Tenant fees ban in England

Introduction

From June 1st 2019, landlords and agents will no longer be able to charge a number of fees in England for new tenancies signed on or after that date.

The tenant fees ban is wide ranging and will effectively bar most fees from being charged. Landlords and agents will only be able to charge for payments defined as permitted in the legislation.

This guide will act as a primer for landlords and agents to help them prepare for these upcoming changes.

Does the fee ban apply to agents and landlords?

Yes, it will apply to both agents and landlords.

Does the ban apply in Wales?

England and Wales are separate jurisdictions for this purpose. They are both passing their own versions of the legislation. There will be differences between them in terms of details, especially around enforcement. This note is directed toward the English legislation.

The Welsh legislation is set to come into force for assured shorthold tenancies in September 2019.

When will the ban come into force?

The fees ban will come into force for all tenancies signed on or after 1st June 2019, including renewal tenancies.

Will the fees ban apply to older tenancies?

Not immediately. It will apply to renewals of tenancies, excluding statutory and contractual periodic tenancies that arise after the Tenant Fees Act comes into force.

After one year the ban will attach to pre-existing tenancies and clauses that charge fees in them will become ineffective. If a landlord or agent takes a prohibited payment after that date they will have 28 days to return it or be considered in breach of this legislation.

What fees are banned?

Anything not permitted, that the tenant (or someone acting on their behalf like a guarantor or parent) is required to pay as a condition of the 'grant, continuance, assignment, termination or renewal' of an assured shorthold tenancy or licence agreement.

This includes payments to third parties, either for services throughout the tenancy or for specific performance of a job and loans from third parties.

In short this means that pretty much any fee that is in the tenancy agreement will be void unless it is exempt.

Examples of banned fees then would be:

  • Charging for a guarantor form
  • Credit checks
  • Inventories
  • Cleaning services
  • Referencing
  • Professional cleaning
  • Having the property de-flead as a condition of allowing pets in the property
  • Admin charges
  • Requirements to have specific insurance providers
  • Gardening services

What is exempted from the banned list?

Holding deposits, rent, deposits and charges for defaulting on the contract are all exempted from this ban.

However, all 4 are subject to additional restrictions as part of the legislation and landlords and agents will need to be mindful of these changes.

In addition, most required payments to third parties are prohibited, however a landlord can require the tenant to use a specific utility or communications provider. Agents are not allowed to require this however.

Finally, landlords may charge for changing tenants or allowing tenants to vacate the property early. This is subject to restrictions on costs however.

Restrictions on rent

There will be a ban on setting rent at a higher level for the first portion of the tenancy and then dropping it down afterwards. This is to prevent landlords or agents trying to offset the ban on fees by artificially increasing the rent for the initial period to make up the costs.

Of course, a higher rent than you would normally charge for the property, that is consistent throughout the tenancy will be fine. The government believes this is unlikely to happen though, as tenants will shop around for the lowest price.

Holding Deposits

Holding deposits will be limited to a maximum of 1 week's rent and subject to statutory legislation on the repayment of this should the tenancy not go ahead. Briefly, this is proposed to be:

  1. The landlord has 15 days to make a decision once a holding deposit is taken.
  2. If the tenancy does not go ahead then the money must be repaid in full within 7 days of the deadline being reached or the landlord backing out.
  3. Repayment does not need to be in full if the tenant backs out of the tenancy agreement themselves, fails right to rent checks, has provided false or misleading information, or where the landlord tries their best to get the information needed but the tenant fails to provide it within the 15 days.
  4. If the tenancy does go ahead, the holding deposit must be returned within 7 days of agreement, unless it is converted into part payment of the actual deposit or used towards the initial rent payment.

Deposits

Deposits will be limited to 5 weeks rent as a maximum amount for tenancies where the annual rent is below £50,000. This has gone up from the originally proposed limit of one month.

Deposits for tenancies where the annual rent is £50,000 or more are limited to the equivalent of 6 weeks rent.

Landlords should bear in mind that deposits are considered to be taken at the start of every new tenancy. As such, if they renew the tenancy on or after June 1st 2019 then they should make sure that their deposit is not more than 5 weeks rent (6 where the annual rent is £50,000 or more). If it is, then any amount above the limit should be returned.

For statutory periodic tenancies, if the deposit is created on or after June 1st 2020 then they should return any amount above the limit within 28 days of the start of the statutory periodic tenancy.

Breaches of the tenancy agreement (damages)

Where the tenant has breached their tenancy agreement and caused damage as a result, then landlords may still seek compensation via deductions from the deposit or court action. They should also be able to leave clauses in their contract stating that the landlord may seek their costs for damages.

What they will not be able to do is insert a clause in the tenancy which sets a fixed fee for the damages incurred (a default fee) unless it is specifically permitted.

