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

Tessa's tips for landlords on tenancy agreements - day 18

This is day 18 of my 31 days of tips on tenancy agreements series.

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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Important note. If you are reading an old post, remember that the law may have changed since it was written.

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4 Responses to Tenancy Agreements 31 days of tips – Day 18 – penalty clauses

  1. Interesting point about interest charges. I recently came across a letting agent charging a tenant an interest rate at 4% above the Bank of England base rate, per day, on the rental balance outstanding. Which in this particular case was £650. The interest should the rent be one month arrears, would exceed the monthly rental cost. When queried the agent said that it was a standard legal form supplied by a property management software company offering a complete letting agency package. Still looking into this one, but first thoughts are ”unfair contract term”. NB. I am a practitioner in landlord and tenant law, as well as part time letting agent.

  2. Yes, we are all used to rates of interest which are a lot less than they used to be. I am considering linking my interest clauses in future to the rate under s69 of the County Courts Act (used when making court claims), which is currently 8%. It also has the great advantage that everyone knows how to calculate it!

  3. Question: my 6month contract ended in November 5th 2010, due to a job offer elsewhere i decided not to renew the contract however my housemate did, i paid rent for November and vacated on December 6th after securing someone else to take on the lease with my housemate. I arranged and paid for professional cleaning service 5-6th December however due to bad weather the rental company did not come and complete the check out and let the new tenant move in before completing it, they now want to charge for the checkout that is due as per clause 2.13 of your Tenancy Agreement: (pay the costs and disbursements in relation to the preparation of the “checkout” at the end of the tenancy. This cost being £100 (excluding VAT) for properties up to and including one bedroom with a supplement payable for each additional bedroom of £15 (excluding VAT).

    The charge for the checkout is £135.13 which is for the whole property i only vacated one room!! and as i was technically out of contract just wondering where i stand? any help would be gratefully appreciated,

  4. I don’t think they can charge you for a checkout if they did not actually carry out the checkout inspection.



About the post author:

Tessa Shepperson

Tessa is a lawyer and specialises in creating products and services which help landlords and letting agents learn and understand landlord & tenant law. For example, she runs the Landlord Law website (now in its 14th year) and is a director of Easy Law Training Ltd and Your Law Store. Tessa also sits on the Property Redress Scheme Council. When not working she enjoys reading, cooking and messing around on the computer. You can also find her on Google

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Tessa is an English lawyer specialising in residential landlord and tenant law.

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