The Return of the Discharge Bonus

In the past it has been suggested that one way to avoid tenancy deposit protection would be for a landlord to offer tenants a ‘discharge bonus’. This operates by the landlord charging a rent at the upper end of the market level (although not sufficiently over the market rate as to allow the tenant to make an application to the RAC) and then offering the tenants a sum of money or some other inducement to leave the property in good condition and obey the terms of their tenancy. This is a ‘win or lose’ offer and does not involve the payment of partial sums of money. Therefore the landlord will either have to pay everything to a tenant who has not caused any problems or nothing at all where the tenant has left the property in an unsatisfactory condition.

The use of this has been given some support recently by the Court of Appeal. In the case of UK Housing Alliance (North West) Ltd v Francis the Court considered a sale and leaseback arrangement. Mr Francis had sold his property to UK Housing and then taken a 10 year AST. He was paid a sum of £87,500 initially and would receive the remaining figure of £37,500 at the end of the 10 year term. If he breached the tenancy such that it was terminated by UK Housing then he would receive none of the final sum.

An argument made before the Court of Appeal was that this retained money was a tenancy deposit for the purposes of the Housing Act 2004. The Court rejected this argument on the basis that the relevant provisions of the Housing Act 2004 contain numerous references to payment and repayment and therefore a promise to pay a future sum did not qualify as a tenancy deposit. On the same basis a discharge bonus, which is also a future promise to pay, should be exempt from the rules.

How valuable a discharge bonus actually is will probably depend on each case. Landlords with multiple properties may well find it more workable than those with just one. It will also be necessary to set the amount of bonus with care to keep it attractive while not leaving the landlord out of pocket. Finally, landlords will need to have a well drafted set of conditions for payment and retention in order to avoid wasteful arguments about whether or not it should be paid.

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