Tenancy Agreements 31 days of tips – Day 18 – penalty clauses

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This is day 18 of my 31 days of tips on tenancy agreements series. To see the rest of the series click here.

Penalty clauses in tenancy agreements

Penalty clauses are clauses which provide for the tenant to make a payment if they breach the terms of the tenancy in some way. Great care needs to be taken, if these are to be included in a tenancy agreement, to ensure that they comply with the Unfair Terms in Consumer Contracts Regulations (explained on Days 15 and 16).

The most common form of penalty clause is the one saying that the tenant must pay interest on unpaid rent. So long as the interest rate is reasonable, this is a perfectly valid clause and is found in most tenancy agreements.

However it is often a different case with other types of penalty clause.

Under contract law, if someone is in breach of contract, the other party is entitled to claim compensation to put him in the position he would have been in, had the contract been carried out as intended. Therefore main thing to consider with penalty clauses, is that they are only fair if they aim to reimburse the landlord for genuine expenses that he has been put to because of the tenants default under the agreement. What is not allowed is for the landlord or his agents to make a profit out of these charges.

So if, for example, the tenancy agreement allows the landlord to make a modest administration charge, say £15, to cover his costs of writing to the tenant about his rent arrears, then this may be found to be fair. Particularly if agents are instructed, as they will often charge for this work. However if the charge was obviously more than the actual cost of the work, say £500, this would clearly be unfair under the Regulations.

Clauses also need to be even handed. For example often agreements provide for a charge to be made if a tenant fails to make an appointment. This will only be fair if the clause provides for the landlord or his agent also to be liable to the tenant if they fail to attend an appointment.

Landlords also sometimes want to claim additional bank charges that they may incur on their own bank overdrafts if they are unable to meet payments because the tenant has not paid his rent. Unfortunately however these will not be valid. There is a general rule that a party to a contract cannot claim for losses incurred ‘by reason of his own impecuniosity’.

If this were allowed then it would be most unfair, as two tenants both owing the same amount of money to their landlord, would have to pay different amounts, depending on whether they landlord had a bank overdraft or not!

Do you have any comments on this section? Have you any examples of particularly onerous penalty clauses? Do you make an administration charge – if so how much do you charge?

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