What is “Rack-Rent”?

The Upper Tribunal (“UT”) clarifies the meaning of “rack-rent” and offers clarity for Rent-to-Rent superior landlords in Khiljee v Waltham Forest LBC [2026] UKUT 171 (LC)

Local Authorities may prosecute or levy substantial fines upon landlords who are found to be “a person having control” or “a person managing” an unlicensed House in Multiple Occupation (“HMO”). Moreover, the Renters’ Rights Act 2025 (“RRA”) overturned the Court of Appeal decision in Rakusen v Jepsen making a superior landlord potentially liable for a Rent Repayment Order (“RRO”) where a relevant housing offence has been committed by them. The RRA regime brings increased penalties and liability for both direct and superior landlords, which is a substantial change to the risk profile in Rent-to-Rent arrangements.

In summary, in a Rent-to-Rent arrangement, a property owner lets her property to an intermediary (usually a “property management” or a “property investment” type company), which then sub-lets to the end occupier(s). The property owner gets a guaranteed, “hassle-free”, usually below-market, rental income; and the company usually manages the property and sub-lets it on a room-let or other similar basis for a higher rent, thus making a profit. In theory, this is a win-win arrangement for everyone involved. In practice, things may get complicated if a housing offence is committed leading to enforcement action by the Local Authority or an RRO application being made by a tenant.

In a recent case, the UT was asked to consider whether a superior landlord was liable to pay a penalty where the rent received by the superior landlord constituted a small proportion of the rent collected by the intermediary landlord from the occupiers.

Background

By way of factual background, Dr Khiljee was the owner of a property in London’s E17 (“the Property”). In 2019, Dr Khiljee engaged We Invest Limited (“WIL”) to manage the Property pursuant to a Rent-to-Rent agreement whereby WIL would sublet the Property and pay guaranteed rent of £3,400 per month to Dr Khiljee. WIL had contracted NOT to sublet the Property as an HMO, however, it did so in breach of the agreement and collected rent between £7,000 to £10,000 per month from the occupiers.

The London Borough of Waltham Forest discovered the use of the Property as an unlicensed HMO and imposed a financial penalty on Dr Khiljee and WIL of £24,500.

First-Tier Tribunal

On appeal by Dr Khiljee, the First-Tier Tribunal (“FTT”) upheld the penalty, subject to a reduction to £19,600. In arriving at its decision, the FTT had stated that it referred to evidence that the maximum rent for a single-family dwelling in the area was £5,000 per month. The FTT stated that Dr Khiljee was the person who had control of the Property because her receipt of £3,400 per month represented at least two-thirds of the rental value.

The FTT then clarified what was meant by “rack-rent”. It was a hypothetical consideration: if the Property had been let as a family dwelling, the maximum rent would have been £5,000.

Upper Tribunal

The decision was appealed to the UT on the grounds that the FTT was wrong in deciding that “rack-rent” was relating to a single dwelling rented rather than the reality that the Property was let as an HMO and not as a single dwelling.    

The UT explained that “rack-rent” should be calculated on the actual use of the Property, not a hypothetical calculation.

Accordingly, the appeal was allowed and Dr Khiljee avoided the penalty.

Conclusion

This is an important clarification by the UT because the rental value of unlicenced HMOs is usually significantly higher than the guaranteed rent paid to the property owner in Rent-to-Rent arrangements. Rack-rent should be assessed factually rather than a hypothetical calculation. This gives more clarity to landlords and local authorities making it relatively straightforward for local authorities to only direct enforcement against “persons having control” to those receiving two-thirds of the rental income.

NB: A person who is not found to be “person having control” for the purpose of the legislation may still be found to commit the offence and be exposed to penalty or prosecution as “person managing”.

Landlords should think carefully before renting out their property and if it is to be let as an HMO, ensure the property is correctly licensed.