Selling a HMO property with tenant in arrears?

What tenant arrears mean for a HMO sale

Tenant arrears mean one or more occupiers have missed rent payments under a tenancy or licence agreement. In a HMO sale, arrears affect both value and buyer appetite because the income stream supports the asking price and any lender assessment. A buyer who plans to keep the property let will review the rent schedule, payment history and the steps already taken to recover the debt. Clear records help a buyer price the risk and reduce delays during enquiries.

Arrears can also signal wider management issues, such as weak referencing, poor rent collection processes or unresolved repairs. Even when those issues do not apply, a buyer may still request a retention from the sale proceeds, a price reduction, or a condition that the seller serves notices before completion. Any action must follow the correct legal route, as mistakes can create claims and disrupt the transaction. Guidance from GOV.UK sets out the main rules on renting, possession and tenant rights.

When arrears exist, transparency matters. Disclose the arrears position early, provide copies of agreements and statements, and confirm whether any repayment plan is in place. That approach supports a realistic valuation and a smoother exchange timetable.

Legal duties and compliance checks before marketing a HMO

Before marketing a HMO, confirm that the property meets the legal standards that apply to shared housing. Start with licensing. Check whether the local authority requires a mandatory or additional HMO licence and confirm that the licence remains valid, correctly names the proposed seller, and matches the current layout and maximum occupier numbers. Where a licence does not exist, seek advice before advertising, as some councils treat unlicensed operation as an offence.

Next, verify core safety and management compliance. Ensure you hold a current gas safety record, up-to-date electrical inspection evidence, and suitable fire precautions for the building type. Review energy performance requirements and confirm that any minimum standard applies to the tenancy type. Keep clear evidence of deposit protection and prescribed information for each occupier, as errors can restrict possession options and concern buyers.

Local rules vary, so check the council’s HMO standards and licensing guidance and keep copies of correspondence. Guidance from GOV.UK and the National Residential Landlords Association can help you confirm the correct documents to provide to a buyer and agent.

How arrears affect valuation, yield, and buyer appetite

Arrears change how buyers model risk and cash flow. A purchaser who relies on rental income will treat missed payments as a reduction in effective rent, not a temporary inconvenience. As a result, the same HMO can attract different valuations depending on whether the buyer prices on actual collected rent or on the contractual rent stated in the agreements.

Valuers and buyers often start with yield, which compares annual rent to the purchase price. When arrears persist, buyers may apply a higher yield requirement to compensate for uncertainty, which pushes the offer price down. Lenders can also take a cautious view of affordability and may base calculations on proven income rather than headline rent. Guidance from the Royal Institution of Chartered Surveyors (RICS) supports a focus on evidence, so clean, dated records matter.

• Valuation impact: Offers may reflect collected rent, expected voids, and the cost of recovery action.
• Yield impact: Buyers may “stress test” income by discounting arrears and assuming longer re-letting periods.
• Buyer appetite: Owner-occupiers rarely buy HMOs, so demand often comes from investors who compare risk across similar stock.

Buyer appetite tends to split into two groups. Conservative landlords and many mortgage-backed buyers prefer stable, provable income and may reduce offers or withdraw if arrears appear unmanaged. Opportunistic investors, including cash buyers, may accept arrears if the discount compensates for the work involved. Even so, a buyer will still expect clarity on who owes what, how long the debt has run, and what steps the seller has taken.

Arrears rarely stop a sale, but arrears without documentation often reduce price and slow negotiations.

To protect value, present a clear rent schedule, a payment history, and a realistic forecast of income after completion. Where arrears affect only one room, show how the remaining rooms perform, as strong occupancy can support pricing even when one account falls behind.

Options for selling: with tenants in place, with vacant possession, or with negotiated surrender

You can sell with tenants in place, which suits investors who accept arrears risk and price for reduced cash flow. Provide a clear rent schedule, up-to-date statements, and evidence of action taken, so a buyer can assess recoverability and compliance. You can also sell with vacant possession, which can widen the buyer pool to owner-occupiers and developers, yet it usually requires lawful possession steps and realistic timescales.

A negotiated surrender can sit between those routes. Here, the occupier agrees in writing to leave on a set date, often in return for a modest incentive or a structured repayment plan. This approach can reduce delay and avoid contested proceedings, but you must document the agreement carefully and keep communications fair.

For the legal framework on regaining possession, refer to GOV.UK guidance on evicting tenants.

Managing arrears during the sale: rent collection, repayment plans, and possession routes

Keep rent collection consistent during marketing. Issue reminders promptly, record all contact, and accept part-payments where sensible, as clear statements support buyer due diligence. Where a tenant can pay, agree a written repayment plan that sets dates, amounts, and what happens if payments stop. If arrears persist, consider possession routes early and take legal advice. A Section 8 notice may apply where rent is unpaid, while a Section 21 notice can suit no-fault possession if eligibility rules are met. Align timescales with the sale and avoid unlawful eviction.

Preparing the sales pack: documents, disclosures, and buyer due diligence

A strong sales pack reduces queries and helps a buyer assess arrears risk quickly. Start with a complete rent pack: signed tenancy or licence agreements for each room, a current rent schedule, and a clear arrears statement showing amounts due, dates missed, and payments received. Include bank statements or a rent ledger that matches the schedule, as inconsistencies often trigger price renegotiation.

Provide evidence of management and recovery steps without overstating prospects of repayment. Add copies of reminder letters, repayment plan agreements, and any notices served, with dates and service method. Where court action has started, include claim forms and orders. A buyer will also expect deposit compliance documents, including prescribed information and protection certificates from an approved scheme such as UK Government guidance on tenancy deposit protection.

Disclose HMO compliance documents alongside arrears papers so due diligence runs in parallel. Supply the licence, floor plans where available, recent safety certificates, and records of inspections and repairs. If any document remains outstanding, state the reason and the expected date of issue. Clear, dated disclosure supports a smoother legal review and limits the risk of late-stage withdrawal.