occupants from two or more households) or sui-generis (seven or more). Moving from C4 or sui-generis to C1 is a material change of use. That requires planning permission.

If your property is in an Article 4 direction area — which covers large parts of most major UK cities — you already needed permission to operate as a C4 HMO. You can't simply pivot to a different use class without going back through the planning system.

The government has been considering a new C5 class for short-term lets that aren't someone's principal home, but that hasn't been finalised. Most councils treat intensification of transient stays as a material change even within Class C3. So the planning route is blocked for most operators, not just difficult.

And there's one more tripwire: mortgage terms. Many buy-to-let and HMO mortgages explicitly prohibit serviced accommodation use. Switching your operation without checking your mortgage conditions could put you in breach of your lending agreement. That's a conversation worth having with a qualified financial adviser before you do anything else.

So What Should HMO Landlords Actually Do?

My position on this is straightforward: the licence to occupy route is not a viable RRA workaround for the overwhelming majority of HMO operators. The legal risk is high, the planning barriers are real, and the enforcement environment post-DMCCA is materially more dangerous than it was even two years ago.

The trade-off you're making is this: you might save some administrative friction around the new assured periodic tenancy regime — but you're exposing yourself to stacked civil penalties that could easily reach five figures per property, plus the reputational and operational cost of enforcement action.

That's not a good trade.

The landlords I'd expect to seriously consider a genuine licence model are those who are already running proper serviced accommodation — daily or weekly changeovers, full housekeeping, no long-term occupiers, genuine hotel-style operations. If that's not your current model, the gap between where you are and where you'd need to be to make it legitimate is enormous. And bridging it isn't cheap.

For everyone else: the better play is to understand the new assured periodic tenancy regime under the RRA, get your processes right, and focus on acquiring compliant stock with strong fundamentals. The investors who will do well post-RRA are the ones who stopped trying to fight the legislation and started optimising within it.

If you're looking for compliant HMO stock — properties that work under the new regime, with the numbers to back them up — [ZARSK](https://zarsk.co.uk) maintains what I believe is the largest HMO database in the UK. It's updated constantly and built specifically for investors who want to find real opportunities without trawling through Rightmove. Worth a look.

And if your bigger problem right now is financing — whether that's getting an HMO mortgage as a newer investor or freeing up equity in an existing portfolio — that's genuinely difficult territory. Our regulated finance partners at [ZARSK Finance](https://www.zarsk.co.uk/finance-property) have been doing this for over a decade. Equity release from an HMO or BTL portfolio is one of the harder things to execute well, and having an experienced team in your corner makes a real difference. Consider consulting a qualified financial adviser before making any decisions — but if you want a starting point, that's where I'd go.

The licence to occupy 'loophole' has been circulating in landlord forums for years. Every time legislation tightens, it resurfaces. And every time, Street v Mountford is still there, sitting in 1985, quietly making most versions of it unenforceable. The DMCCA has simply added teeth to what was already a losing strategy for most operators. My honest prediction: within 18 months of the RRA's full implementation, there will be a wave of enforcement actions against landlords who thought a renamed contract would protect them. The ones who read the actual case law — and adjusted their strategy accordingly — won't be in that wave.