Tenant Fees Act – Guidance

On 1 April the Ministry of Housing, Communities & Local Government (MHCLG) published guidance on the Tenant Fees Act 2019.

MHCLG has issued 3 guidance documents on the Act for tenants, enforcement authorities and landlords and lettings agents. We will concentrate on the guidance issued to landlords and lettings agents.

The guidance begins with a discussion on the charges that can be applied in connection with a tenancy. Our previous post on these charges can be read here. The guidance then addresses the enforcement date of the ban. In summary, the ban applies from 1 June 2019 for all new (including renewals and in some instances statutory periodic) tenancy agreements, student lets or licenses to occupy housing in the private rental sector. For agreements entered prior to 1 June 2019, landlords and agents will still be permitted to charge tenant fees as they do now until 31 May 2020. This means that from 1 June 2020 any term in a tenancy agreement entered into prior to 1 June 2019 which requires these tenants to make payments will no longer be binding.

At page 14 the guidance then proceeds to explain the Act by way of a series of question and answers. We will aim to address only some of these Q&As and recommend further reading.

References

Landlords and agents cannot require a tenant to obtain a reference through a third-party reference service as a condition of granting a tenancy. A tenant can be asked to provide a reference from their previous landlord or agent, and landlords and agents are prohibited from making a charge for this reference. However, where landlords or agents ask tenant’s previous landlords or agents for a reference a charge may be payable by the requesting landlord or agent. Tenants will no longer be liable for the cost of a credit check. However, there is a holding deposit exception to this (see below).

Refusing to let to a tenant where they do not have a reference check provided by a third party is not an option. A tenant cannot be required to meet any condition that could only be met by paying a fee. However, a tenant can use the services of a third party, so for example a credit reference agency, if they elect to do so.

Some tenants may present their own references in light of the Tenant Fees Act 2019. But agents will need to consider whether they are of sufficient quality to be acceptable. In practice it maybe more pragmatic for the agent to simply incur the cost of a reference which will be of a known level of quality.

Deposits

If the annual rent for the property is less than £50,000, the maximum deposit you can ask a tenant to pay is up to five weeks’ rent. If the rent is above £50,000 then the maximum is 6 weeks’ rent.

The cap on deposits apply from 1 June 2019 to any new tenancies which commence or are renewed on or after that date. Tenancy agreements, licenses to occupy and student lets that commenced prior to this date are not subject to this cap until 1 June 2020 (transition period). What this means is that from 1 June 2020 any provision in an agreement which breaches this deposit cap will no longer be legally binding. This means it is likely to be applicable to statutory periodic tenancies.

For agreements that are renewed, that is when they become a new tenancy, license, or student let, on or after 1 June 2019 any part of the deposit that exceeds the cap will need to be returned within 10 days if it is secured with a tenancy deposit scheme. Where the deposit is not secured with a tenancy deposit scheme it still needs to be returned when the tenancy is renewed but the 10 day time limit does not apply.

The position with tenancies that commenced prior to 1 June 2019 is slightly different. If a tenant paid a tenancy deposit which exceeds the cap before 1 June 2019 landlords or agents do not immediately need to refund part of a tenancy deposit which exceeds the cap. There is a 12 month transition period from 1 June 2019 to 31 May 2020 for continuing tenancies that includes statutory periodic tenancies which commenced prior to 1 June 2019. During this transitional period any deposit which exceeds the cap does not need to be refunded however on 1 June 2020 it will, but according to the guidance not immediately and only once the tenancy to which it relates is at an end. It is, however certainly possible that deposits that exceed the cap could be raised as a defence to any section 21 possession hearing and rather than having to defend such a case it may be in the landlords and agents’ interest to refund the excess rather than fund a lengthy legal case.

Holding Deposits

Holding deposits are capped at one weeks’ rent and can only be accepted for one property at any one time. Multiple holding deposits for one property are not permitted and once it is taken a property should no longer be advertised.

Once a holding deposit (HD) is taken landlords and agents should provide potential tenants with paperwork. This paperwork will set out important information about the HD and further details can be sourced at page 33 of the guidance.

Once a HD is accepted a landlord will usually have 2 weeks to enter into a tenancy. If a tenancy is not entered within 2 weeks landlords should refund the HD within 7 days. The HD can be offset against any deposit where a tenancy is entered into or returned within 7 days. Finally, a landlord also has 7 days to return the HD where they elect to withdraw from the proposed agreement. There are circumstances where landlords or agents can retain a HD including where a tenant provides false or misleading information, further details can be sourced at page 34 of the guidance.

Any decision to retain a HD must be set out in writing within 7 days of deciding not to let or within 7 days after the period in which a tenancy should have been agreed. Such a decision to retain the HD should be decided on a case by case basis and must only cover the costs actually incurred. The costs incurred will then need to be evidenced to demonstrate that the decision to retain the HD was reasonable. Tenants who may be unhappy with the decision to retain their HD can challenge the decision through trading standards or via the First Tier Tribunal. Therefore, any decision to retain the HD should not be taken lightly and should only really be considered where the tenant has acted unreasonably.

Default Fees and Damages Payments

Default fees are only recoverable where there is a clause in the tenancy entitling such a charge.  Furthermore, fees are only payable where a tenant is late paying their rent or where a tenant has lost a key or security device giving access to the property.

Damages are treated a little differently. Damages can still be recovered for breach of contract where the amount sought is proportionate and the actual cost incurred. Damages which amount to a penalty are not recoverable so for example a charge applied because the tenant did not have the property cleaned is not recoverable.

However, all this is somewhat complicated where legal fees are concerned. Most tenancy agreements include a clause permitting landlords to recover legal fees in the event of a tenant breach. Such a clause makes the legal costs a damages award in court. However, the guidance states categorically at page 49 that legal fees are not recoverable because they are treated as default fees. Unfortunately, this is going to cause some confusion because under the Tenant Act 2019 (Sch 1 c.5) ‘A payment of damages for breach of a tenancy agreement or an agreement between a letting agent and a relevant person is a permitted payment.’ Accordingly, pursuant to this clause a landlord or agent should be entitled to recover contractual legal fees in the event of a tenant breach. However, we believe that many tenants and their advisers will rely on the guidance in the first instance and as such it may be prudent for agents to remove such a clause from their tenancy agreements rather than face a legal challenge.

The guidance is generally quite helpful however at 59 pages it is not an easy read. Furthermore, given that some areas of the guidance appear to contradict the legislation, in our opinion, it must be treated with care.

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