This legislation is likely to have a major impact on the rental sector, particularly in terms of reducing the level of fees passed on to tenants in future, and will have significant commercial implications for letting agents.
Keira Brown, Legal Adviser at DAS Law, takes a look at the key changes... *
What’s this all about?
The act represents a real shake-up of the rental sector. In short, it means that most charges currently levied against tenants, such as for credit checks and inventories, will be unlawful for new tenancies.
It’s worth noting that at this stage that this legislation is specifically for England. Wales is in the process of passing its own legislation.
What types of tenancy does it apply to?
The act applies to three types of arrangement:
- Assured Shorthold Tenancies
- Student Accommodation
- Licenses
What fees are going to be banned?
Put simply, any fee that is in the tenancy agreement will be void – unless it is specifically exempted. This includes payments to third parties, either for services throughout the tenancy or for specific performance of a job, and loans from third parties. So the following are examples of banned fees:
- Charging for a guarantor form
- Credit checks
- Inventories
- Cleaning services
- Referencing
- Administration charges
- Gardening services
Will it apply to existing tenancies?
It will apply to all new tenancies and renewals granted after that date. For tenancies created before that, the ban will attach to these from 1 June 2020 and the fees will then cease to be payable.
What charges will still be allowed?
- Rent;
- A refundable holding deposit;
- A refundable tenancy deposit;
- Payments associated with early termination of the tenancy, if requested by the tenant;
- Payments in respect of utilities, communication services, TV License and council tax;
- Payments to change the tenancy, if requested by the tenant;
- Fees for late payment of rent and replacement of a lost key, where required under the agreement.
However, it should be noted that the Act brings in new restrictions around these.
What are the restrictions on rent?
Anticipating that it would be used as a likely workaround for the fees restrictions, the act bans landlords from setting rent at an artificially higher rate for an initial short period, then dropping it to a lower level. However, it does not prevent a higher level of rent if it is consistent throughout the tenancy.
What are the restrictions on holding deposits?
These are payments taken before the tenancy is granted, while suitable pre-contract checks such as references are made. These will be limited to a maximum of one week’s rent and must be refunded where a tenant later enters into a tenancy agreement. The deposit must also be repaid should the tenancy not go ahead – where the tenant is not at fault – although this is subject to a detailed and specific set of rules.
What are the restrictions on deposits?
For annual rents below £50,000 the deposit will be limited to five weeks rent; for annual rents above £50,000 the deposit is limited to six weeks rent.
What are the restrictions on charges for breaches?
If a tenant breaches their agreement and this causes losses, landlords may seek compensation through deductions from the deposit, or court action. Two occasions where fees may be charged under the Act are loss of keys – needs to be evidenced by a clear paper trail – and late payment of rent, to which interest may be applied after 14 days (limited to 3% above the Bank of England base rate).
And what about payments to third parties?
A number of third party services are allowed to form part of the tenancy agreement but these are not fees to agents. Tenancy agreements may require that a tenant must make the following payments:
- Television licence
- Council tax
- Utilities
- Communication services
Are there any penalties for breaching the Act?
If the act is breached and a fee wrongly charged, this can be recovered by the tenant via the County Court system. The local authority will also have a discretionary power to apply fines. The first offence can carry a £5,000 penalty, and the second offence – if within five years – up to a £30,000 penalty. Second offences also constitute a criminal offence and even a potential banning order.
Are there any other implications if a landlord does charge a prohibited fee?
In the circumstances where a banned fee is charged, the landlord in question will be prevented from serving a Section 21 notice, until such payments are refunded.
What are the implications for the rental sector?
While good news for tenants, this act will have serious implications for landlords and agencies. Letting agency business models are likely to be severely impacted, and the fee ban is expected to increase the number of landlords self-managing. Will this lead to an increase in landlord and tenant disputes and increased legal activity in this area? We shall see.
* Information gathered from GOV.UK, the Tenant Fees Act, the Residential Landlords Association, and Landlords Guild.
Disclaimer: This information is for general guidance regarding rights and responsibilities and is not formal legal advice as no lawyer-client relationship has been created.