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The Big Issue, Article 4 and all that...

13th Jun 2014

Category: Local property news

Tagged:Article 4, property investment

Over the past few years, what are known as Article 4 Directions have sprung up all over the country.

Put simply, what they state is that anyone wishing to convert a house currently in use as family accommodation into a house in multiple occupation (HMO) must be granted planning permission. Article 4 Directions have been introduced in a range of English cities including Sheffield and Leeds. In the East Midlands, Loughborough was the first to take advantage of the new legislation in February 2011 and Nottingham followed suit a year later in March 2012. Derby has yet to launch a consultation on Article 4 whereas Leicester will be making an Article 4 Direction in August of this year, although this will be what is known as a non-immediate direction; landlords will have a one year grace period in which to reinstate their properties as HMOs if they so wish. Needless to say, Article 4 is hugely unpopular with landlords, but how did it come about?

The route of the problem can be traced back to 1995 and the introduction of the General Permitted Development Order (GPDO) which granted automatic planning permission for certain types of development, known as permitted development. Article 4 of the GPDO gives Local Planning Authorities the right to restrict some types of permitted development. It was originally intended to enable councils to preserve the character of conservation areas and that is actually what it is still used for today in places such as Brighton and Bath. However, that all changed in April 2010 when HMOs were given their very own usage class under the planning laws, Class C4. Previously HMOs had been categorised as Class C3, small dwelling houses used as a main residence by families or groups of up to 6 people living together as a single household. A class C4 property is defined as a small dwelling house occupied by between 3 and 6 unrelated individuals who share common amenities such as a kitchen or bathroom. Most importantly, under the GPDO, change of use between Class C3 and C4 or vice versa counts as a permitted development.

The problem is that councils can use Article 4 to restrict change of use between the two classes as a permitted development. It would be easy to assume that Article 4 is just another form of regulation that landlords have to deal with, something that takes up both time and money, but the reality is that planning permission for change of use from C3 to C4 is unlikely to be granted. To further complicate things, for the purposes of mandatory licensing, a HMO is defined as a building with three or more storeys and five or more unrelated tenants. Article 4 is actually far more restrictive than mandatory licensing because it applies to houses with 3 or more unrelated tenants and any number of storeys. HMO licences also tend to be granted provided the applicant meets the licensing conditions, unlike planning permission under Article 4.

So, what is the justification for using Article 4 to restrict the proportion of HMOs within a given area? Well it certainly isn’t in the interests of raising revenue; there is no fee payable for making a planning application to convert a house from C3 to C4 usage and the council has to bear the whole cost of processing the applications and dealing with any appeals. One thing immediately becomes clear when you look at the use of Article 4 Directions to restrict HMO development; they are almost exclusively used in areas with high student populations. Dig a little deeper and another thing becomes apparent; Article 4 tends to be used in poor cities with vibrant, successful universities. This is true of Sheffield, Leeds, Leicester, Nottingham, Loughborough… the list goes on. Look at Oxford and Cambridge, both renowned university towns but both also affluent cities in their own right. In Cambridge there are no Article 4 Directions in place and no intention of introducing any. In Oxford there is a very limited Direction in place but it does not prevent C3 houses changing use to C4; rather, it prevents a handful of office and industrial sites – places that generate employment, wealth and tax revenue for the city - being converted into student accommodation that generates higher yields for the landlords.

When Sheffield City Council introduced Article 4 they cited a desire to create “cohesive communities where people from different backgrounds and of different generations get on well together, feel valued and feel they have a voice.”  They stated that allowing the development of areas with a high concentration of shared housing, which can lead to a transitory population, should be discouraged. There was much talk of creating “balanced communities.” The consultation exercise performed by Nottingham City Council in advance of the launch of Article 4 also made much of balanced, diverse communities and hinted darkly at the problems that might be caused by high concentrations of HMOs though, given that in some areas of the city over 50% of the housing stock is made up of HMOs, any such problems should already be glaringly apparent. It spoke of reclaiming the city centre for families and creating vibrant communities. It seems that the justifications for Article 4 are extremely light on facts and statistics and more to do with creating a utopian vision of a community where old and young, rich and poor live in vibrant harmony.

