Robert Kay, Dispute Resolution Partner
The law relating to residential tenancies is set to change dramatically over the next year or so. The government recently announced its intention to abolish Section 21 notices, so-called ‘no fault’ repossessions in the private rented sector, as well as reform of Section 8 evictions. (See author’s earlier article here).
Although the consultation process for these aspects is underway, what many do not know is that coming into force on 1 June is the Tenant Fees Act 2019 (the Act) which dictates the fees that can be charged by a landlord or letting agent “in connection with a tenancy of housing in England”.
According to the Explanatory Note the aim of the Act is to:
“…make renting fairer and more affordable for tenants by reducing the costs at the outset of a tenancy. This Act also aims to improve transparency and competition in the private rental market. The Act implements the commitment to ban letting fees paid by tenants in England and includes other measures to improve fairness, competition and affordability in the lettings sector”.
A grace period of one year will be applied for all existing tenancies, but for tenancy’s commencing on or after 1 June 2019, the Act immediately applies.
The Act comprises of five main provisions in that it:
- Restricts the type, and amount, of payments that landlords and letting agents can require from tenants of most assured shorthold tenancies (ASTs), student accommodation and under licences to occupy.
- Restricts the amount that can be taken as a tenancy deposit.
- Restricts the amount that can be taken as a holding deposit and sets a timetable for dealing with repayment.
- Prohibits landlords and letting agents from requiring tenants to enter a contract with a third party for a service or insurance. There are limited exceptions for utilities and communication services.
- Imposes sanctions for non-compliance.
Let’s look at these in detail:
Restrictions on payments landlords and letting agents can claim
The Act severely restricts the type of payments a landlord or letting agent can claim in connection with a residential tenancy.
The following types of payments are permitted:
- Tenancy deposit (capped at five weeks’ rent if annual rent is less than £50,000- or six-weeks’ rent if annual rent is £50,000 or more).
- Holding deposit (capped at one week’s rent).
- Payments on certain default events (loss of key or security device, failure to pay rent or breach of the tenancy).
- Fee for the variation, assignment, or novation of the tenancy (capped at £50 or reasonable costs).
- Payment on early termination of the tenancy.
- Council tax.
- Utilities (electricity, gas, other fuel, water or sewerage).
- TV licence.
- Payments for a landline phone, internet and cable or satellite TV.
Any other type of fee is strictly prohibited. These include examples such as:
- Viewing fees.
- Professional cleaning services.
Prohibited payments also extend to over-inflating the cost of the loss of a key or security device. Landlords or letting agents will need to produce evidence of the cost of procuring a replacement and charge no more than the said amount.
Rent spikes at the start of a tenancy will also fall into prohibited payment territory.
Landlords will be unable to charge more than five weeks’ rent for properties let for £50,000 or less. This rises to six weeks’ rent if the annual rent is over £50,000.
A holding deposit is an amount paid by a tenant to the landlord or letting agent to reserve the property before the tenancy commencing. Under the Act, if the holding deposit amount exceeds one week’s rent, it will also be a prohibited payment.
The deadline for entering into a tenancy agreement after a holding deposit is paid is 15 days. This can be extended only by agreement from the tenant and with written notification.
The holding deposit must be repaid:
- Within seven days if a tenancy agreement is entered into in respect of the property the holding deposit applies to.
- Within seven days if the landlord decides not to enter into a tenancy agreement with the payer of the deposit before the deadline.
- The landlord and the tenant fail to enter into a tenancy agreement before the deadline. In such a situation, the deposit must be repaid within seven days from the expiry of the deadline.
The landlord can retain the holding deposit if:
- The prospective tenant is prohibited from renting the house following Right to Rent checks (albeit the High Court found that the Government’s Right to Rent Scheme, introduced in 2016, is discriminatory and breaches the European Convention on Human Rights – see my colleague’s article here).
- The prospective tenant provides false or misleading information, and it would be reasonable for the landlord or letting agent to take this into account when deciding whether to offer a tenancy to the payer.
- If the tenant decides to forgo the property before the deadline, provided the landlord or letting agent does not behave in a way which would make it reasonable for a person not to enter into a tenancy agreement for the property.
Contracts with third parties for services and/or insurance
Neither landlords or letting agents can require a tenant to enter into third-party contracts for services or insurance. The following are exceptions to this general rule; however, they only apply to landlords. Tenancy agreements produced by a letting agency should be in the landlord’s name, so the following exemptions are permitted.
- The contract involves a utility such as electricity, gas, water etc.
- The contract is for a communication service such as phone, internet etc.
Sanctions for non-compliance
If a landlord or letting agency breaches the Act, a fine of up to £5,000 can be imposed (and they will be required to repay any prohibited payments). If a second breach is committed within five years, a penalty of up to £30,000 may be imposed. Furthermore, a second offence is a banning order offence, which means the local authority can apply to the First-tier Tribunal to ban the accused from being a landlord or acting as a letting agent in England.
In addition to criminal sanctions, fines and orders to repay any prohibited payments, no valid section 21 notice may be served on a tenant while a landlord or agent is holding onto any prohibited payment.
The Tenant Fees Act 2019 – which will apply to new tenancies after 1 June 2019, and all tenancies from 1 June 2020 – needs to be examined carefully by landlords and letting agents, as this article is only a summary of the key points. Given the extent of the fines and prospect of a banning order for a second breach, as well as the fact that any section 21 notices may be rendered invalid if there has been a prohibited payment, it would be prudent to seek legal advice if you are in any doubt regarding your compliance obligations.
If you require advice on landlord and tenant issues, or any other type of dispute, please get in touch with Robert Kay, a Partner in our Dispute Resolution team.
Please note – this article does not constitute legal advice.