This article was first published on Lexis®PSL Property Disputes on 6 June 2018. Click for a free trial of Lexis®PSL.

Property Disputes analysis: David Smith, partner at Anthony Gold Solicitors, and Robert Mullarkey, trainee solicitor at the firm, consider the background to the draft Tenant Fees Bill and its progress through Parliament.

Original news

Tenant Fees Bill bans letting fees and tackles unfair tenant costs.

The Tenant Fees Bill has been introduced into Parliament to stop tenants having to pay expensive letting fees, saving them approximately £240m a year. The Bill will bring in other measures, such as providing assurance that rent deposits will not exceed the cost of six weeks rent, to reduce unfair practice by letting agents and to improve affordability for tenants who rent property in the UK.

What is the Tenant Fees Bill?

The Tenant Fees Bill seeks to prohibit landlords and letting agents from charging fees to tenants for the grant, renewal or continuation of a tenancy—such fees are deemed by the Bill to be ‘prohibited’. The Bill specifies certain exceptions, or ‘permitted’ fees which are set out in a schedule with a power for the Secretary of State to amend the list of permitted fees by secondary legislation.

The Bill also contains other features including a cap on tenancy deposits at six weeks’ rent, a cap on holding deposits at one week’s rent and amendments to the Consumer Rights Act 2015 (CRA 2015). The amendments to CRA 2015 extend the requirement of letting agents to publicise their fees to cover third party websites, such as Zoopla and RightMove, and to provide information about their membership of their client money protection scheme.

Why has the government introduced the Bill?

Although there are possibly political dimensions to the introduction of the Bill aimed at appeasing young voters, many of whom rent in the private sector, there are other policy reasons for the Bill. The Bill aims to introduce more transparency to pre-tenancy fees, as tenants are not always fully aware of the letting fees they will be charged before considering a new tenancy. It also aims to increase market competition, as letting agents often impose unfair or excessive fees because tenants have a very limited ability to negotiate or opt-out, restricting movement and affordability in the private rented sector.

The theory is that if landlords are obliged to pay the fee they will be able to exercise more choice, leading to fees being driven down by market forces. Often, another restriction on affordability is the size of the deposit that landlords demand from tenants to enter into a tenancy. While deposits are not an obligation of a tenancy, 74% of households in the private rented sector paid a deposit in 2014/15. The requirement for large deposits upfront can be a significant financial burden on tenants, and can be a source of dispute at the end of the tenancy if the landlord attempts to deduct money. A cap on deposits at six weeks’ rent aims to address the affordability issue, while also providing a balance to ensure landlords have adequate financial security for their asset.

What are the mechanisms of the Bill?

If any clause under the tenancy agreement requires the tenant to make a ‘prohibited payment’, that clause will not be binding. However, the existence of such a clause does not invalidate the whole agreement, and the tenant will still be bound by all other clauses of the tenancy.

Responsibility for enforcement of the legislation will fall to local authorities’ trading standards, who must satisfy the criminal burden of proof (beyond reasonable doubt) that a landlord or agent has received a prohibited payment. If satisfied, a financial penalty of up to £5,000 can be imposed. Repeat offenders can have criminal proceedings brought against them with a fine of up to £30,000 imposed. Those who commit a further breach within five years of the imposition of a financial penalty or conviction for a previous breach, will be subject to a banning order offence under the Housing and Planning Act 2016.

Tenants will be able to recover prohibited fees in the First-tier Tribunal. One of the most significant amendments to the Bill following the Select Committee report, is the prohibition on serving a section 21 notice under the Housing Act 1988 until the prohibited fee has been repaid to the tenant. This brings the unlawful charging of tenancy fees in line with other obligations, such as tenancy deposit protection.

What are permitted fees?

All payments will be prohibited, except for the following specific exceptions:

  • rent
  • a refundable tenancy deposit capped at six weeks’ rent
  • a refundable holding deposit capped at one week’s rent
  • default fees
  • fees for varying a tenancy, which are capped at £50 unless the landlord or agent can prove that a greater fee was reasonable

What are prohibited fees?

Prohibited fees are any fees which a landlord or letting agent demands as a condition of the grant, renewal or continuation of a tenancy which do not fall within one of the five exceptions above.

The Bill also contains anti-avoidance mechanisms which prevent landlords from front-loading the first month’s rent to charge fees and then dropping the rent in the subsequent months.

Are there any potential problems with the Bill?

There are ways which a landlord or agent might circumvent the ban on charging letting fees, by making certain fees optional. This would most likely work with referencing checks—a landlord or letting agent could provide the tenant with an option of obtaining a reference themselves or paying an optional fee to the landlord or letting agent to do it for them. Some tenants might prefer to pay the optional fee rather than have to obtain the reference themselves.

What are the likely outcomes from the Bill?

Some critics of the Bill have suggested that banning letting fees will lead to an increase in rents. However, evidence from Scotland, where fees have been banned since clarification of the law in 2012, indicates that this is not the case. Research by Shelter in 2014 suggests that any negative impact of the ban on letting fees has been minimal for landlords, agents and renters, with the sector remaining competitive. The validity of comparisons between Scotland and England in relation to the private rented market is uncertain, however.

There is also the possibility of increased friction between landlords and agents over default fees. Many tenancy agreements contain default fees already, but these are often not actually charged. If agents are more reliant on them, however, they are more likely to seek to charge these. In practice, these fees are likely to be taken from the tenancy deposit. If the landlord is reliant on the same deposit money to cover other costs and expenses, it may be a challenge for agents to demand that their fees are paid first.

Will the Bill become legislation?

The government has already indicated its commitment to dedicating legislative time to the Bill during this Parliament. The Second Reading in the House of Commons took place on 21 May 2018 and the Bill has now been committed to the Public Bill Committee, which met on 5 June 2018 and is due to meet again on 7 June, with a report expected to the House of Commons by 12 June.

It is possible that the Bill will become enacted in late 2018, but most likely in early 2019.

This article was first published on Lexis®PSL Property Disputes on 6 June 2018. Click for a free trial of Lexis®PSL.