Acting on housing fraud

The Prevention of Social Housing Fraud Act 2013 received Royal Assent on 31 January 2013, the legislative end of a national drive begun in 2009 at one time offering financial reward to those who 'shopped' subletting neighbours to clamp down on unlawful subletting and other housing fraud. The Act is expected to come into force this month.

It aims to ensure that social housing is occupied by those in greatest need and was foreshadowed by alarming statistics: an estimated 50,000 homes occupied unlawfully in 2009; 98,000 in 2012; and an annual cost to councils of 900m.

The overwhelming majority of responses to consultation in January 2012 sought a more effective deterrent. Offences under the Fraud Act 2006 had been used to prosecute high profile cases such as that of Kelly-Louise Goatley, who illegally sublet her flat overlooking Hyde Park at a profit of more than 23,000. However, like civil remedies, such as restitutionary damages and accounts of profit, they were considered by some to be ill-fitting and inadequate.

The Act aims to address this by making important changes to both civil and criminal law. In practice, those most likely to benefit social landlords are the creation of unlawful profit orders (UPOs) and the permanent loss of security of tenure for assured tenants who sublet unlawfully.

UPOs are a new species of order by which the court may require a defendant to pay the landlord the profit made from an unlawful sub-letting. The UPO is available both in civil proceedings and in criminal proceedings in which there has been a conviction for an unlawful sub-letting offence.

Criminal and civil

The civil UPO applies to secure tenants and the assured tenants of PRPs and RSLs who, in breach of tenancy agreement, cease to occupy their homes, sub-let or part with possession of them, or part of them, and receive money in return. It will not apply to assured shared ownership leases.

The maximum payable is the defendant's net profit, i.e. the total received from the sub-letting less any rent, including service charges, paid to the landlord while the property was sublet. Otherwise, the amount payable is at the court's discretion.

The civil UPO is expected to feature commonly in the county court, especially in parallel possession claims. While its efficacy as a source of finance is open to question, the UPO is likely to prove a useful tactical device: a disincentive to (former) tenants, who might otherwise defend possession claims to trial at significant cost. Moreover, it is unlikely to result in an evidential burden beyond that already borne in sub-letting possession claims.

Criminal courts must consider whether to make a UPO following a defendant's conviction for unlawful sub-letting or an associated offence (below), and may do so if they consider it appropriate. Such an order can be made in addition to or instead of dealing with the offender by alternative means.
The fact that a civil UPO has been made does not prevent the court making a criminal UPO post-conviction and vice versa, but theamount payable under the later order will, broadly speaking, be limited by reference to the earlier.

Otherwise, the maximum payable is the defendant's net profit, in other words the total received from the sub-letting less any rent paid to the landlord while the property was sub-let. In general, however, the amount payable is at the court's discretion. If the defendant fails to pay when required, the amount will attract interest at the Judgment Act rate.

The Act creates two new criminal offences concerning the sub-letting of properties held under (a) secure tenancies and (b) assured tenancies granted by private registered providers (PRPs) or registered social landlords (RSLs). Assured shared ownership leases are excluded. The key feature distinguishing the offences is the tenant's mens rea.

The lesser offence is committed if the tenant ceases to occupy the property as his only or principal home and either sub-lets or parts with possession of it, or part of it, knowing that to be a breach of his tenancy agreement.

There are exceptions. Broadly, a tenant who does so because of violence or threats of violence made by a person living in the property or in the locality will not commit an offence. Nor will he do so if a person occupying the property because of his actions is entitled to apply for a right to occupy it, or to have the tenancy transferred to him, or a person in respect of whom such an application might be made. In practice, this is likely to include spouses, former spouses, civil partners, co-habitants and children for whose benefit the tenancy might be transferred.

The greater offence is committed if the tenant acts not merely in knowing breach of his tenancy agreement but dishonestly. The elements of the greater and lesser offences are otherwise the same.

R v Ghosh [1982] QB 1053 is likely to define the parameters of dishonesty, as contemplated by the Act: broadly, knowledge that a reasonable and honest person would consider the tenant's actions dishonest. That will be a question of fact, though the appeal courts might expect a rash of cases following implementation of the Act concerning the distinction between the lesser and greater offences. In that regard, it is anticipated, for example, that dishonesty will more readily be found if the tenant has profited from his actions.