What about the problems created by Article 4, for they are many and various. Firstly, an Article 4 Direction massively skews the housing market in an area it is applied to. Houses with HMO status increase in value, those without fall in value; evidence has shown that this fall is typically between 20 and 40%. The winners are landlords who own existing HMOs, the losers are owner occupiers who cannot sell their houses. In other words, the residents that the council are trying to support and lure back into these communities are the very ones that are being penalised by the legislation.

Article 4 also takes no account whatsoever of changing demographics. In Sheffield as a whole, 1 in 9 of the residents are students. In the City of Nottingham students make up an even higher proportion of the population, 17% or 1 in 6. Back in 1984 there were around 12,000 students in Sheffield; last year there were 61,000. These increases are driven by a number of factors including the “education, education, education” policies brought in by Tony Blair. Whatever the causes, all these students have to live somewhere and in areas close to the universities students make up a significant majority of the residents. Of course, they could live in the purpose built student accommodation developments that are springing up in many university cities, but most students prefer to live in HMOs, not least because rents in purpose built accommodation are around 50% higher.

This policy is unbelievably discriminatory against students. They are forced to live in accommodation that is expensive, institutional and disruptive for those with heavy workloads or who, like nurses, work shifts. They are denied any chance to become part of the community in which they will typically live for at least two years. It is not just students that live in HMOs but also young professionals and people who have moved through work. Students can’t afford to compete with these people for increasingly scarce HMO places. If a local government tried to discriminate against any other social group in this way, they would find themselves in court.

The very concept of a balanced community is a nebulous one. I live in a town where 95% of the residents are owner occupiers, where unemployment is virtually unheard of and well under 1% of the population belong to an ethnic minority. It is hardly what you might call balanced but, strangely, the local council are reluctant to introduce any policies to address this highly unsatisfactory situation. By comparison, I bought my first house in the same area of Sheffield that I lived in as a student. House prices were at least 25% higher than any other area in the city centre. There was a thriving vegetarian restaurant, the local pub had a jazz band on a Sunday night and a couple of shops restored old furniture, the perfect example of a cottage industry. On my street the residents included young professionals, some students, an actress, a footballer, a retired steelworker and a Rastafarian musician. It is hard to imagine a more vibrant, diverse and balanced community, yet this was an area with a large student population and a high concentration of HMOs. All the evidence suggests that HMOs and students go a long way to creating balanced communities, not destroying them.

The laws of supply and demand dictate that restricting the number of HMOs in an area will drive up rents. Conversely, all local authorities are required by law to ensure a given number of places are available in small HMOs and it is well known that the stock of social housing that caters to one person households is wholly inadequate. By imposing an Article 4 Direction, councils are actually preventing themselves from meeting their own obligations.

It is clear that the justifications given for imposing Article 4 to limit the number of HMOs do not hold water, so what are the real reasons? There have been some suggestions that Article 4 has been used to create demand for purpose built student accommodation developments, many of which are undersubscribed. The argument is that since some PBSA blocks are owned and operated by local authorities, this is a method of revenue raising by the back door. However, most PBSA developments are being built by the universities and private investors; most city councils only have a modest presence in the market, not enough to justify legislating to distort the market. Well, I love a conspiracy theory as much as the next man so let me combine a few facts and a healthy dose of conjecture to explain what I think Article 4 is really all about.

Usage Class C4 was created by a struggling Labour government just three weeks before the last election. Given that they were still dealing with the aftermath of the worst financial crisis since the 1930s and facing a drubbing in the polls, you would have thought that pushing through a minor amendment to the planning laws would be at the bottom of their list of priorities. The timing was suspicious to say the least. Although it was a minor change, it had a big impact because it allowed Article 4 of the GPDO to be used to restrict development of HMOs. A cynic might argue that Class C4 was created expressly for this purpose. Certainly, within months of the change, the first consultations for Article 4 Directions were already being made.

Article 4 is almost exclusively used in areas with high student populations. In the consultation for the introduction of Article 4 in Nottingham, the language used about students was very negative; they were described as a continuing drain on community resources. Students are by definition a transient population; they normally live in university accommodation for their first year and then in the community for the next two years. Many of them are registered to vote at home rather than at their university address. Councils that penalise students are unlikely to pay the price at the next election.

It has been said that Article 4 is an attempt at social engineering. Could it be that in reality it is actually electoral engineering? The Private Sector Landlord Magazine- East Midlands

Tom Kite

Partner BA(Hons) MARLA

An experienced Nottingham Property Specialist and a Founding Partner of Comfort Lettings.

Connect with me on Linkedin


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