To charge a fee or not to charge a fee, that is the question: An explanation of the Tenant Fees Act 2019

Legal assistant, Hayley Harvey, discusses the Tenant Fees Act 2019 and its practical implications for both landlords and tenants.

What is the Tenant Fees Act?

The Tenant Fees Act 2019 (the Act) is part of a Government scheme to make residential letting fairer and to reduce the “hidden” costs that many tenants face when renting in the private sector. Tenants can see at the outset of a tenancy what the real cost of renting that property will be.

The main provisions of the Act will come into force on 1 June 2019 and apply to all assured shorthold tenancies (ASTs), tenancies of student accommodation, and licences to occupy housing in the private rented sector in England, granted on or after 1 June 2019.

It will apply to all ASTs (including those predating the Act) with effect from 1 June 2020.

The Act will impact all residential landlords and tenants. Landlords will need to review payments that are routinely charged to a tenant at the outset of a tenancy, as they may no longer be able to charge them under the Act.

What fees can a tenant be asked to pay?

The Act focusses on the fees that can be charged to a tenant. If the fee a landlord wishes to charge does not appear on the permitted payments list below, it will be a “prohibited payment”. Charging a tenant for a prohibited payment will be a breach of the Act.

Permitted payments under the Act

Rent

In the first year of the tenancy, the landlord cannot charge an increased rent at the outset and thereafter reduce the rent. For example, a landlord cannot charge £950 in the first month and then charge £700 from month two onwards. Presumably, this is to try to stop landlords hiding fees in that first rental payment.

However, a landlord and tenant can agree, under a rent review clause in the tenancy agreement, to rent increases and decreases. The rent review clause must allow for both increases and decreases.

Refundable tenancy deposit

A landlord may request a deposit from the tenant as security for the tenant performing their obligations under the tenancy.

The Act has brought in caps on the tenancy deposit:

• If the yearly rent is less than £50,000, the deposit must not exceed five weeks’ rent.
• If the yearly rent is more than £50,000, the deposit must not exceed six weeks’ rent.

For tenancies granted from 1 June 2019 onwards, any deposit amount taken over those stated above, will be a prohibited payment and a breach of the Act.

Refundable holding deposit

A landlord may request a holding deposit from the tenant while things like the reference checks are going through. Once a holding deposit has been agreed, a landlord should stop advertising the property.

The Act has brought in a cap and certain conditions to be adhered to for a holding deposit:

• The landlord cannot request a holding deposit which is more than one week of the total rent for the property.
• A landlord may only hold one holding deposit for that property at any one time.

A landlord must refund the holding deposit within seven days in the following circumstances:

• The tenant enters into the tenancy agreement.
• The landlord decides not to rent the property.
• An agreement is not reached before the “deadline for agreement” (usually on the 15th day after a holding deposit was received) (not through the fault of the tenant).
• The landlord behaves in an unreasonable way and the tenant cannot be expected to enter into a tenancy agreement with them.

A holding deposit can only be retained by a landlord if the tenant does any of the following:

• Provides false or misleading information.
• Fails the “right to rent” checks.
• Withdraws from the proposed tenancy.
• Fails to take reasonable steps to enter the tenancy by the “deadline for agreement” (for example by not providing proof of their income to the landlord despite sufficient notice being given to the tenant).

If the landlord wants to retain the holding deposit, they must write to the tenant stating the reason for holding the deposit within seven days of deciding not to enter the agreement or the “deadline for agreement” date.

Default fees

The Act specifically mentions fees for late payment of rent and replacement of a lost key. A landlord can only charge a tenant a default fee where this has been expressly stated in the tenancy agreement. The default fee must be reasonable and reflect the costs incurred by the landlord.

The interest that can be charged on any default payment from the due date to the date of payment must not exceed 3% above the current Bank of England base rate.

Changes to the tenancy

Where a tenant requests a change to the tenancy agreement (that is, to assign their tenancy or amend the user clause), the landlord can recover a charge or costs for the work involved in making this change from the tenant. However, the general expectation under the Act is that the charge to the tenant will not exceed £50. If a landlord wishes to charge over £50 they will need to provide evidence to demonstrate their reasonable costs.

Completing a renewal of a tenancy does not constitute a “change to the tenancy”. From 1 June 2019, a landlord will not be able to charge for a renewal of a tenancy. An exception to this is if the current tenancy was entered into before 1 June 2019 and it expressly refers to the tenant paying certain renewal fees. This exception only applies until 31 May 2020.

Early termination

A landlord can charge a tenant an early termination fee if the tenant requests to leave before the end of the tenancy. However, that fee must not exceed the financial loss the landlord has suffered by the tenant leaving early. A landlord should be able to provide evidence of the specific losses that have been incurred.

Council tax / utilities / communications (internet)

Tenants are still responsible for paying these in accordance with their tenancy agreement (that is, the landlord is still permitted to pass these charges on to the tenant as long as they are not included within the rent).

What if the fee I usually charge isn’t on the permitted payments list?

If the fee is not listed as one of the permitted payments set out above, you cannot charge the tenant for it. It will be a prohibited payment.

Some examples of these prohibited payments are the cost of preparing an inventory, undertaking a credit check through a third party, charging for a professional clean at the end of the tenancy, set up fees for the tenancy, referencing fees and guarantor fees.

What happens if you don’t comply with the Act?

Trading Standards authorities have a duty to enforce the Act, as do district councils. Tenants can also seek to recover prohibited payments through the First Tier Tribunal (Property Chamber).

A breach of the Act is usually a civil offence, with a financial penalty of up to £5,000. If there is a further breach within five years of a penalty, this will be a criminal offence. The penalty for this under the Housing and Planning Act 2016 is an unlimited fine. However, as an alternative to prosecution, a financial penalty of £30,000 can be levied, but this is at the relevant authority’s discretion.

If a landlord receives two or more financial penalties in 12 months, they could be put on a “rogue” landlord database by the relevant authority.

If a landlord is wanting to obtain possession of the property, they will be unable to use the section 21 procedure if they have not repaid any fees or returned any deposit to the tenant, which they should have done under the Act.

What should landlords be considering now?

The main provisions of the Act come into force on 1 June 2019, so landlords should review their current practices to ensure that nothing in any applicable tenancies granted after 1 June 2019 will fall into the prohibited payment category.

For applicable tenancies granted before 1 June 2019, fees can still be charged in accordance with the existing tenancy agreement until 31 May 2020 or until the tenancy agreement comes up for renewal.

After 1 June 2020, any term in a tenancy agreement requiring a tenant to pay a fee that is not a permitted payment under the Act, will be ineffective. Any prohibited payment taken by the landlord must be returned within 28 days or the landlord will be in breach of the Act.

Conclusion

It is clear that the Act is going to have a big effect on residential tenancies; some would say it is long overdue! The penalties for non-compliance are costly, and so it would be pragmatic for landlords and tenants to know their rights and responsibilities in advance of 1 June 2019.

The government has produced helpful guidance notes on the Act for landlords, letting agents and tenants; see Tenant Fees Act 2019: guidance.

This article first appeared in the Property Litigation Column on 24 April 2019.