A warning to landlords and agents
ARLA Propertymark (ARLA) has claimed that there may be a big problem waiting for landlords and agents.
A problem which could involve tenants demanding the refund of rent and tenancy deposits and being able to successfully challenge section 21 claims until this has been done.
If correct, it would affect tenancies in England created after 1 June 2019.
ARLA are describing this as a potential PPI moment
What is it?
It is taking any payment, any payment at all, other than the authorised 1 weeks tenancy deposit, from tenants before the tenancy agreement has been signed and dated.
This, it is claimed. could put landlords and agents in breach of the Tenant Fees Act 2019 which prohibits the taking of any payment other than the holding deposit before the grant of a tenancy.
But are ARLA correct?
The Tenant Fees Act clauses
The problem, it is claimed is as follows.
In Schedule 1 of the Act it says at subsection 3(2)
In this Act “holding deposit” means money which is paid by or on behalf of a tenant to a landlord or letting agent before the grant of a tenancy …
And at (3)
If the amount of the holding deposit exceeds one week’s rent, the amount of the excess is a prohibited payment.
Now I think that there is an argument that ARLA are wrong on this as the full wording of 3(2) says
In this Act “holding deposit” means money which is paid by or on behalf of a tenant to a landlord or letting agent before the grant of a tenancy with the intention that it should be dealt with by the landlord or letting agent in accordance with Schedule 2 (treatment of holding deposit). (My emphasis)
Which would indicate that only payments which the landlord or agent intend to be taken as a holding deposit would be covered by the limitation of one week’s rent.
So for the landlord or agent to successfully defend any challenge by the tenant, they would need to prove that they intended to treat money received in excess of the 1 weeks rent, other than as a holding deposit.
But how do you prove an intention?
Payments in advance
At the moment (or in pre Tenancy Fees Act days) it is (or was) very common for landlords and letting agents to take payments from tenants in advance of signing the tenancy agreement.
Indeed it is often recommended that tenancy agreements are NOT signed until the landlord or agent has been paid the first months rent and the deposit in cleared funds.
I can remember occasions from my solicitor days where I was asked to evict tenants who had moved in before making any payments and had then failed to pay anything at all. Once a tenant is in occupation there is not much a landlord can do, if no payments are made, other than start the time-consuming business of eviction through the courts.
Hence the advice to make sure that you have at least some payments from your tenant.
The potential problem
What ARLA are worried about, are claims a long way in the future, from tenants who are able to show that they paid £X where the amount that was allowable for a holding deposit was the lesser £Y.
Unless the landlord or letting agent are able to prove, on the balance of probabilities, that they intended the money to be used for something other than a holding deposit, the tenant would be entitled to the refund of the money through the First Tier Tribunal, and would be able to defend any claim for possession under section 21 until this had been done.
The landlord or agent could also be vulnerable to penalty fines and prosecutions from Local Authorities if they were very unlucky.
David Cox, the Chief Executive Officer of ARLA told me
Whilst I accept taking the rest of the rent and security deposit in advance of the signing the contract is actually an ambiguous issue which will require case law to clarify, we are advising a belt and braces approach as I would rather that the precedent (when it comes) does not involve an ARLA agent.
David then went on to say he would
advocate a “best practice” approach to the industry rather than taking the narrowest possible interpretation of the legislation which if it subsequently gets overturned by the court could create a massive PPI moment with tenants requesting these payments back and agents not being able to issue Section 21 Notices.
Advice to landlords and agents
The belt and braces
The ARLA advice seems to be to take no payments whatsoever (other than the allowable holding deposit) from prospective tenants until the tenancy agreement has been signed by all parties and dated.
However if this ‘belt and braces’ approach is taken, I would perhaps go further and say that payments should not be taken until at least one day after the tenancy agreement is dated as otherwise, tenants may be able to claim that they paid the money over before the time of signature and dating rather than afterwards.
We have had this problem in the past with section 20 notices (where landlords had to prove that they were given to tenants before the tenancy agreement was signed).
But is the ‘belt and braces’ approach really necessary?
I do think that landlords and agents need to be very careful. However, if money is taken for a tenancy deposit and is then immediately protected in a scheme, this should be sufficient to satisfy the section and any Judge dealing with a claim.
A tenant will find it an uphill battle to claim that their £1,000 payment (or whatever) was intended to be treated as a holding deposit if it was immediately protected with My Deposits.
As the deposit was taken for the purposes of the tenancy only, the landlord or agent will be unable to make any deductions if the tenancy fails to go ahead and the money can be refunded to them – although there may be a delay if the money is protected in a custodial scheme.
So it is arguable that money taken for deposits and protected immediately will be compliant with the section.
What about rent in advance?
This more problematic.
If any rent payments are taken, I think tenants may find it easy to allege that the landlord had no intention of refunding this money to them if the tenancy did not go ahead and that therefore it was in effect a holding deposit.
So my advice would be to play safe and not take any rent payments until your tenancy agreement has been signed and dated. At least until the true meaning of this section has been resolved by case law.
However what you could perhaps do instead is put a clause in your tenancy agreement saying that where the agreement is signed in advance of the tenant going into occupation, the tenancy will be conditional upon the tenant paying the tenancy deposit and first month’s rent.
Then if your tenant fails to pay this will offer some protection if you decide not to proceed.
The Tenant Fees Act was drafted with the best of intentions and I myself totally agree with it in principle. I have never been happy with letting agents charging fees to tenants in their own right and I think it is entirely proper that they have been made illegal.
However, there is no doubt that this act will make it a lot more difficult to rent out properties within the law, and it is unfortunate that the interpretation of some of its clauses will be unclear until such time as we have a legal case decided on the point.
The issues covered by this post are just some of the many pitfalls that now await landlords and agents if they are not extremely careful.
It is also possible that forcing landlords to commit to tenants before the tenants have ‘proved themselves’ by making upfront payments could be a negative step and one more ‘straw on the camels back’ hastening the exit of large numbers of private landlords from the sector.