Those familiar with recent legislative changes in the Private Rented Sector (‘PRS’) will no doubt be accustomed to the government’s desire to keep prospective tenants in occupation; as growth in the PRS sector has culminated in a strain on housing due to the increase in prospective tenants.

Politicians have taken the view that the most effective way of keeping tenants in occupation is to redress the balance between landlord and tenant and ensure a culture of fairness in the PRS sector. The Tenant Fees Act (‘the Act’), which came into force on 1 June 2019, aims to prevent landlords and agents from demanding excessive fees by prohibiting payment of any fees which are not prescribed by the Act.

What are the key aspects of the Act?

A “tenancy” under the Act includes assured shorthold tenancies (‘ASTs’), aside from ASTs of social housing or long leases over 21 years, student lettings and most licences to occupy starting on or after 1 June 2019.

Where a tenancy agreement was entered into before 1 June 2019, landlords can still charge fees which aren’t covered by the Act until 31 May 2020 (or exercise any provision that would be in breach of the Act) but only where these are required under an existing tenancy agreement. (for example, fees to renew a fixed-term agreement).

As stated above, any such tenancy will prohibit a landlord or letting agent from requiring a tenant (or anyone acting on their behalf or guaranteeing their rent) to make payments not listed in the Act.  All payments are prohibited unless they are expressly permitted – therefore landlords and letting agents need to be aware of this exhaustive list and factor them into any agreement.

The Act also requires a tenant to enter into a contract with a third party for the provision of services (except for utilities or communication services) or insurance or to make a loan to any person in connection with their tenancy. 

The landlord may only receive one holding deposit per property, regardless of the number of prospective tenants. The landlord will have to engage in far more due diligence for each prospective tenant, as if they provide false or misleading information the landlord can only retain a tenant’s holding deposit if the information is such that it “reasonably affects the landlord’s decision to let the property”.

This is subjective and depends on the facts of the case, and so could lead to a backlog in the courts, especially following the government’s proposed intention to repeal the Section 21 procedure, as landlords may only remove a tenant under Section 8 or retain the holding deposit of deceptive tenants after incurring significant legal costs.

What Penalties does the Act Confer for Non-Compliance?

The Act imposes the following sanctions for non-compliance:

  1. A fine of up to £5,000 for a breach of Schedule 1. Each request for a prohibited payment will constitute a breach and a fine could be imposed for each breach.
  2. It is a criminal offence for landlords to commit a further breach within five years of having a financial penalty imposed or being convicted of previous criminal offence under the Act. A conviction could result in an unlimited fine. This is also a banning order offence under the Housing and Planning Act 2016 and repeat offenders could find themselves banned from being a landlord or letting property or on the database of rogue landlords and property agents.
  3. An enforcement authority has discretion to impose a fine up to £30,000 as an alternative to prosecution.

What can a Landlord Charge a Tenant under the Act?

In a nutshell, Landlords can only receive payments if it is listed in Schedule 1 of the Act.

It is important to note that the Act will not prevent the landlord from recovering damages for breaches of the tenancy agreement.

The permitted payments under Schedule 1 are as follows:

  • Rent

However, all parties must be aware that within the first year of a tenancy, a landlord is prohibited from charging more at the start of the tenancy than for a later rental period. 

For example, if the rent is payable monthly, the tenancy agreement could not require the tenant to pay £1,000 in the first month and then £500 from month two (or even eleven) onwards. 

  • A refundable tenancy deposit, but only up to the level set out in the Act

This is money held as security for the performance of the tenant’s obligations under the tenancy.  The maximum deposit that a landlord will be able to request is:

  • If the annual rent is less than £50,000 – 5 week’s rent
  • If the annual rent is £50,000 or above – 6 week’s rent

For properties let under an AST, landlords must continue to ensure that they comply with tenancy deposit scheme legislation.

  • A refundable holding deposit of no more than 1 week’s rent (based on the total agreed rent for the property)
  • A default payment for:
  • the replacement of a lost key/security device;

The landlord or letting agent can only charge the reasonable cost incurred in replacing these and must be able to support this with evidence (e.g. invoices)

or

  • late payment of rent (where the rent is more than 14 days overdue);

This is capped.  The payment charged must be less than the amount payable if the tenant was charged interest on the unpaid rent at 3% per annum above the Bank of England base rate for each day that the rent remained unpaid.

However, the tenancy agreement must expressly permit these to be recovered. 

  • Payments for a variation, assignment or novation of the tenancy at the tenant’s request
  • Payment for early termination of the tenancy at the tenant’s request

This payment cannot exceed the actual financial loss suffered by the landlord or the reasonable costs that have been incurred by the letting agent in arranging for the tenant to leave early.  If there are no missed rent payments, Government guidance expects that a landlord will not charge an early termination fee.

  • Payments for/in respect of council tax, utilities, a TV licence or the provision of communication services by the landlord, if this is payable by the tenant under the terms of their tenancy agreement

Summary

Whilst it can be agreed that changes to the PRS were needed to curb excessive and unjustified fees, the government runs the risk of exacerbating the housing crisis by over-regulating landlords. If landlords are forced to incur extra costs as a result of extra regulation, then the logical response would be to increase rent. We would then see a vacuum in the buy-to-let market as prospective landlords avoid the PRS and prospective tenants can no longer afford rent on a property which they would have been able to occupy in the past.

Landlords must ensure that they avoid the sanctions for non-compliance by adhering to the list of permitted payments in Schedule 1 and ensure that any agreement is sufficiently drafted.

Tenants must, on the other hand, keep meticulous records of all payments made to the landlord and take advice on whether each invoice is permitted under the Act. If it is not, then they have scope to issue proceedings against the landlord or agent for non-compliance.