This is the third in a series of posts on the Tenant Fees Act which comes into force on 1 June 2019. The two previous posts in this series are an overview of the TFA and discuss the issue of optional and default fees .
The Tenant Fees Act has a number of provisions around tenancy deposits and holding deposits. These are very important as they will bring substantial change to the way many landlords and agents to business. Due to the transition provisions they may also require specific actions on tenancies as they are renewed.
The TFA restricts tenancy deposits to the monetary equivalent for five weeks rent. This does not need to be calculated precisely and so the weekly rent is worked out as the annual figure divided by 52, despite the fact that there are actually slightly more than 52 weeks in a year. This will apply to all tenancies and licences covered by the TFA, that means Assured Shorthold Tenancies and licences that are not for holiday purposes.
This will apply to all tenancies agreed and signed after 1 June 2019 but not to tenancies that are agreed before that date even though they start afterwards. Any tenancy that is renewed for a new fixed term after that date will also be covered but it will not cover tenancies that become periodic after that date as no new money is being taken. This means that any fixed term renewal made after 1 June 2019 will have to have any excess sum of deposit that is more than the five-weeks figure refunded to the tenant. There is of course nothing that prevents a landlord prior to such a renewal making deductions from the deposit to cover existing property damage or arrears of rent or from increasing the rent as part of the renewal and re-calculating the deposit appropriately.
This will be a big change in the market. Many landlords and agents currently calculate deposits based on six weeks rent giving sufficient funds to cover the last months rent plus further damage. That cushion will be reduced and there is no right to increase the deposit beyond the five weeks to take account of increased risks caused by specific tenants. This is likely to mean that landlords will look less favourably on tenants with increased risk of property damage such as those with pets or with higher risks of rent arrears such as overseas students. There is no ability to charge a pet deposit or a fee for pets or to insist on a professional clean for tenants with pets.
There is a small liberalisation. Where the rent for the property is over £50,000 per annum, then a landlord can seek a deposit equivalent to six weeks rent but this will only provide a small relief for a very small number of tenancies.
Most landlords do not take a holding deposit, many agents do. However, not all agents do so properly and often simply take money, calling it a holding deposit, without any written agreement at all. Doing this is highly risky as it provides no legal basis for deductions from the deposit which makes it rather pointless to hold it. It has also been argued that taking money and calling it a holding deposit without further clarity of what this means creates a position that the landlord is obliged to rent the property to the tenant, despite the normal approach of saying that tenancies are “subject to contract”. The new provisions will make it even more important that agents have a proper holding deposit agreement.
The new provisions allow for a holding deposit of up to one week’s rent to be taken by an agent and landlord and held for up to fourteen days. On the fifteenth day they must enter into a tenancy or agree to extend the holding period. If the tenancy does not happen as a result of the landlord’s decision then the holding deposit must be returned. If the prospective tenant chooses not to proceed or fails to take all reasonable steps to enter into a tenancy (provided that the landlord or his agent if he has one) has done so, then deductions can be made from that sum to cover costs. In fact, the legislation does not say much about what those deductions should be for and it is arguable that the landlord could take all of the holding deposit in order to cover lost opportunities to get someone else. If the tenancy does go ahead then the holding deposit must either be returned to the tenant, credited to the tenancy deposit, or credited to the rent account.
The TFA strictly prohibits a holding deposit being taken from more than one person at a time so landlords cannot really have two or more tenants operating together. However, there is no specific reason why a landlord, provided they are being reasonable, cannot take a holding deposit from one prospective tenant while continuing to market the property to others. Potentially the landlord could then choose to give back the holding deposit to the first prospective tenant and take a holding deposit from someone else, effectively switching horses. Notably the guidance states that once a holding deposit has been taken the property cannot be marketed to others. However, this cannot be right. The legislation itself contains no such prohibition and so, provided that the relevant holding deposit agreement was clear that this would happen there seems to be no barrier to taking a holding deposit and continuing to market the property.
It is also worth noting that it is possible to sign a tenancy agreement prior to the start date of the tenancy and such an agreement would be binding on the landlord and tenant provided it has been properly executed. It is possible that some landlords will pressure tenants into signing such agreements prior to the end of the holding deposit period which may have the perverse effect of tying tenants even more tightly into properties that they may not in fact want.