London property company is charging £255 a week for 'studio apartments' as small as three metres by three metres

A London property company is charging £255 a week for "studio apartments" as small as three metres by three metres that tenants claim are "worse than prison cells" and that breach statutory overcrowding regulations.

Nineteen tiny, dilapidated rooms above a McDonald's in Islington, north London, are earning a multi-millionaire landlord and a sub-letting company an estimated £400,000 a year in rent, a Guardian investigation has revealed.

The rent per square metre is more than twice that for other one-bed privately rented flats in the same area. Recently built studios on the same road for students are double the size but cost less. Rent on the unfit housing was being paid largely by the taxpayer through housing benefit, although Islington council has now said it will no longer pay as the units represent a "category one hazard" under health and safety regulations in terms of crowding and space. It said the taxpayer was being "ripped off". The council has now issued an order rendering the tenancies void in two months. It follows a series of door-to-door inspections of private rented properties in the borough over the summer.

The flats represent a new low in London's housing crisis, where at least 42,000 new homes are still needed each year to meet demand and prices are rising at almost 20% a year. The owner is Andrew Panayi, a wealthy landlord with 250 properties in north London. He bought the former hostel in 2004 and, after fitting plastic showers, two-ring hobs, small fridges and a toilet, marketed them as studios.

Some tenants have described life in the flats as "unsafe and inhumane" and have complained of a lack of hygiene caused by the proximity of cramped toilets, showers and cooking facilities.

Darren Ricketts, 39, a new occupier who arrived this week despite the banning order said he could not believe the lack of space and cost.

"When I signed the papers I saw the rent was £258 a week," he said. "I said to the lady, 'That's a mistake: £58, yes, but not that much.' The landlord must be raking it in. I was shocked. I am grateful to have a roof over my head, but this morning I woke up and thought: 'What am I going to do with all my stuff?'"

Another tenant, Nejat Mohamed Ali, 45, said: "I have bruises on my legs from constantly pushing the bed around so I can get to the shower or the kitchen. The hot cooking plate is less than 60cm from my bed." She added: "I am very depressed. I used to live with dignity... councils are supposed to invest in property and not spend £255 a week on prison cells. It is abuse of the taxpayer."

Panayi blamed the tenants for making the homes too cramped by piling in too much furniture.

"These places are designed for single people," he said. "They should have a single bed but they asked for double beds and the beds are too big. There's more than enough room for a single person."

James Murray, Islington council's executive member for housing, said: "This shows how appalling the housing crisis has got, where people who are desperate for accommodation are being crammed into tiny units and tenants and the taxpayer is being ripped off by a rich landlord and a property company who are skimming off handsome profits."

Harry Lewis, 54, an unemployed father of three, said the cramped dimensions of his home meant he could never entertain his children or family. He said he survived on takeaways and was suffering from depression.

"I have been here three years and I am suffering health problems," he said. "You have to eat, go to the toilet and wash all in this small space. There are huge issues."

"I'm stressed," said his neighbour, Evzen Kessel, an unemployed street-cleaner from the Czech Republic. "All I can do here is sleep. I spend all day outside because there's no room here to live."

Panayi has sub-let the properties to Investing Solutions Limited (ISL), which describes itself as a rent guarantee company. Many of the tenants were referred to ISL by Fresh Start Housing, a charity that sets out to provide "support for homeless people and those about to be homeless". ISL receives the £255-a-week payment from the government's housing benefit pot and then pays Panayi around £150 a week. The maximum the government will pay in housing benefit for a one-bed property in that part of London is currently £258 a week.

A spokesman for ISL said it was "very, very shocked" by the decision to declare the flats unfit for human habitation. It said the high rent was to reflect the "high-risk tenants" who often do not have money for rent advances or deposits and can sometimes have their housing benefit frozen at short notice. "The ones I saw were normal studio sized," said Gerry Sandhu, a manager at the firm. "We don't measure them. That's the landlord's responsibility."

John van Someren, trustee of the Fresh Start charity, said it would prioritise rehousing the people it referred.

Nineteen of the tiny, dilapidated rooms are being let out above a McDonald’s restaurant in Islington. Photograph: David Levene

"We will have to ask the landlord what the heck he is doing placing our tenants into accommodation below legal requirements," he said. "Then we will have to ask Islington why they are paying housing benefit on properties that they say are in breach of size regulations."

Islington said there is no inspection before housing benefit is paid out, although an environmental health officer did visit in 2012 when it was assured the property was a hostel rather than studios.

Panayi attacked Islington for not consulting him before issuing the closure orders. "Islington will have to rehouse these people in boarding houses once they have been evicted through bailiff action," he said. "The council should have come to speak to me first."

He said that from next week he will begin a redesign to add around a third to the space of each unit and make them "larger and more .

'I don't understand what they are afraid of'

Behind a battered purple shopfront advertising accountancy services on Caledonian Road, north London, works Andrew Panayi – one of London's most controversial landlords. The 67-year-old Cyprus-born Briton owns 250 properties in the area, including hundreds of flats and studios as well as shops including a McDonald's. It has made him, he claims, a fortune in the "tens of millions".

He became the star of a BBC documentary about the area in which he boasted of flouting planning procedures and talked of "milking" his properties. Hanging on the wall of his scruffy office is a picture of him slitting the throat of a wild boar in Cyprus, a set of heavy dumbbells rests in the corner and a side table groans with bottles of whiskey and red wine. Pride of place is given to an icon of Zeus and a faded poster of a glamour model.

Among his assets is the hostel on Holloway Road that he bought in 2004 and turned into a £220,000-a-year cash machine by cramming already tiny rooms with flimsy shower cubicles, kitchenettes and WCs and renting them as studios to desperate home-seekers on housing benefit. The local council started investigating his properties after he offered a tiny studio on a different street for £170 a week.

"I single-handledly improved Caledonian Road," he said in his defence. "I provided so much accommodation. I don't understand what they are afraid of."

He is likely to survive the criticism. The balance sheet of his rental business, Ploughcane UK, looks very strong. Accounts filed this year showed it has net assets of £17m and a turnover in 2013 of £2.7m, of which £2.3m was operating profit.

• This article was updated on 9 September to correct the spelling of Cyprus.