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 June, we’ve written this article to help you understand the ban and how to avoid the pitfalls.
The Tenant Fee Ban will be extended to all existing tenancies as of June 2020.
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.
Consumer Rights Act 2015
Sections 18 to 20 make modifications to the Consumer Rights Act 2015, largely to section 83 but some to section 87. These changes are about the requirement of agents to display fees and are not relevant to this article. The Government have simply used this legislation to make some other amendments. Basically agents will have to state which Client Money Protection scheme they are a member of in the office, on their website and on any third party website.
Lead Enforcement Authority
The estate agency world already has a lead enforcement authority in the form of the National Trading Standards Estate Agency Team in Powys Council. Section 24 brings in a “lead enforcement authority” for the lettings world. The default lead enforcement authority is the Secretary of State, but section 24(2) allows the Secretary of State to make arrangements for a local trading standards authority in England to be the lead enforcement authority.
The duties of the lead enforcement authority are stated in section 25. They are stated to include providing information, to issue guidance, to oversee lettings legislation and provide guidance to local authorities in enforcing the legislation.
The lead enforcement authority also has a role in providing information to the Secretary of State about changes in practice in the market and how the Tenant Fees Bill is working.
Enforcement of the Tenant Fees Bill
Local Trading Standards, and district councils, have a role enforcing the Tenant Fees Bill. However, the lead enforcement authority has been granted a power to directly enforce the legislation where it considers it necessary or expedient to do so.
The lead enforcement authority can also require a local authority to assist the lead enforcement authority in taking enforcement action. Due to the proximity of the local authority it is much more likely they will be the ones aware of an offence, rather than a remote lead enforcement authority.
Section 27 contains the definition of what is meant by a “letting agent”. It is based on acting on behalf of a landlord looking for a tenant or for a tenant looking for a property.
People working in those roles within their employment are not counted, so the responsibility lies at the company level. Lawyers carrying out legal work are also exempted.
The legislation is defined as only applying to assured shorthold tenancies and licences. This means that contractual tenancies to companies, where it is not the only or principal home or any other reason, can still all be charged fees. It should, however, be noted that you cannot choose to use a contractual tenancy. Whether a tenancy is an assured shorthold or a contractual tenancy will be a matter of the facts of the letting, simply calling it contractual will not change that.
Transition to post Tenant Fees Bill
Obviously there will be a number of tenancies where a fee is already included in the agreement, though not yet charged, a check out fee for example.
Basically any new agreement, including renewals, but excluding statutory periodic tenancies, must comply with the new rules from the date the legislation is introduced.
If a tenancy is already in existence at the commencement of the ban, any prohibited payments continue to be allowed for a period of up to 12 months. Therefore, an inventory check-out fee in a tenancy agreed before the ban is introduced, will still be chargeable if they leave before 1 June 2020 (assuming the expected introduction on the 1 June 2019). Thereafter, collecting the check-out fee would be a prohibited payment.
Subsections 30(5) (for landlords) says that 12 months after the law comes into force any provision in the agreement “ceases to be binding” if it would be a prohibited payment in an agreement created after the law came into force.
Whilst some examples would be easy to identify as a problem, one tricky area is deposits. The question is, if a deposit in excess of the new five week limit is held under a tenancy agreed before the law came into force, does it have to be refunded at the end of the 12 month transitional period?
The legislation dictates that security deposits will be capped at the equivalent of 5-weeks’ rent for assured-shorthold tenancies with an annual rent of up to £50,000, or 6-weeks’ rent for tenancies with an annual rent of £50,000 or more.
Although not retrospective, these changes will apply to ALL new tenancies entered into from 1 June 2019, alongside any existing tenancies that are renewed on a fixed-term basis. For clarity, this does NOT affect any tenancies which continue on a periodic basis. Also, if new tenancy agreements are entered into (signed) before 1 June 2019, these tenancies will not be affected initially, irrespective of when the tenant actually moves into the property, though the cap will apply to any future renewal.
At present, all of the tenancy deposit protection schemes are currently in joint discussions with The Ministry of Housing, Communities and Local Government (MHCLG), in relation to deposits currently protected that will be affected by the cap.
It is hoped that the process of returning any excess deposits will result in the least amount of administrative effort for landlords and agents and will be based around a part-repayment of a deposit; you shouldn’t be required to repay and re-protect deposits (or issue new Prescribed Information).
The Deposit Protection Scheme (DPS) offer a facility to calculate the amount of deposit that should be returned to a tenant if the initial deposit was over 5 weeks. Again, this does not have to happen immediately, you will have 12 months grace.
Section 34 explains that the actual ban on fees needs regulations to commence them. This is expected to be 1 June 2019. There is concern that many agents will go bankrupt without the tenant fees and so they are bringing in the requirement for agents to have Client Money Protection in April, before the fee ban. Landlord’s using agents would be well advised to ensure that after April their chosen agent has Client Money Protection in place.
Schedule one lists permitted payments after the Tenant Fees Bill is in place, though many of them have restrictions.
