It is increasingly commonplace for owners of vacant commercial buildings to permit their occupation by so-called 'property guardians' with a view to protecting them from squatters and vandals. As an Upper Tribunal (UT) ruling showed, however, such arrangements can be fraught with legal difficulty.

The owner of an office block entered into an agreement with a company whereby the latter was to provide guardianship services in respect of the property. The company agreed to pay a licence fee of £600 a month. The minimum term of the agreement was four months and it was thereafter determinable on four weeks' notice.

On taking up possession, the company converted the building to create 30 bedrooms with shared kitchen and bathroom facilities. Property guardians who occupied the rooms paid licence fees to a sister company. Those fees were far below prevailing rents in the area but, if all the bedrooms were occupied, an income of £15,000 a month would be generated.

The local authority for the area took the view that the property was being used as an unlicensed house in multiple occupation (HMO). On that basis, penalty notices were raised against both companies and their sole director. The First-tier Tribunal (FTT) subsequently rejected a challenge to those notices. It also made rent repayment orders against the sister company in respect of fees paid by 10 of the property guardians.

In ruling that the building was an HMO, the FTT found that the property guardians' only use of their individual rooms was as their residences. Although the contract between the building's owner and the company was described as a service agreement, the FTT found that it amounted to a tenancy in law.

Dismissing an appeal against the penalty notices, the UT found on the evidence that the company was a person managing the property. The sister company was a person having control of the property. Given that both companies remained liable, the director's appeal also necessarily failed. The rent repayment orders issued against the sister company were also justified.

The UT noted that the property's owner had played no part in the proceedings but had paid a financial penalty without protest when the local authority contended that it had also committed an offence under the Housing Act 2004.