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?
Tenancy deposits
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.
And finally
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.
So this would apply to other ancillary fees (taken before 01 June 2019 on a tenancy signed on or after 01 June 2019) aswell then? Like referencing or admin. If the agent cannot prove what they were taken for?
As for this Tessa..
“I have never been happy with letting agents charging fees to tenants in their own right ”
I do have evidence on my hard drive to the contrary.
Fees other than permitted fees taken for tenancies signed and dated on or after 1 June should be refunded. Fees taken for tenancies signed before 1 June are probably OK – for the moment.
So far as what I may or may not have said about agents fees in the past, it’s not (regardless of what you may think) something that I have ever actually agreed with. I was for many years a solicitor. If solicitors charged fees to both parties in a contract it would normally be professional misconduct.
However, I dare say I may have made an off the cuff comment at some time or another which could be interpreted to the contrary. I do remember saying it was understandable why agents thought it was OK.
I was not aware that my every comment was being monitored in this way! It seems a bit excessive. I am not a particularly important person.
S30(1)(a) and S30(7)(a)would appear to say not.
i.e. any money taken before 1 June is unaffected by the Act, even if the agreement is signed later.
Surely all that is needed is a letter from the Landlord or Agent saying:
Please pay the following sums
Holding deposit £xxx – by xxx
And then if the letting proceeds
Rent in advance £xxx – by yyy
Deposit £xxx – by yyy
Or whatever. I don’t think it ought to be a problem in practice. But then there was the Superstrike fiasco, so perhaps people are right to be cautious
Yes, that would answer your question about proving intention, wouldn’t it.
If the agent didn’t spell-out what they took any payments (above and beyond 1 week’s deposit) for though AND the tenant can evidence the agent’s refusal to return that money to them, well, I look fwd to someone taking that to court.
Could the landlord simply make handing over the keys to the property conditional on the rent and deposit funds having cleared?
Surely in order to retain any money when a tenancy doesn’t proceed a landlord would have had to have some form of agreement of the terms under which they COULD retain said money?
If they asked for the first months rent and the deposit in cleared funds prior to tenancy commencement (the definition of which is explained in the AST) then they would have no grounds under which they could legally retain this money in any case unless this was set out in advance to the tenant, so by definition a months rent and a full deposit cannot in any way be considered a holding deposit.
I’m no solicitor, but surely if there was no way this money COULD be legally retained then it should be assumed that there was no intention to ever do so unless there is some solid proof to the contrary, such as a landlord doing just that!
Bugger me sideways we’re now at risk of being charged for why we MIGHT have intended to do and not what we have ACTUALLY done or intended to do! When will this horror-show end??
Whilst ARLA may refer to this as a PPI moment I wonder how many agents claimed back PPI as individuals and punched the air when the cheque came through, feeling justice had been served. Funny when the boot is on the other foot isn’t it?
Is “signing the agreement” a red herring?
Is the contract not made when the LL/Agent offers the property to the prospective T and the T accepts that offer by paying the first period’s rent and the deposit?
The signing is then just a record that the parties have agreed the terms of the contract.
The relevant wording appears to me to be ” in connection with a tenancy” in S1(1) and S2(1).
This does not say “under a tenancy” which would imply that the tenancy has started at the time.
Schedule 1 allows the payment of rent and deposit.
Also schedule 1 para 3(2) explicitly defines a holding deposit as being taken with the intention of being treated in accordance with Schedule 2 (as you have noted). So intent not to be a holding deposit can be shown by
1. clearly stating so in terms and conditions that the T signs as part of agreeing to using the Agent’s (or prospective LL’s) services.
2. Providing a receipt for the monies stating what they have been taken for.
3. protecting the deposit once the tenancy has started.
4. not asking for the first period’s rent again.
An alternative approach might be that the contract requires the first period’s rent and the deposit to be paid in cleared funds to the LL/A before access will be given to the property, and if the T fails to do this but complies at a later date an the tenancy starts, then the rent payment is due from the agreed start date.
The T can then pay by cash on the day the tenancy is to start (allowed) or by bank transfer in advance (allowed because it is an alternative to an allowed payment).
If, after payment of rent and deposit, the T chooses not to proceed with the tenancy, then refund of the monies shows no intent to keep them. And LL could pursue the T for losses from breach of contract.
