The new Tenant Fee Ban legislation, over two years in the gestation, has finally received Royal Assent with the majority coming into force on the 1 June 2019. Although the focus is on agents, be aware that this affects private landlords too.
For example, in discussion with a landlord recently he said “I won’t be affected as I don’t charge my tenants any fees, they just pay for the referencing”.
Whilst the view is understandable, it is misguided and charging for referencing could be an offence with a £5,000 penalty.
As the Tenant Fee ban is effective from next month, we’ve written a series of 3 articles (to be distributed during the week) to help you understand the ban and how to avoid the pitfalls.
A Budget Promise
This legislation started as a budget announcement in the Autumn Statement 2017. This alone is unusual in that one would have expected this to be a housing announcement, not a budget announcement.
Perhaps this shows how much this is a political announcement more than anything else.
Nonetheless, the idea has received wide support across both Houses of Parliament. The claim is that this legislation will save tenants £240 million in the first year alone.
Tenant Fee Ban – The Principles
A simple way to regard this legislation, to give an overview, is that a landlord or agent cannot take any money from a tenant in respect of a rented property unless the law allows it in Schedule 1 of the Tenant Fee Ban (Act 2019).
To show how comprehensive this ban is, the first item that the schedule allows you to collect is the rent! Without that provision this law would even ban collecting rent. In addition to this simple restriction other restrictions prevent the requirement to enter into a contract for services or insurance. The law has been written in this way to provide a very comprehensive ban with limited opportunity to circumvent it.
Tenant Fee Ban – The Legislation
Section 1 introduced the ban for landlords and section 2 introduces the ban for agents.
There are a couple of places in the legislation where the rules for landlords and agents are different (the ban on section 21 notices for example).
Although it is convenient to talk about a ban on tenants paying fees, indeed the legislation uses this name, actually the law says a “relevant person”.
This is defined to include the tenant, but also anyone working on the tenant’s behalf (a company or council for example). The latter drafts of the legislation clarified that guarantors cannot be charged either.
Where a prohibited payment is charged the law says that that provision of the tenancy is not binding but the rest of the agreement remains binding.
So, for example, if you included a clause with an inventory check out fee, it is an offence for which you could receive a penalty, and you could not charge the penalty as the provision is not enforceable, but it would not give the tenant the right to walk away from the whole tenancy or to refuse to pay the rent.
Penalties for charging tenant fees
The law creates a penalty of £5,000 for the first offence and £30,000 for a second offence within five years.
The guidance clarifies that if a landlord has ten properties with too much deposit, then each deposit is an offence, but as they are all committed at the same time, they would ‘only’ be up to £5,000 per property.
Another helpful comment in the draft guidance is that if a set-up fee is charged and stated to cover the agreement, referencing, inventory, right to rent checks and check in costs, this would amount to five separate offences, each carrying a £5,000 penalty, not a single offence.
A second or subsequent offence within five years may attract the financial penalty (up to £30,000), kept by the local authority, or may be pursued through the courts where an unlimited fine may be issued, along with it being a banning order offence. Banning orders are not available for first offences.
Where the offence is committed by a corporate body with “the consent, connivance of or to be attributable to any neglect on the part of, an officer”, the officer as well as the corporate body may be punished.
This leaves company directors potentially liable for the offence, despite the concept of limited liability.
This may affect landlords holding properties within a limited company structure.
Recovery of banned tenant fees
Section 15 allows a “relevant person” to seek to recover a prohibited payment. This process is now done through the First-tier Tribunal. Beneficially the tribunal system allows more limited costs so “no win, no fee” claims should be more limited.
Local authorities have the power to assist a relevant person in seeking to recover a prohibited payment. The enforcement authority can also recover the amounts unlawfully paid and charge interest on them too.
Section 21 Affected by Tenant Fee Act 2019
Section 17 of the new legislation introduces a prohibition on serving a section 21 notice when a prohibited payment has been taken and is still being held.
The biggest danger around this part is probably the danger that those defending tenants in possession proceedings may look carefully at the charging to see if anything has been done as they seek to delay or avoid possession.
Interestingly the whole of section 21 prohibition is linked only to the landlord accepting a prohibited payment, and not the agent collecting a prohibited payment.
Following discussion with MHCLG they said that if the agent was charging, why should the penalty fall on the landlord? This is undeniably logical, but it flies in the face of what happens with gas safety records or incorrect deposit protection.
Section 17(1) says that if the landlord requires a prohibited payment, and the Relevant Person makes the prohibited payment, then no section 21 can be served. It is significant to notice that it is not sufficient in section 17(1) simply to demand the payment, payment must actually be made.
Section 17(2) links the section 21 penalty to failure to comply with Schedule 2. Schedule 2 basically governs the rules around holding deposits (not the amount but rather when they have to be refunded etc, the procedure).
Subsection (3) allows for a ‘get out of jail card’ in the form of a refund of the prohibited payment or holding deposit and then the section 21 notice becomes available again. Unlike the issue with gas safety records and the section 21 notice, it is not a once and for ever offence.
The ban on a section 21 notice does not apply where none or part of the prohibited payment has been refunded because, with the consent of the relevant person, it has been used towards the rent or the main tenancy deposit, or split between the two.
The comment about “with the consent of the relevant person” seems significant here. It would be quite easy with the tenant as on the tenant application form the tenant could simply agree that the holding deposit could be used as rent or as the main tenancy deposit. It could be more tricky if the prohibited payment was paid by someone other than the tenant (may be an employer or the local authority) as getting evidence of consent to use it for rent or the tenancy deposit may be more difficult, but will become essential.
Read our second article which covers more about how the new rules will affect Landlords.