This is the second article on the Tenant Fees Bill and covers more about how the new rules will affect landlords. For those who seek more information on this topic, please feel free to read our first article.
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).
Just as I am writing this article, I have learned that the Deposit Protection Scheme (DPS) are now offering 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).
In part three we will consider some practical actions that landlords should consider.