24 Apr 2019
The ban on tenant fees in the Tenant Fees Act 2019 (the Act) will come into force on 1 June 2019. The Act limits the fees which residential landlords and letting agents in England can charge to tenants and their guarantors. Breach of the Act could result in substantial civil penalties and criminal sanctions.
What is the aim of the Act?
The government’s aim in bringing in the Act is “to reduce the costs that tenants can face at the outset, and throughout, a tenancy”. It is “part of a wider package of measures aimed at rebalancing the relationship between tenants and landlords to deliver a fairer, good quality and more affordable private rented sector”.
What tenancies are covered by the fees ban?
The ban applies in England to assured shorthold tenancies (which are not long leases), tenancies of student accommodation and licences to occupy housing. It covers the residential private rented sector only; tenancies of social housing are excluded.
Generally, a long lease is one which granted for more than 21 years or is perpetually renewable, but certain shared ownership leases and right to buy leases are also long leases.
What fees are banned?
The Act bans all payments landlords or letting agents require tenants or their guarantors to make (whether to the landlord, agent or a third party) in connection with a tenancy of housing, unless the payment is expressly permitted by a limited list in the Act.
The permitted payments are set out below.
Permitted payment – Rent
Points to note
Anti-avoidance rules aim to prevent landlords recovering lost fee income as rent via tenancy agreements which charge a higher rent initially which later drops within the first year of the tenancy.
There is no restriction on charging a higher rent for the whole duration of the term of the tenancy.
Permitted payment – Tenancy deposits (as security for the tenant’s obligations)
Points to note
The tenancy deposit must be refundable and no more than five weeks’ rent (or six weeks’ rent where the annual rent is £50,000 or more).
Holding deposits (to reserve a property)
The holding deposit must be refundable and no more than one week’s rent.
A holding deposit is not permitted if the landlord or letting agent has previously received a holding deposit in respect of the same property, which has not yet been repaid.
- fails a right to rent check (and neither the landlord nor any letting agent knew or should have known before the deposit was accepted that the tenant would fail such a check); or
- provides false or misleading information which the landlord or letting agent is reasonably entitled to take into account in deciding whether to grant the tenancy. Government guidance suggests that the landlord will only be acting reasonably where the false information casts doubt on the tenant’s financial suitability or honesty (e.g. a significantly too high income declaration, or a clear lie about income or employment).
In any of the above cases, the landlord or agent must serve notice on the tenant stating the ground on which the deposit is retained, or the right to retain it will be lost.
There are also strict time limits prescribed by the Act for the return of holding deposits. Generally, a deposit must be returned within seven days after:
- the tenancy is entered into (unless it is set off against rent, if agreed by the tenant);
- the landlord decides not to grant the tenancy; or
- the “deadline for agreement”, which is the 15th day after the deposit is taken, unless a different date has been agreed in writing.
For the payment to be permitted, the tenancy agreement must expressly provide for the payment to be required.
For lost keys, the landlord or letting agent can only recover the costs that they have reasonably incurred. This must be evidenced in writing.
For late rent, the sum is limited to daily interest on the unpaid rent at an annual rate of 3% above base rate.
Landlord and letting agents cannot both charge late rent payment fees to tenants; only one of the landlord or letting agent can do so.
This is not subject to any limitation and would cover, for example, a payment by a tenant to a landlord to compensate the landlord for damage to the property caused by the tenant.
Landlords should of course bear in mind the cap on the deposit they can require from a tenant as security for the tenant’s obligations (see “Tenancy deposits” above), so less money will be available as security for any damages or unpaid rent.
Early termination payments
Payments by a tenant are permitted to compensate a landlord or letting agent if the tenant ends a tenancy before the end of the fixed term or without giving sufficient notice.
The payment cannot exceed the amount of the landlord’s loss caused by the early termination, or the letting agent’s reasonable costs of arranging the termination.
Payments for utilities, communication services and council tax
A tenancy agreement may validly require a tenant to make payments in respect of utilities, communication services and council tax.
Payments on assignment, novation or variation of a tenancy
Payments by a tenant in return for assignment, novation or variation of a tenancy are permitted but are capped at the greater of £50 or a higher fee if the landlord or letting agent can prove that is reasonable).
Are any other arrangements prohibited by the Act?
Generally landlords and letting agents are not allowed to require a tenant to enter into a contract with a third party in connection with a tenancy. However, there are limited exceptions in connection with the provision of utilities and communication services to the tenant.
The Act also prohibits the tenant being required to make a loan (whether to the landlord, letting agent or a third party) in connection with the tenancy. It is difficult to envisage circumstances in which this would be relevant.
How will the rules be enforced?
Robust sanctions sit behind the obligations in the Act. Potential consequences for breach include:
Barring the landlord from serving a section 21 notice on the tenant to terminate an assured shorthold tenancy until it has repaid any prohibited payment in full.
The repayment of any prohibited payments, with interest. This could be ordered by the enforcement authority but the tenant also has a right to apply to court to seek repayment.
Any obligation to make a prohibited payment or enter into a prohibited arrangement will not be binding on the tenant but the agreement will so far as practicable, continue to have effect in every other respect.
Civil fines of up to £5,000 for the first offence and criminal fines of up to £30,000 for subsequent offences.
Offences under the Act are also banning order offences under the Housing and Planning Act 2016, so offending landlords or lettings agents are liable to be banned from letting property or carrying our property lettings and management work.
When do the provisions come into force?
The tenant fees ban will come into force on 1 June 2019. Initially, the ban will apply only to prohibited payments or arrangements required by landlords or agents after that date, so pre-existing requirements will not be rendered invalid.
However, from 1 June 2020, the prohibition will extend to pre-existing provisions which contravene the Act. Such provisions will no longer be enforceable, but the rest of the agreement will, so far as practicable, remain in effect.
What guidance is available?
The government has published guidance for tenants, landlords and letting agents to explain how the Act will affect them.
Various landlord and letting agent associations, such as the Residential Landlords Association and ARLA Propertymark have put together guidance on the changes for their members.
What impact is the Act likely to have?
Some have speculated that the Act may lead to an increase in rents, as landlords attempt to offset a reduction in income from fees. Others, the government included, believe that landlords will have to keep rent increases under control to keep their properties competitive.
It might be possible for landlords and letting agents to circumvent the fees ban by making the payment of fees by a tenant optional, as an alternative to complying with another requirement (e.g. a requirement that the tenant obtain a reference itself). The Act itself confirms this can be valid and, if the practice becomes widespread, the impact of the fees ban may be lessened.
Some business models are likely to be more severely affected than others by the fees ban. Landlords and letting agents should review their income projections now to ensure they are not caught out.