The government's guidance goes further than this however, wrongly stating that landlords may not have clauses in their contract stating that that legal costs will be payable in the event of a breach.

Breaches of the tenancy agreement (default payments)

Landlords are allowed to charge for two types of default payments - loss of keys and late payment of rent. Both are subject to restrictions.

For the loss of keys, landlords are allowed to charge the reasonable cost that they can evidence in writing. Anything landlords cannot evidence in writing with receipts will likely be considered a prohibited payment.

For late payment of rent, landlords and agents may only charge 3% above the Bank of England base rate in interest on the late payment of rent from the date the payment is missed. At the time of writing this would be 3.75% interest. They may not charge for sending reminder letters.

How to calculate interest on the rent

The calculation is (rent amount in arrears) x 0.0375 / 365 x (the amount of days since the arrears began).

For example

A tenant misses a rent payment of £500 on 1st January and a further payment on 1st February, on February 28th the tenancy ends and the landlord intends to charge for payment.

£500 for the rent amount for the first 31 days £500 x 0.0375 = £18.75 £18.75/365 = 5p per day 5p x 31 = £1.55 for the first 31 days of arrears at that total.

£1000 = rent amount in arrears for the last 27 days

£1,000 x 0.0375 = £37.50 annual interest £37.50 / 365 = 10p per day

27 days have passed since the tenant went into arrears so 10p x 27 = £2.70. £2.70 + £1.55 = £4.25 in arrears can be charged for the late rent.

Changes to the tenancy

While most costs related to assignment or surrender of a tenancy are prohibited, landlords and agents are still allowed to charge certain small sums to tenants if the tenant requests a change in tenant or an early surrender.

Where the tenants have requested a change in the tenancy (such as swapping tenants), the landlord may charge a fee of £50 for the change or the costs incurred. They must be able to evidence in writing any costs incurred if they do go above £50 and the draft guidance makes it clear that £50 is considered the norm for landlords and agents.

Where the tenants have requested early surrender of the tenancy, the landlord or agent may charge fees equivalent to the loss incurred. As charges such as referencing, tenancy drafting, etc are prohibited landlords will not be able to show a loss has been incurred for the provision of these services. Instead, landlords and agents will be able to charge the equivalent of the rent lost due to the unforeseen void period. As the void period may not be clear at the point of charging many landlords and agents will likely start to regularly refuse tenants looking to surrender early as a result.

Third party payments

A number of third party payments can be required as part of the tenancy agreement. Most can be used by landlords and agents, but some are exclusive to landlords.

Landlords and agents

  1. A contractual clause insisting on the tenants paying the television licence is an acceptable payment
  2. A clause insisting on the tenant paying the council tax is an acceptable payment

Landlords only

  1. A clause requiring the tenants to pay for the landlord's costs from a specific service provider for utilities is a permitted payment.
  2. A clause requiring tenants to pay the landlord's cost for a specific communication service (phones, broadband, cable/Sky TV) is permitted for landlords.

If the landlord seeks to charge more than the billed costs for these services then any excess will be considered a prohibited payment.

I wish to use a zero deposit scheme. Is this still permissible?

In short, yes. Landlords and agents can still charge a fee if it is an alternative to a permitted payment such as a deposit.

As a result, a tenancy that states a deposit can be taken or the tenant may pay a fee to use a zero deposit scheme would be a permitted payment under the Tenant Fees Act.

What are the financial penalties for this?

Where a breach has occurred and a banned fee or payment is taken, tenants will be able to get any money wrongly paid back via the county court. Local Trading Standards are supposed to assist tenants with this in some fashion once it comes into force.

The landlord or agent may be charged interest on this from the day that the prohibited payment was taken.

In addition, local trading standards will be required to enforce this legislation and will issue a fine of up to £5,000 for a first offence. Subsequent breaches are criminal offences or alternatively, the landlord can be fined up to £30,000 as a civil penalty and be subject to a banning order.

Will I be restricted from serving a Section 21 notice if I charge fees?

Yes.

No Section 21 notice may be given so long as a prohibited payment was requested, paid by a tenant and is still being held by the landlord or agent.

Landlords and agents can either refund the prohibited payment or, with the permission of the tenant, use that money as payment towards rent or the deposit.

What tenancy types does this legislation apply to?

Only ASTs, student accommodation, and licences are caught by this. Company lets and non-assured tenancies will be exempt.

What do I need to be thinking about before the ban comes in?

Landlords and agents will have to consider their current business models carefully. The prohibition on fees will impact heavily on some business models and this is likely to lead to increasing rents or heavier costs to the landlords.

Similarly, it is vital that landlords and agents consider whether their current tenancy agreements and holding deposit forms are fit for purpose once the new legislation comes into force. The RLA will be updating our documents to ensure compliance with the ban on fees prior to it coming into force. We would urge any of our members to use the new documents once they are published.

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