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