If, after payment of rent and deposit, the LL chooses not to proceed with the tenancy, then there may be problems (I have not explored this one).
I am not sure I agree with Tessa’s interpretation of para 3(2) of Schedule 1. There is a “nice legal point” as the drafting of the Act is poor. If I told you that Tom paid Dick £100 with the intention that it be used in a certain manner, you would assume it was Tom’s intention, not Dick’s that was determinative. When a tenant pays a holding deposit he or she does not usually think of Schedule 2 and indeed may not know about the Act. A sensible interpretation is that the tenant intended the money to be used as a holding deposits and holding deposits are dealt with in Schedule 2. Ergo, the tenant intended it to be used in accordance with Schedule 2. The onus would then be on the tenant to show that it was NOT intended to be a holding deposit.
I think it is bad advice to avoid taking rent and the balance of the tenancy deposit before completion. ARLA’s fear, in my opinion, is overblown. First, if it is the agent’s intention that is determinative it will not be hard to show that rent was paid as rent. Second if it is the tenant’s intention he/she will have to show that the sum requested as rent/tenancy deposit and paid just prior to completion was intended as a (presumably second) holding deposit. Even the most tenant-friendly judge won’t fall for that nonsense!
The bigger risk for agents is that they need the express consent of the person paying the holding deposit to set it off against the rent/tenancy deposit. If they don’t get that consent then even if full credit is given, they are in breach of the Act. See my article here: https://www.property118.com/tenant-fees-act-2019-elephant-trap-unwary/
One of the associated issues that this raises (again) is the poor use of wording related to tenancy deposits in the main legislation and in most tenancy agreements. A tenancy deposit is money that belongs to the tenant that is being held by the landlord.
There is no meaningful sense in which a tenancy deposit is “paid” to a landlord at the start of the tenancy (although that payment may occur in the future). It’s given to the landlord or entrusted to them, but it’s not paid – which also means it can’t be a fee.
If it were paid to the landlord or was some kind of fee, the landlord would have some kind of claim to it, as the meaning of pay and fee imply a transfer of ownership from one party to the other (usually in exchange for something. A tenant might pay rent in advance, but they don’t “pay” a deposit at all.
I used to take £300 as a holding deposit, an amount I thought would be enough to show intent on behalf of the prospective tenant but also enough of an amount that made sure you didn’t get bothered by time wasters who showed an interest and then changed their minds. The change in the law to now only take one weeks rental amount as a holding deposit is easy to deal with and so should not cause anyone any issues.
The other part of the article about paying the balance of the deposit and rent in advance before anything is signed is a bit more of an issue. Clearly only a madman would allow someone to move in before they paid anything so is the way forward to make sure the tenancy agreement is signed in advance of the start of the tenancy, say a week ahead, and then for the money to be paid over during that week and also to insert the clause Tessa was speaking about??
I usually, up to this point send a copy of the agreement to the tenant in advance, so they have time to read it and ask questions, but don’t actually sign until the day of check-in. I was advised to do this years ago because if it was signed in advance, that tied the landlord to the tenancy, and then if the house burnt down between signing and check in it may result in the landlord having to find alternative accommodation for someone who hadn’t even moved in!
I agree this is a one in a million chance and so on balance, if signing a week before the start of the tenancy gets round this issue of payment in advance, then I think it would be better to do it that way.
Our Landlord Law tenancy agreements have a clause saying that the tenancy will end if the property is destroyed. However most insurance will provide for at least some cover for rehousing tenants.
As a footnote to that I recently dealt with a leak which did a lot of damage and the tenant had to be temporarily rehoused. In the end it was actually the tenants contents insurance that paid out for the alternative accommodation as the wording in the buildings policy was (words to the effect) that they would pay for it only if it was not covered anywhere else! A nightmare to negotiate though between two insurance companies, a loss adjuster and the tenant as well as the owner of the flat! Not directly relevant to this article but worth a mention I thought.
Hi Tessa,
I just read this article over on your Landlord Law Services post and noted a typo which you may want to correct.
“ARLA believe that this means that any payments made before the grant of a tenancy will be deemed to be a holding deposit – and so will be a prohibited payment to the extent that it exceeds one month’s rent.”
one MONTH’S rent, rather than one WEEK’S rent.