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Landlords Watch Out On Taking Payments From Tenants Going Forward

Landlords of

  • assured shorthold tenancies
  • licences (lodger lettings for example)
  • student lettings (provided by a specified educational institution)

need to be aware of the Tenant Fees Act 2019 which has just been passed which is expected to commence on 1st June 2019. 

The Act controls what payments a landlord or letting agent may require and will fundamentally alter what landlords can demand by way of payments from tenants. 

1.       Offence

The starting point to understand is that ALL payments are essentially prohibited unless the payment is expressly “permitted” under the Act. For example, rent and deposits are permitted under the Act but even they have restrictions (yes, even rent has some restrictions). 

It’s not only an offence for a landlord or letting agent to require a prohibited payment but it’s also an offence for a landlord or letting agent to require a tenant to make a prohibited payment to a third party (for example asking a tenant to pay directly to a referencing company is prohibited). 

The penalty for a first offence is up to £5,000. If a person commits a second offence within 5 years, a penalty of up to £30,000 is payable.  In addition, a second offence is a criminal offence.  Furthermore, a second offence is a banning order offence and if enforced would mean the landlord could be banned from letting again during that period of the banning order. 

Any financial penalty is on top of being required to repay any prohibited payments or holding deposit received. 

Where an offence is committed by a body corporate is proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of, an officer of a body corporate, the officer as well as the body corporate commits the offence and is liable to be proceeded against and punished accordingly. 

In addition to it being an offence if a landlord requires a tenant who has an assured shorthold tenancy to make a prohibited payment and, the person makes a prohibited payment as a result of the requirement or, a landlord breaches the holding deposit rules where the holding deposit relates to an assured shorthold tenancy, then  no section 21 notice may be given in relation to the tenancy so long as all or part of the prohibited payment or holding deposit has not been repaid to the tenant  and effectively the landlord would not be able to terminate the tenancy without having paid it back. 

As an alternative to repayment, the tenant can consent to: 

  • the payment or deposit being applied towards a payment of rent under the tenancy,
  • the payment or deposit being applied towards the tenancy deposit in respect of the tenancy, or
  • some of the payment or deposit be applied to the rent and the rest be applied towards a tenancy deposit.

It’s important to note the tenant must consent for that to be allowed otherwise the money will need to be repaid in order to serve a section 21. 

With the consent of the relevant person, it’s possible to repay part of a prohibited payment directly and then another part towards rent, tenancy deposit or a combination of both. As long as ultimately the whole prohibited payment has been repaid, a section 21 notice can then be served. 

Only when the landlord requests and receives a prohibited payment do the restrictions on serving a section 21 apply.  If a letting agent makes such a request and receives payment, the landlord is unaffected for section 21 purposes. 

2.       What about tenancy agreements entered into before 1st June 2019 

Where a tenancy was granted before 1 June 2019, if any provision of the tenancy would be prohibited (had the tenancy been granted from 1 June 2019), the provision ceases to be binding on the tenant (or a relevant person) after 1 year from commencement of section 1 of the Act (but the agreement continues, so far as practicable, to have effect in every other respect).

If, after 1 June 2020, the landlord (or a letting agent) accepts a payment from a tenant pursuant to a prohibited provision, the landlord or letting agent must return the payment within 28 days otherwise, the landlord or agent is to be treated as having required the tenant to make a prohibited payment. There is no requirement for this repayment to be requested by the tenant (or other relevant person) so this is a strict time-limit and the landlord or agent must be proactive in returning the money. 

3.       So what permitted payments are landlords or letting agents allowed to receive? 

The permitted payments are contained in Schedule 1 of the Act and they are:

  • Rent
  • Tenancy deposit
  • Holding deposit
  • Payment in the event of a default
  • Payment on variation, assignment or novation of a tenancy
  • Payment on termination of a tenancy
  • Payment in respect of council tax
  • Payment in respect of utilities etc.
  • Payment in respect of a television licence
  • Payment in respect of communication services
  • Each one has restrictions and limitations
  • By explanation in respect of some of these

1)      Payment of rent 

a)      Payment of rent under a tenancy is a permitted payment.  However, if you were thinking you could charge a higher than normal rent for month one (for example) and then a reduced rent for the remainder of the term, think again! They already thought of people trying to avoid the legislation that way!

b)      Although receiving rent is a permitted payment, it is subject to the following:

If the amount of rent payable in respect of any relevant period (“P1”) is more than the amount of rent payable in respect of any later relevant period (“P2”), the additional amount payable in respect of P1 is a prohibited payment.

For example, if we say a tenancy starts on 1 July and we say the rent for July is £900.00 (P1) and then from 1 August it’s £700 per month (P2), as the amount for P1 is greater than P2, the difference is prohibited (in our example the difference is £200 and it is that which is the prohibited payment – the £700 being a permitted payment).