The first permitted payment is actually rent, showing how comprehensive the ban is in that they have to specifically allow for the payment of rent. There are rules about reducing the rent that may catch out a few.
What they are doing is preventing the charging of a higher rent in the first month and then reducing it, so that instead of a fee it is simply called rent. This extra amount is a prohibited payment.
The second permitted payment is the deposit, the restriction here is that it must not exceed five weeks’ rent on a tenancy with a rent value of up to £50,000 per annum, six weeks rent over that level.
The week’s rent is not quite accurate as it takes the annual rent and divides it by 52. However as this is a tiny bit more than five actual weeks’ rent worked out from daily basis, it is at least on the safe side.
The third permitted payment is the holding deposit. In this Schedule it is limited to one week’s rent, but Schedule two introduces new procedures around the holding deposits. It uses the same 52 week calculation to establish what is one week’s rent.
The fourth permitted payment is default costs. However this can only be for default in relation to keys and rent. Lost keys or access devices (electronic fobs) can be charged, but only at the actual cost, which must be reasonable. Rent default can only be charge at 3% over Bank of England Base rate, and regardless of the rate actually incurred by the landlord.
The payment of “damages” is a permitted payment. This is understood to allow for charges at the end of the tenancy where the tenant has caused damage to the property and the landlord seeks a deposit deduction. This comes under the heading of default as the deduction would be in respect of a breach of tenancy.
Paragraph 6 introduces the first of the new permitted payments that have been added since the legislation started it parliamentary journey.
This paragraph deals with a payment where the tenant wants a variation, assignment or novation of the tenancy.
Chargeable by the landlord or agent it is limited to the greater of £50 or the reasonable costs. This means that if the tenant wants to move the rent payment date, a charge could be made for the work of issuing new standing orders etc.
If the tenant wants a pet in a block and the freeholder imposes a charge for agreement to have the pet then, within limits on reasonability, that cost can be passed on to the tenant.
A tenant who wants to leave before a point in the contract where they have the right to leave, can be charged the landlord’s losses. This could be a tenant leaving during a fixed term tenancy or a tenant wishing to leave a periodic agreement without giving the proper notice.
The amount is limited to the landlord’s loss and any amount over this is an excess payment and may incur the penalty charge.
This introduces an interesting situation where the agent may charge the landlord for a new tenancy and the landlord may be able to charge at least a pro rata amount of that to the tenant as a loss. We suggest a pro rata amount as if the tenant left in month 11 of a 12 month fixed term it would not seem reasonable to charge all the re-letting cost to the tenant when the landlord had enjoyed eleven twelfths of the benefit and had only lost one twelfth of what they paid for.
Requiring the tenant to pay the council tax is a permitted payment. Whilst this seem logical and obvious, the statement in the legislation is clearly linked to paying the council tax to the “billing authority” as defined in the Local Government Finance Act 1992 section 1(2).
This would imply that a separate payment of council tax to the landlord is not a permitted payment and would attract a penalty. A rent including council tax would seem to be the way around that, but care should be taken not to have a separate payment. This may affect some landlords of houses in multiple occupation where the landlord is legally liable to the local authority to pay the tax.
Another glaring omission from the early drafts was the ability to require the tenant to pay the utilities. These are defined as electricity, gas, or other fuel and water or sewerage. It also clarifies that requiring a Green Deal payment as part of the utility bill is a permitted payment.
In this case it does not define to whom the payment is made so a payment to the landlord for utilities is permitted.
A payment to the British Broadcasting Corporation is a permitted payment. Therefore the tenancy agreement can include a requirement for the tenant to purchase a TV licence if they want to use a TV.
The TV licence is dealt with separately above, and in addition to this it is permitted to require tenants to pay for subscriptions for telephone services, other than mobile phone, broadband, cable and satellite services.
It may be open to challenge as a fair clause ‘requiring’ the tenant to have these services, this is simply saying that though the legislation prohibits landlords from requiring tenants to enter into contracts or make payments to third parties, this does not prevent them from requiring the tenant to pay for broadband if the tenant wants broadband.
These payments can very clearly be charges from the landlord to the tenant, though the charges made by the landlord cannot exceed the reasonable costs incurred by the landlord in providing the service (law that already applies to the provision of electricity and gas).
Schedule 2 introduces new rules about the handling of holding deposits. It does not limit the amount, that is done in Schedule 1.
It introduces a new concept of a “deadline for agreement”. By default this is the fifteenth day beginning with the day on which the holding deposit is received. In simple terms this means if the landlord and tenant have not started the tenancy within 15 days then, by the default, the holding deposit will have to be refunded.
There are certain markets where this simply would not work, student lets for example, where there may be six months between reservation and move in. However, para 2(2) allows for the landlord and tenant to agree, in writing, a deadline for agreement that is different from the default. There are no limits on the agreement in terms of how long it could be.
The holding deposit has to be repaid if the tenancy is entered into, if the landlord decides to withdraw before the expiry of the deadline, or if the landlord and tenant fail to enter into a tenancy agreement within the deadline.
