Making the fraudsters pay
Tackling illegal sub-letting has never been a higher priority for local authorities and RSLs, but with ever tighter budgets many will struggle to maintain a sustained campaign. Faced with this problem, some local authorities are considering actions not only to recover possession of sub-let properties, but also to recover the illegal profits made by sub-letters, writes Chris Corney
In September 2009 the Audit Commission’s report “Protecting the Public Purse” estimated that 2.5% of the total stock of council housing in London is subject to illegal sub-letting. Anecdotal evidence suggests that in some London boroughs the proportion may be much higher, perhaps up to 5 - 10% of the total stock. The gap between social rents and private sector rents, particularly in inner London, is driving a large black market in illegally sub-let council houses and flats. This is not limited to informal arrangements within families or one-off key sales. In some cases, local authority fraud teams have uncovered large scale illegal operations involving multiple properties, sometimes brazenly advertised through high street letting agencies.
Why bother about illegal sub-letting?
It has been wryly observed that illegal sub-lessees often make for model tenants – they tend to avoid drawing attention to themselves and pay the rent punctually. Indeed for experienced investigators, advance payment of rent is one of the more reliable indicators of possible sub-letting.
However, illegal sub-letting is an enormous drain on the supply of precious social housing. The Audit Commission has estimated that if illegal sub-lets are properly tackled then at least 50,000 properties, valued in excess of £2billion, could be brought back into social use. lllegal sub-letting deprives law abiding members of the public on waiting lists of properties that are suitable for occupation, and undermines public confidence in the fairness of allocation. Local authorities are compelled to house an increased number of homeless families in overcrowded and expensive temporary accommodation. Illegal sub-lets are sometimes associated with damage to property including unauthorised and unsafe modification of property for multiple occupation. They can be associated with anti-social behaviour and serious crime.
Against this background, tackling the problem has become a high political priority. Gordon Brown’s Policy Paper published on the 30 June 2009 announced an “autumn crackdown on fraud within the housing sector, freeing up housing for people in need” and makes specific reference to tenants “illegally sub-letting their homes.” Following this initiative, the DCLG has allocated £50,000 grants to local authorities, and £10,000 to some RSLs to address housing tenancy fraud. On 29 March 2010 this was followed by the announcement from Housing Minister John Healey of the Government’s intention to create a new offence to cover unauthorised sub-letting of social housing.
Despite the political will and new resources, there is undoubtedly a major task which will require sustained resources to deal with the cost of investigation and, where illegal sub-letting is identified, to take steps recover the property.
Why pursue civil recovery against sub-letters?
Historically, when a case of illegal sub-letting is identified, the typical response of social landlords has been limited to recovering possession and terminating the tenancy. Sometimes criminal prosecutions are pursued where (as often) the sub-letting is linked to benefit fraud, and this may increase if they proposed new criminal offence of sub-letting makes it onto the statute book.. But criminal prosecutions are costly and fines are collected centrally, so this option may have limited appeal for financially challenged local authorities.
Whilst recovering the property is obviously the top priority, it is also open to social landlords to pursue civil claims for damages against housing tenancy fraudsters. Such claims can be pursued as a “follow on” from the normal possession proceedings, without delaying recovery of possession. Servite Houses, a large housing association with 16,000 houses across London, the South and the Midlands has pursued one of the fiercest campaigns against sub-letters, recovering approximately 1 property a week over recent years. Recently this campaign included obtaining a County Court Judgment of £25,000 plus costs against a tenant who was demonstrated to have sub-let of one of their properties. There may be more of this to follow.
The benefits of taking civil action for recovery of damages include:
- the prospect of substantial recovery for the public purse
- money recovered can be used towards further investigation and enforcement action thereby increasing resources available to social landlords to regain control of their housing stock
- civil recovery will have a far greater deterrent effect on illegal landlords if they anticipate not only losing the property but also re-paying their unlawful profits (with interest) and legal costs.
What money can be recovered?
Clearly any rent arrears can be pursued, and this is often included within possession proceedings anyway. But even if the rent account has been kept up to date, it is open to social landlords to seek an account of the unlawful profits made from the sub-letting over and above the rent which is paid to the social landlord.
This claim is based on the principle that the sub-letter has been unjustly enriched, even if there is no direct loss to the landlord. The claim can go back over many years and interest can be added. On top of this the landlord can pursue damages for dilapidations to the property and costs of restoring property to safe condition. The claim can also be combined with recovery of Housing Benefit illegally claimed by the illegal landlord, the illegal sub-tenant or both, and recovery of illegally claimed Single Occupiers Discount on Council Tax. It is therefore quite possible in cases where the illegal sub-letting has been run on a commercial footing to envisage claims running to tens of thousands of pounds.
In addition – and as an admittedly provocative suggestion - we think it may be open to local authorities with statutory homelessness duties to seek damages from illegal sub-letters of their properties where it can be demonstrated that the authority in question has incurred the expense of providing temporary accommodation to a homeless family who could have been housed in the illegal sub-let property.
When will civil recovery be appropriate?
It may be considered that civil recovery is unlikely to be an option where the illegal sub-let arises from a change in family circumstances where there is no profit to the original tenant. However, some early findings from current investigations suggest that around a third of illegal sub-letting is undertaken on a commercial basis. Civil recovery should be considered in these cases, where sufficient assets of the original sub-letting tenant can be identified. It is not uncommon for investigations to reveal that the sub-letting tenant owns their own property (or properties) against which a civil judgment can be enforced.
Conclusion
Civil recovery should be considered as an additional weapon available to social landlords and local authorities in tackling the problem of unlawful sub-letting. Used in conjunction with repossession proceedings it should deter illegal sub-letting and generate revenues for social landlords.
Chris Corney is a partner of DMH Stallard LLP
This email address is being protected from spambots. You need JavaScript enabled to view it.