2)      Tenancy Deposit

a)      A tenancy deposit (which is taken to secure the performance of the tenancy) is a permitted payment. No change is made to the requirements of protecting and prescribed information etc.

b)      However, the amount that can be requested by a landlord or agent is changed.

c)       Where the annual rent is less than £50,000 per annum, the maximum tenancy deposit allowed is five weeks.  Where the annual rent is equal to or greater than £50,000, up to six weeks deposit is allowed.

d)      In order to calculate the 5 or 6 weeks rent amount, you first take the annual rent and divide by 52 to get one weeks rent and then multiply by 5 or 6 as appropriate.

e)      Any excess over and above the 5 or 6 weeks amount would be a prohibited payment

3)      Holding Deposit

a)      A holding deposit is not to be confused with a tenancy deposit as detailed above.

b)      A holding deposit is a permitted payment taken before the granting of the tenancy and is ordinarily used whilst the landlord or agent takes steps to grant a tenancy to the payer (such as referencing etc.):

c)       … money which is paid by or on behalf of a tenant to a landlord or letting agent before the grant of a tenancy with the intention that it should be dealt with by the landlord or letting agent in accordance with Schedule 2 (treatment of holding deposit).

d)      There is a strict procedure to be followed under Schedule 2 in relation to accepting and repaying a holding deposit.

e)      The maximum holding deposit allowed is up to one week’s rent calculated the same as the tenancy deposit (annual rent divided by 52).

f)       Only one holding deposit may be held at any one time for the same letting unit so taking multiple holding deposits from multiple prospective tenants is not allowed. If a holding deposit has been repaid to a previous prospective tenant, a further one for the same housing can then be taken from a new prospective tenant.  If the landlord or agent is entitled to retain a holding deposit (e.g. due to false information resulting in a tenancy not being granted) the landlord or agent can then take a further holding deposit from another prospective tenant. 

4)      Payment in the Event of a Default

Certain defaults under a tenancy agreement can be charged for with restrictions.

i)        The Loss of a Key

a)      In order for a payment in respect of the loss of a key or other security device to be a permitted payment, the cost must be reasonably incurred by the landlord or letting agent as a result of the default, and supported by evidence in writing which is provided to the person on whom the requirement to make the payment is imposed.

b)      Any excess over and above what costs have been reasonably incurred are a prohibited payment.

c)       If requesting payment under this heading, the actual receipt for the new key, security fob or whatever was reasonably incurred must be provided and that would be all that can be charged.

ii)       Failure to Pay Rent in Full

a)      In addition to the rent itself, payment of interest is a permitted payment as long as the amount of interest charged is:

b)      the aggregate of the amounts found by applying, in relation to each day after the due date for which the rent remains unpaid, an annual percentage rate of 3% above the Bank of England base rate to the amount of rent that remains unpaid at the end of that day.

Therefore a daily rate may be calculated and can be added from day 15 of non-payment onwards (but the interest can then be applied back to the day after the ‘due date’).

For example, if a rent of £650.00 was due on 1 August and if the Bank of England Base Rate is 0.75% on 15 August, an annual percentage rate of 3.75% can be added for each day it remains unpaid (6p – rounding down). In this example, the interest can be applied back to 2 August (but only if payment hasn’t been made before 15 August). Anything above would be a prohibited payment.

c)       Only the landlord OR agent can request the interest payment. If the landlord requests payment and the agent subsequently requests the interest payment, the agent is deemed to have requested a prohibited payment. The same goes the other way round (so if an agent has already requested and then the landlord subsequently requests an interest payment, the landlord has requested a prohibited payment).

iii)     A Payment of Damages for Breach of an Agreement

a)      Payment of damages for breach of a tenancy agreement or an agreement between a letting agent and a relevant person (tenant, guarantor or person acting on behalf of a tenant) is a permitted payment.

b)      The Consumer Rights Act 2015 already requires that any term of a tenancy be “fair” so the Tenancy Fees Act 2019 doesn’t go any further than this for this permitted payment.

c)       This allows for damages such as repairs to be claimed at the end of a tenancy for example.

5)      Payment on Termination of a Tenancy

a)      A payment is a permitted payment if it is a payment to a landlord or letting agent in consideration of the termination of a tenancy at the tenant’s request.

b)      That can be a request by the tenant either before the end of a fixed term or in the case of a periodic tenancy, without the tenant giving the period of notice required under the tenancy agreement or by virtue of any rule of law.

c)       However, in order to be a permitted payment, the amount cannot exceed the loss suffered by the landlord or the reasonable costs to the letting agent as a result of the termination of the tenancy

d)      And, in respect of a payment to a letting agent in consideration of the termination of a tenancy at the tenant’s request but if the amount of the payment exceeds the reasonable costs of the letting agent in respect of the termination of the tenancy, the amount of the excess is a prohibited payment. 

Conclusion

Landlords and Letting agents need to review as a matter of urgency their standard letting agreements as many of the provisions contained therein will going forward be illegal if utilised as a means of demanding or taking payments from the tenant , and liable for a statutory fine  for which on repeat offence could be £30,0000. 

Indeed breach may well impact on their ability to get tenants out at the end of the tenancies if the provisions are not met (see above). 

On existing tenancies or ones entered into post 1st June 2019 then from 1st June 2020 any enforcement of provisions of those agreements which breach the Act will be illegal as if the tenancies were entered into post 1st June 2019.