Gary Leverett, a Senior Solicitor in our Disputes team, looks at the Tenant Fees Act which initially comes into Effect on 1 June this year...
One of the most common complaints of those who rent property in the private sector is the hidden costs of renting, such as finder’s fees, credit checks, admin fees, renewal fees and the professional clean at the end of a tenancy. The government appears to be aware of these concerns and in order to make residential letting fairer - and to reduce these hidden costs - the Tenant Fees Act 2019 will first come into effect on 1 June 2019.
It will initially apply to all Assured Shorthold Tenancies, tenancies of student accommodation and licences to occupy housing in the private rented sector in England, granted on or after this date. From 1 June 2020 it will then apply to all Assured Shorthold Tenancies, including those entered into before the 1 June 2019.
As a landlord you will have to review those payments that are normally charged to a tenant at the outset of a tenancy, as the probability is that you will no longer be able to do so under the Act. If a fee that a landlord wishes to charge does not appear in the Act, it will no longer be able to be charged under the terms of the Act.
In the first year of the tenancy the landlord cannot charge a higher rent at the start and afterwards reduce the rent, thus hiding fees in the first rental payments. So for example, a landlord cannot initially charge rent at £1,000 per month and then charge £800 per month two or three months afterwards.
If there is a rent review clause in the tenancy agreement, allowing rent to increase and decrease, a landlord and tenant can agree under this clause to rent increases and decreases.
2. Refundable Tenancy Deposit
A landlord may ask for a deposit from the tenant as security for the tenant performing their obligations under the tenancy agreement. However, if the annual rent is less than £50,000, the deposit cannot exceed five weeks rent; if the annual rent is more than £50,000, the deposit must not exceed six weeks rent. Any deposit taken above these amounts will be a prohibitive payment and a breach of the Act.
3. Refundable Holding Deposit
A landlord may still request a holding deposit from the tenant while undertaking, things like reference or credit checks but once one has been agreed, the landlord should stop advertising the property. Again, there are caps and conditions in that a holding deposit cannot be more than one week of the total rent for the property - and a landlord can only hold one holding deposit for that property at any one time.
The holding deposit must be refunded within seven days of:
- The tenant entering into a tenancy agreement
- The landlord deciding not to rent the property
- An agreement not being reached before the ‘deadline for agreement’, which is usually on the 15th day after the holding deposit was received, provided this was not through the fault of the tenant
- The landlord behaving in an unreasonable way and the tenant consequently not being expected to enter into a tenancy agreement with them
A holding deposit can only be retained if the tenant:
¬ Provides false or misleading information
¬ Fails the ‘right to rent’ checks
¬ Withdraws from the proposed tenancy
¬ Fails to take reasonable steps to enter the tenancy by the deadline for agreement
The landlord must write to the tenant stating the reasons for holding the deposit within seven days of deciding not to enter into the agreement or the deadline for agreement date.
4. Default fees
The Act only allows a landlord to charge a default fee in respect of late payment of rent and replacement of a lost key and only if this has been expressly stated in the tenancy agreement. The default fee must be reasonable and reflect the costs incurred by the landlord.
Interest can be charged on any default payment from the due date to the date of payment but must not exceed 3% under the current Bank of England base rate.
5. Changes to the Tenancy
If a tenant requests a change to the tenancy agreement (for example to assign their tenancy or to amend the user clause) a landlord can recover a charge or cost for the work involved in making this change, but the general expectation under the Act is that the charge will not exceed £50. Any more and the landlord must provide evidence that the charge is reasonable.
This does not include a renewal of the tenancy as this will not be considered to be a ‘change to the tenancy’; however, if the current tenancy was entered into before 1 January 2019 and it expressly refers to renewal fees these may be charged, but this exception only applies to 31 May 2020.
6. Early Termination
A landlord can charge an early termination fee if a tenant requests to leave before the end of the tenancy, provided that it does not exceed the financial cost that the landlord has suffered as a result. A landlord will need to provide evidence of the specific loss that has been occurred.
7. Community Tax/Utilities/Communications (internet)
A landlord is permitted to pass these charges on to the tenant if they are not included with the rent provided they are included in the tenancy agreement.
Any other fees are not deemed to be permitted payments, so the costs of preparing an inventory, undertaking a credit check, charging for a professional clean at the end of the tenancy, set up fees for the tenancy, renewal fees, referencing fees and guarantor fees will not be allowed.
Trading Standard Authorities and District Councils have a duty to enforce the Act. Tenants can also apply to recover prohibited payments through the First Tier Tribunal (Property Chamber).
A breach is a civil offence with financial penalties of up to £5,000. Any further breaches within five years of a penalty will be a criminal offence, with an unlimited fine.
The relevant Local Authority will put a landlord that receives two or more financial penalties within 12 months on a ‘rogue’ landlord database.
Further, a landlord will not be able to use the Section 21 procedure if they have not repaid any fees or returned any deposit that is prohibited.
Landlords will need to review their practices and their tenancy agreements to make sure that those permitted payments are specifically referred to under the terms of the tenancy agreement, otherwise they will not be recoverable. The government has helpfully produced guidance notes which can be reviewed and downloaded from their website.
Failure to review your tenancy agreements and your charging practices could prove to be costly and therefore it is imperative that you do so immediately, not only in respect of new tenancies from 1 June 2019 but also those currently existing.
This change now shows how the pendulum is swinging from landlords to the protection of tenants and my opinion is that it will only continue further in the future.