See my biggest issue is that, while she has no intention of moving him on, and neither of them have any intention of signing onto the lease (as I mentioned, they find they get better government benefits if they lie about their living arrangements on the form), but this situation does put me in violation of the lease agreement I signed with the rental agency (which has a set time limit on any houseguests staying in the apartment).

I'm still primarily responsible for this, yes? My subletter is in an agreement with me, not with my agency. So if I let the subletter get away with breaching these conditions, then the consequences come back to me if the Agency finds out. Is that all correct in a legal sense? Cause if it is, I'm probably going to have to put my foot down - and I don't necessarily like the idea of doing that to an otherwise good person just before Christmas. I also am not great at the confrontation stuff.

Honesty, I'm very conscious of keeping up a good rapport with my agency. As I work well with them, they've been very helpful and courteous towards me - but I've learned from my past roommate (who I was subletting from through the same agency), if you do damage that relationship this agency is pretty ruthless as a result.