Where the holding deposit has to be repaid it must be repaid within 7 days.
There are exceptions to this general rule requiring repayment.
- Firstly, if the person applying fails Immigration Act checks and the landlord or agent could not reasonably have known they would fail.
- Secondly, if a person gives false information (lies on the referencing application form), it does not have to be repaid.
- Thirdly, before the deadline for agreement the tenant notifies the landlord or agent that they have decided not to enter into the tenancy.
- Fourthly the landlord and agent have taken all reasonable steps to enter into the agreement but the tenant fails to take all reasonable steps.
In all of the above cases, a trap exists. The person who receives the holding deposit must repay it if: the person believes one of the above reasons exist but they do NOT give the person who paid the deposit a notice in writing, within 7 days, explaining why the holding deposit will not be repaid.
The third and fourth reasons above do not count if the agent tries to impose a requirement that breaches the basic rule not to charge or require them to enter into a contract for services or insurance.
A holding deposit does not have to be repaid where, with the consent of the person who paid the money (note not necessarily the tenant), it is used as part of the rent or deposit. If used as part of the deposit the rules clarify that the date of receipt for the purpose of deposit protection is the start of the tenancy.
This provides the details of how the penalty regime will be applied.
It starts with a notice of intent from the enforcement authority. This must be served within six months of them being aware of the offence or six months beginning with the last day on which the breach occurred.
The agent can then make representations to the authority before they serve a “final notice”. There is still a further right of appeal to the First-tier Tribunal
The penalty can be recovered “as an order of the court”. In other words it counts as if they had got a county court judgement and the usual enforcement options apply.
Enforcement authorities can use the money recovered to spend on any private rented sector enforcement. If it is not spent on this it has to be returned to the Treasury so there could be some enthusiasm for enforcement rather than lose the money!
Obviously landlords should review their tenancy agreements and remove clauses that would breach the new rule, be they prohibited payments or asking tenants to enter into contracts for service or insurance. It is worthy of note that it is an offence to have a clause in the agreement even if it is not enforced.
One very obvious casualty of this will be a requirement for the tenant to pay for professional cleaning of the property. Before this legislation, this practice was already open to question if it was enforceable but is now clearly not allowed. It will be an offence with a £5,000 potential penalty to even have the wording in future agreements.
Landlords will not be able to charge for referencing. However, although requiring a relevant person to enter into a contract for service is prohibited, it is permitted if a “fee ban complaint” option is given. So for example the tenant being invited to pay for their referencing or provide a list of documents to comply with referencing at no cost, should meet the new requirements. Likewise above, though requiring professional cleaning is not permitted, providing a property cleaned professionally and requiring it returned cleaned to the same standard (without specifying how that is achieved), is acceptable.
Since the announcement there has been a phenomenal growth on no deposit schemes. Here the tenant does not pay a deposit but instead effectively buys a sort of insurance policy. In the event the landlord has a claim against the deposit, the insurance will pay the money to the landlord. In some case the amount they offer exceeds the limit of the 5 weeks’ rent the legislation imposes.
It is important to understand that the tenant typically remains totally liable for the money paid out by the deposit insurance scheme. Therefore, they may not have to find so much up front money but rather than putting in five weeks’ rent and probably getting it all back, they typically pay about one week’s rent but get none of it back and remain totally liable for any claim against the insurance.
Most of these schemes (and the referencing ones) are marketed on the basis that they are paying a commission to the landlord or agent. Agents will be tempted to do this to raise money but should consider what might be in the landlord’s best interest as is their fiduciary duty. To choose a scheme and not collect a deposit, then have the scheme cease trading, could leave the agent exposed. Monies paid to the agent without the landlord’s express agreement would be money that actually belonged to the landlord.
Understanding an anomaly
Resident landlords are a great anomaly. If you have a resident landlord who rents out rooms in his own house to lodgers, he will be only issuing a licence and therefore cannot charge any fees.
However, if the same landlord, in addition to renting out rooms in his own part of the house, has a self-contained basement flat, for the renting of the flat the landlord will use a contractual tenancy. The Housing Act prevents him from using an assured shorthold, and for that basement flat he can charge fees or a higher deposit.
Compliance with the Tenant Fees Act requires a range of different elements all of which must be completed to comply.
Firstly, it is important to understand the legislation. This article gives an overview but further detail can be found in the act itself.
Secondly, although draft guidance has been released, the final guidance has not yet been issued. MHCLG did say in January that it would only be available on the 1 June. Following pressure from the industry they have said they will try and bring it out earlier.
Charges and payments at a glance
Remember that the law starts from the position that no money may be taken from the tenant unless the law states it can. Note that there are certain conditions / restriction to what constitutes a permitted payment. There are also strict rules for when (and how much) an agent can charge a tenant.
- Payment of rent under the tenancy
- Tenancy deposit
- Holding deposit
- Default fee
- Variation or assignment
- Early termination
- Council tax
- TV licence
- Communication services
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