The defences of sub-letting because of violence or threats of violence, or occupation by a spouse, partner or child, for example, are not available in respect of the greater offence.

The lesser offence carries a sentence of a fine not exceeding 5,000, the greater offence a sentence on summary conviction of up to six months in prison, a fine not exceeding 5,000 or both; and on indictment, up to two years in prison, a fine or both.

As an exception to the general rule the lesser, summary-only offence may be prosecuted within six months of the date on which the prosecutor became aware of evidence sufficient to warrant a prosecution, though not later than three years after the offence was committed, or the last day on which it was committed if it was a continuing offence.

Local authorities may prosecute both sub-letting and associated offences such as aiding or abetting an unlawful sub-letting. They can do so whether or not they are or were the landlord or the property is within the local authority's area.

In recent years there have been a number of high-profile prosecutions for illegal subletting under the Fraud Act 2006.

It is not easy to predict whether there will be more prosecutions as a result of the Act, whether prosecutions are more likely to be successful or indeed the extent to which local authorities will use their new powers of prosecution. The political will to prosecute is likely to endure, but the ability of local authorities in particular to do so financially is open to question. It is understood that the Secretary of State does not propose to issue guidance about these powers but to rely instead on guidance issued by the Chartered Institute of Housing. It is unclear when that guidance will be forthcoming or what it will provide.

On balance, it is suggested, local authorities, like other social landlords, are likely to consider claims for possession and a civil UPO the best use of already scarce resources, carrying both a lower standard of proof and the prospect of 'punishing' the tenant financially for his unlawful behaviour.

Security of tenure

Additionally, the Act makes a significant change to assured tenants' security of tenure.

Presently, an assured tenant, who sub-lets or parts with possession of the whole of his property, loses security of tenure, as the property is no longer his only or principal home, but may regain it by moving back in. He may, therefore, defeat a notice to quit, served to end his contractual tenancy, by moving in before the notice expires.

This contrasts starkly with the position of secure tenants, who cannot regain security whether by moving back in or otherwise.

The Act ensures that assured tenants of PRPs and RSLs, who are not shared ownership lessees, will lose security of tenure permanently if, in breach of their tenancy agreement, they sub-let or part with possession of the whole of their property.

PRPs and RSLs will no doubt welcome this alignment of security for secure and assured tenants. The present dichotomy is, after all, difficult to justify, allowing the inconsistent treatment of otherwise comparable tenants and those who have abused social housing to frustrate attempts to repossess their properties all too easily.

The Act gives the Secretary of State and Welsh ministers power to make regulations enabling persons, to be prescribed, to compel others to provide information for the purposes of housing fraud investigations. They may, in particular, provide local authorities with powers similar to those used to investigate benefit fraud. Regulations may also criminalise a failure to provide information. The intention is to create offences equivalent to those applicable to benefit fraud investigations.

Given the high standard of proof in criminal proceedings, the information-sharing facilitated by the Act may prove crucial to ensuring that there is enough evidence of sufficient quality for a successful prosecution under the Act. It is understood that the secretary of state will lay regulations before parliament in the summer for commencement in the autumn.

Whether, ultimately, the Act's new offences provide a deterrent capable of reducing the number of homes occupied unlawfully in England and Wales remains to be seen. It is envisaged that, while the tailor-made criminal offences will be used by local authorities and others to prosecute the most serious cases of illegal subletting, which justify the extra cost and higher standard of proof, the real benefit of the Act will be seen in the civil courts.

In the meantime, social landlords will generally welcome the changes made by the Act and look forward to the imminent commencement order.

The Prevention of Social Housing Fraud Act 2013 The Act: ? creates criminal offences of unlawful sub-letting by secure tenants and the assured tenants of social landlords; ? gives local authorities wide powers to prosecute them; ? creates the Unlawful Profit Order, requiring defendants to pay the profits of unlawful sub-letting to the landlord, either following conviction or in civil proceedings; ? provides that assured tenants of social landlords, who unlawfully sub-let or part with possession of their homes, lose security of tenure permanently; and ? gives the Secretary of State and Welsh Ministers power to make regulations to facilitate the investigation of social housing fraud.