Get Your House in Order
Residential landlords, and their advisers, could perhaps be forgiven for feeling rather in the firing line of late with numerous proposed reforms, consultations and statutory changes aimed at reforming the residential property market, the latest being the introduction on 1 June 2019 of the Tenant Fees Act 2019 (The Act).
The Act applies to Assured Shorthold Tenancies (ASTs) granted on or after 1 June 2019, excluding social housing and long leases (exceeding 21 years), and will apply to all ASTs (including those predating the Act) with effect from June 2020. The stated aim of the Act is to reduce the “hidden” costs that a tenant can face at the start of his or her tenancy by enabling a tenant to see, at a glance, what a given property will cost. Whilst the Act will undoubtedly succeed in imposing controls on the practices of “rogue” landlords and agents, it will affect all parties involved in residential lettings as many of the payments prohibited under the Act are of a nature commonly charged by reputable landlords and recovered from their tenants.
As observed in Lauren Addy’s article: Tenant Fees Act 2019: Time’s up for residential letting fees (EG 25/02/19), rather than specifying which fees are prohibited, the Act prohibits all payments except those which are permitted by the Act. Whilst this approach is clearly intended to remove the scope for the exploitation of any potential loopholes that could result from the use of a more prescriptive list of permitted and non-permitted payments, it has led to a degree of confusion and misunderstanding.
This confusion has been addressed, to some extent, with the publication of informative guidance documents for both landlords and tenants: [https://www.gov.uk/government/publications/tenant-fees-act-2019-guidance]. The guidance provides useful examples of the sort of commonly encountered payments now deemed prohibited payments. These include viewing fees, tenant set up fees, inventory checks, check out fees, reference fees, credit checks and the payment for services of a third party such as chimney sweeps, gardeners or professional cleaners (unless included in the rental payment itself). The guidance for tenants also includes template letters that tenants may use to challenge and request repayment of any prohibited payments.
The permitted payments are set out in Schedule 1 of the Act and are considered below in the order they appear in the Act.
Unsurprisingly, the payment of rent is a permitted payment, subject to the qualification that a rent payment that is higher than the payment due for a similar period later in the term is not permitted. This is presumably intended to prevent the landlord from including a rent “spike” at the start of the term to offset its costs in granting the tenancy. This does not prevent the parties from agreeing legitimate stepped rent increases or periodic rent reviews during the term.
The payment of a tenancy deposit to secure performance of the tenant’s obligations in the tenancy is permitted, provided that the deposit does not exceed five weeks’ rent (if the yearly rent is less than £50,000) or six weeks’ rent (if the yearly rent is more than £50,000). These limits are relatively standard in the market and should still allow a landlord adequate protection in most circumstances. Additional deposit payments to cover potential damage where the tenant is permitted to keep a pet are not permitted.
Interestingly, the option for a tenant to use a “deposit replacement product” is given as an example of a permitted payment in the tenant guidance. Such products require the tenant to pay an upfront fee (usually one week’s rent) and monthly payments towards a premium based on the credit worthiness of the tenant and the rent liability.
Whilst a tenant can no longer be required to pay a setup fee or cover the cost of references and credit checks, a landlord can require a prospective tenant to pay a holding deposit as evidence of his or her intention to complete a tenancy. However, in order to be a permitted payment, any such deposit must not exceed one week’s rent, and cannot be requested if the landlord already holds a deposit for the same property from the same tenant (for example in the case of a renewal). The deposit may be held for a maximum of 14 days (or longer if agreed between the parties) and must be repaid to the tenant within 7 days of the tenancy being completed.
The deposit may only be retained by the landlord if the tenant fails the “right to rent” checks, provides unsatisfactory or misleading financial or other information, withdraws from the transaction or fails to take all reasonable steps to enter into the tenancy within the agreed deposit period. The deposit cannot be retained if the landlord elects not to proceed with the letting as a result of an unsatisfactory reference or credit check.
Payment in the event of a default
The Act allows for the payment of a permitted “default fee” in respect of just two forms of tenant default, namely interest on the late payment of rent and the cost of replacing lost keys. Any such default fee must be expressly set out in the tenancy agreement and must comply with the requirements set out below:
A default fee for non-payment of rent must allow a 14 day grace period, after which the default fee can be charged on the rent payable from the due date to the date of payment, subject to a cap equal to 3% above the then current base rate of the Bank of England.
