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To Fee or Not to Fee…

Jun 17, 2019
1 June 2019 saw the arrival of the Tenant Fees Act 2019 (TFA), which represents the first piece of primary legislation in two decades to directly address the relationship between landlords and residential tenants in England and Wales. First announced by the Chancellor in his autumn statement of 2016, the TFA brings in a number of restrictions on what landlords and their letting agents can and cannot charge to new tenants. 

While many current and prospective tenants will welcome the arrival of the TFA, several landlord associations have argued that landlords will be forced to pass on the burden of these changes to tenants in the form of higher rents. Regardless of the knock-on effects that the TFA will have, it is important that landlords are aware of the new limitations this Act imposes on them, as landlords in breach of the TFA risk losing their right to end the tenancy at the end of the term, as well as receiving a fine of up to £30,000. 

What Tenancies Does the TFA Apply To?
The TFA applies to most residential tenancies entered into on or after 1 June 2019. The scope of the TFA in this regard is very broad, including assured shorthold tenancies (ASTs), student lettings and most licenses to occupy. The main tenancies that are not covered by the TFA are ASTs for social housing and ASTs with long leases (over 21 years). 

Tenancies entered into before 1 June 2019 benefit from a 12 month grace period, meaning they are exempt from these new rules until 31 May 2020. This includes periodic tenancies that have arisen after the end of a fixed term before 1 June 2019. Only terms that are not compatible with the TFA will cease to have effect on 31 May 2020, the rest of the terms of a tenancy will be unaffected. 

What Changes Does the TFA Make to Residential Tenancies? 
The TFA prevents landlords and their letting agents from charging certain types of fees to their tenants (and their tenants’ guarantors). It also prohibits landlords or their letting agents from requiring tenants to enter into contracts with third parties for the provision of services or insurance (with the exception of utilities and communication services). 

Rather than listing the charges that a landlord cannot make, the TFA instead lists the charges that they can. These are referred to as ’permitted payments’. 
What Charges Qualify as ’Permitted Payments’?

The permitted payments that a landlord can charge are found in Schedule 1 of the TFA. These fall into seven categories:

  1. Rent – while this should come as no surprise, there is an important qualification made by the TFA. This is that within the first year of a tenancy, a landlord cannot charge more at the start than for a later period. For example, a landlord cannot charge £750 per month for the first three months of the tenancy and then reduce this to £600 from month four onwards. This is to prevent landlords from simply passing on any extra costs they incur as a result of the TFA onto the tenant by simply raising the rent for the first few months of the tenancy. 

    It is important to note that this rule does not prevent the operation of rent review clauses that alters the rent in-line with market rates. 
  2. A refundable tenancy deposit – landlords will still be able to demand tenancy deposits at the start of the tenancy in the usual way. However, the TFA limits the maximum deposit that can be demanded to the following levels:

    a.     If annual rent is less than £50,000 – 5 weeks’ rent
    b.     If annual rent is £50,000 or above – 6 weeks’ rent

    The TFA does not alter a landlord’s responsibility to protect a deposit taken as part of an AST in the usual way. 
  3. A refundable holding deposit – landlords may hold a refundable holding deposit of up one week’s rent while pre-tenancy checks are being carried out or the tenancy agreement is being negotiated. Schedule 2 of the TFA outlines the rules for both the size of the deposit that can be held and the length of time for which it can be held. The particulars of these calculations are beyond the scope of this article, although the government has posted helpful guidance on its website. 
  4. A payment in the event of default for:

    a.     The late payment of rent – this charge is capped at the amount that the tenant would pay if interest was charged on the rent at a rate of 3% above the base rate of the Bank of England per annum. Furthermore, the tenancy document must specifically allow for such a charge to be levied.
    b.     The replacement of a lost key / security device – this charge must be reasonable and the landlord / letting agent must provide evidence of the charges incurred (i.e. invoices). 
  5. Payments for a variation, assignment or novation of the tenancy at the tenant’s request – this applies to any variation of the tenancy agreement that alters the obligations of either party. Such charges are limited to £50 or the reasonable costs of amending the tenancy, for which the landlord tenant will need to provide evidence. 
  6. Payment for early termination of the tenancy at the tenant’s request – such a charge cannot exceed the actual financial loss of the landlord in arranging for the tenant to leave early. The government has produced guidance on this issue, suggesting that if there are no missed rental payments then no early termination fee will be due. 
  7. Payments in respect of utilities, TV licence or council tax – if a landlord provides any of the aforementioned services as part of the tenancy agreement, they may pass this cost on to the tenant. 
What are the Penalties for Failure to Comply with the TFA?

If a landlord or letting agent receives a payment that is not a permitted payment after 1 June 2019, they have 28 days to return this payment before they are in breach of the TFA. Tenancy deposits received before 1 June 2019 that exceed the newly-prescribed limits do not need to be returned until the end of the fixed-term of the tenancy. 

It appears from the preliminary literature that any sanctions will be primarily enforced by trading standards, although local councils can also chose to take enforcement action. There are three types of sanctions that may be made against a landlord or letting agent:

  1. Fines and criminal prosecution – the TFA allows for a fine of up to £5,000 to be levied against a landlord / letting agent for each and every payment that is not a permitted payment that is requested or received. Each individual request for such a payment can attract its own individual fine. 

    If a landlord / letting agent commits a further breach within five years of having a financial penalty imposed or being convicted of a criminal offence under the TFA, they can receive a further fine of up to £30,000. Additionally, the offender may be banned from being a landlord or letting agent or placed on the database of rogue landlords and property agents. 
  2. Repayment of fees – upon finding that a landlord or letting agency has received a prohibited payment, the prosecuting body will order the perpetrator to pay back that money to the tenant immediately. 
  3. Prevention from serving a Section 21 Notice – a Section 21 Notice is the notice that a landlord must serve on a tenant to end the tenancy after the fixed term has expired. While a landlord is in breach of the TFA, they may not serve a Section 21 Notice on their tenant to bring an end to the tenancy. If a landlord has received a prohibited payment or holding deposit, a Section 21 Notice cannot be served until the landlord has paid this back to the tenant (or applied towards the rent with the tenant’s consent).

Landlords should read the government’s guidance on the effect of the TFA carefully to make sure they are not unwittingly in breach of its provisions. Both landlords and letting agents should carefully review their tenancy agreement templates for this same reason.

Sam Cook

About the author

Sam Cook

Sam joined our Commercial and Property Litigation Team in 2016 after completing his training and practicing for three years at two leading regional law firms ...

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