A default fee relating to the loss of a key or other security device must reflect the reasonable costs incurred by the landlord and details of these costs must be given to the tenant in writing.
There are, of course, many more forms of tenant default that are not mentioned in the Act, for example breach of repair, damage to contents and failure to return the premises in a clean condition at the end of the term. Whilst it is not permissible for the tenancy agreement to specify a set default fee payable in respect of such breaches, the Act does not prevent the landlord relying on a clause in the tenancy which allows him to recover from the tenant the costs incurred in remedying the breach. In the absence of such a clause, the landlord can deduct the cost of remedying the breach from the tenancy deposit at the end of the tenancy; or pursue a claim for damages, either during the course of the tenancy, or at the end.
Payments to vary or assign a tenancy
A payment by the tenant to the landlord as consideration to vary or assign an existing tenancy will be a permitted payment but only if the fee is not more than the greater of £50 or the reasonable costs of the person to whom the payment is made in respect of the variation or assignment. Whilst the £50 limit is a relatively low sum, it will only apply in cases where the landlord’s reasonable costs are lower. If the charges exceed the specified maximum, only the excess is a prohibited payment.
Payment on termination of a tenancy
A payment by the tenant to the landlord as consideration to terminate the tenancy before the end of the fixed term or without the requisite period of notice is permitted, but only so far as it reflects the actual loss (if any) suffered by the landlord. Generally this will mean that the fee charged should be limited to the loss of rent (payable on the same basis as under the tenancy, ie, not as a lump sum on termination) and costs such as re-advertising and agent’s fees. Where a suitable replacement tenant is found the termination fee should be limited to the loss of rent up to the date that the replacement tenancy is in place. A termination payment is not permitted where the tenant is exercising a contractual break.
Payments to cover council tax, utilities (electricity, gas or other fuel or water or sewerage) and telecommunications (telephones (not mobile), the internet, cable television and satellite television are permitted payments and can be recovered from tenants. Landlords must not, however, overcharge for the provision of any such services. A payment for a TV licence is a permitted payment, provided that the tenancy agreement requires the payment to be made. Landlords cannot charge interest on the late payment of such sums (unless they are included in the rent payment).
Penalties for non compliance
- A provision in a tenancy agreement that purports to recover a prohibited payment from a tenant will be unenforceable; however, all other terms of the tenancy will remain in force.
- A landlord or letting agent who requires a tenant to make a prohibited payment may face prosecution and payment of a fine of up to £5,000, or up to £30,000 if that person has committed a similar offence in the previous five years.
- A landlord who receives a prohibited payment will not be able to serve a section 21 notice (for possession at the end of the term) until the prohibited payment is repaid to the tenant.
Timing and retrospective effect
New tenancies: The Act applies to all new ASTs granted on or after 1 June 2019 (with the exception of new periodic tenancies arising after that date under section 5(2) of the Housing Act 1988 (ie, statutory periodic tenancies) in respect of an AST granted before 1 June 2019).
Existing tenancies: The Act will apply to all ASTs from 1 June 2020. After this date any contractual provisions that purport to require the tenant to make a payment that is prohibited by the Act will be of no effect and a landlord or letting agent who accepts a prohibited payment and does not return it with 28 days will be treated as having received a prohibited payment.
Application of the Act
Whilst it is possible that residential landlords will want to apply the same standard tenancy provisions to all tenancies granted, the Act does not apply to all residential tenancies. A tenancy cannot be an AST unless: (i) the tenant is an individual or individuals and at least one of them occupies the property as his or her only or principal home; and (ii) the yearly rent exceeds £250 (or, in London, £1,000) and is less than £100,000. Accordingly, a contractual tenancy granted outside these parameters may include provision for payments which would be prohibited by the Act.
The changes to tenancy agreements required to reflect the Act are relatively straightforward, and it is likely that most landlords will have updated their standard tenancy agreements in good time for the introduction of the Act on 1 June 2019. However, many of the provisions of the Act will require a change to established practices and procedures and landlords and agents will need to review their current practices regarding payments of holding deposits, rent deposits, inventory fees, penalties for late payments and other “in tenancy” fees to ensure that these comply with the controls set out in the Act.
This article first appeared in Estates Gazette on 22 October 2019. Find out more about our Real Estate services.
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