Tenant Fees Act 2019 – Draconian legislation

I am a solicitor and a consultant with DMH Stallard LLP and have been a PRS landlord for 30 years.

The Tenant Fees Act 2019 which comes into force on 1st June 2019 applies to fees paid in connection with lettings of residential property by Private Rented Sector (PRS) landlords. There are some transitional provisions for tenancies starting before 1^st June 2019 but I will describe the law when the Act is fully in force.

Key points

• The Act is a steel jackhammer to crack a pigeon’s egg
• Landlords will be severely punished for minor accounting mistakes
• Dishonest behaviour by tenants will be rewarded
• Local councils can be enlisted to extort and blackmail landlords
• Landlords will be obliged to be interest-free lenders
• Defaulting tenants are encouraged to ambush landlords in court

Politicians from Left and Right, and tenant advisory and support organisations such as Shelter have sung its praises and remarked how it will make renting “fairer” and will save tenants money. The Act will certainly deprive letting agents of a significant part of their income. If agents try to recover that from landlords, they in turn will probably put up rents! The full truth about the Act is somewhat different from the spin put out by politicians and tenant groups. The Act is a Draconian piece of legislation which can and undoubtedly will be used by defaulting tenants to hurt landlords unjustly.

Nobody denies there has been a serious problem with unjustified fees being charged particularly to people seeking to rent and also to tenants once they have moved in. In London and other parts of the country with high tenant demand, some unscrupulous agents have gouged fees and enriched themselves at the expense of desperate people. It was right that something be done.

A rogue tax collector’s database

The problems of rip-off fees could have been dealt with by reducing fees to modest amounts to allow landlords and agents to recover costs. A credit check costs a few pounds. Referencing companies charge £30 to £50. If that were not sufficient, fees could have been made unlawful and landlords made to repay (with interest and/or a penalty) within say14 days of demand and punished if they failed to do so. Even that would have gone well beyond normal business practice. If the gas company over-charge, they aren’t fined if they don’t repay immediately you ask! If HMRC get a taxpayer’s PAYE coding wrong, take £100 too much tax and don’t rectify it immediately, they aren’t fined and put on a rogue tax collector’s database the second time a taxpayer complains. From 1^st June Landlords may be.

England becoming a totalitarian country

In a free society everything that is not forbidden is allowed. I believe this is a fundamental principle of English law and life. In contrast, in totalitarian societies everything is forbidden unless it is expressly allowed. Instead of restricting fees to reasonable levels the Tenant Fees Act prohibits all payments by a tenant to a PRS landlord unless the payments are expressly permitted by the Act. The Secretary of State can decide what are permitted and what are prohibited payments. It remains legal to take a tenancy deposit but the Secretary of State can prohibit all deposits without referring back to Parliament. Even rent might have been made a prohibited payment but the Parliamentary draftsman, perhaps mindful of a possible future Corbyn government, spells out that rent cannot be made a prohibited payment! I suppose landlords should be grateful though until now I doubt that even in their wildest dreams did Messrs Corbyn and McDonnell think to punish landlords simply for asking for rent to be paid. This “Conservative” Government has provided the template for future attacks on the PRS. Is England becoming a totalitarian country?

Want to borrow £1000 interest free? Don’t pay your landlord.

The Act permits payment of interest on rent arrears at no more than 3% over Bank of England Base Rate (currently ¾%) and only if rent is at least 14 days’ late. On a rent of £1000 a month, this amounts to about 10 pence a day. Many tenancy agreements allow landlords to charge a fixed sum of £15 to £20 for sending out a late rent letter. This is a useful spur to tenants. Even at 6% or 8% pa default interest on most rents is only a few pounds a month. From 1^st June late rent fees are now prohibited. Landlords have been made the nation’s involuntary lenders. Landlords provide the cheapest unsecured loans on the High Street. Wonga can’t compete. Need to borrow £1000 for a fortnight? Don’t pay your landlord. Interest free if you repay within 14 days!

One major problem for landlords under the Act is that default is binary and immediate. There is no prior warning for the landlord or opportunity to put a matter right. In most areas of commerce if a supplier of goods or services wrongly charges, the law does not punish him or her if the matter is rectified promptly. If the cashier at a supermarket rings up the wrong price or double-counts an item the shop is not liable to a fine unless they refuse to rectify the situation. Under the Tenant Fees Act as soon as a prohibited payment of even one penny is taken the landlord is in default.

The Act imposes a duty on every local “weights and measures authority” in England and on district councils to enforce the Act. For a first offence there is a civil penalty of up to £5000. For a second offence within five years there is criminal liability and a fine of up to £30,000. The landlord may also be put on a “rogue landlords” register.

You can keep the money…but you are in trouble if I later change my mind.

Landlords are at risk even before a tenancy agreement is signed. Consider the following scenario. A prospective tenant, Tony, sees an advertisement and telephones the landlord, Larry, to arrange to view a vacant property. They meet and Tony agrees to rent the property for 12 months starting in three weeks’ time at £900 per month. At Larry’s request Tony pays a reservation fee of £200 which will be set off against the first month’s rent if the tenancy proceeds. Tony signs an acknowledgement that the fee will be forfeited if he backs out. Larry turns away other prospective tenants and takes the property off the market. He sends out a draft tenancy and other paperwork. Tony is happy with the form of tenancy. His references are satisfactory and Larry texts Tony to arrange to meet to sign the tenancy and check Tony in.

The evening before the meeting Tony texts Larry and says: “Sorry to let you down but I have moved into another place I like better. You can keep the £200.” Larry is understandably annoyed. He has had no rent and has lost the opportunity to let to other people. He keeps the £200 and re-markets the property.

Larry will be shocked if a few weeks after Tony was due to move in he receives a letter saying that Tony had been talking to a lawyer friend. Tony demands the return of the £200 and says Larry could be fined up to £5000 for breach of the Tenant Fees Act 2019. How can this be? Unfortunately for him, Larry is in breach because he did not give Tony notice in writing within 7 days of the date Tony was supposed to move in stating why Larry was forfeiting the reservation fee. Tony’s text that Larry can keep the £200 does not affect liability under the Act which says that even where there is a good reason for keeping the deposit it must be returned if the recipient did “not give the person who paid the deposit a notice in writing within the relevant period explaining why the person who received it intends not to repay it.” As Basil Fawlty might say, Larry telling Tony why Larry was keeping the £200 was a statement of the “bleeding obvious”. Alice in Wonderland stuff, you might think! No, from June 1st it’s the law of England.

Think that’s bad? It gets worse. The Act does not define “notice in writing”. In law it is not clear text messages count as notices in writing. They may do so in some cases but lawyers disagree. Even if Larry had texted back that he was keeping the deposit he will not have complied with the Act if he has to serve a formal, signed notice on Tony. Larry will probably have Tony’s address from taking up references but the Act does not say what happens if it is impossible to find Tony. The onus is on Larry to serve the notice.

The blackmailer’s accomplice

You might think Tony will struggle to persuade the council to take enforcement action but all he needs to do is to put a spin on his behaviour and conveniently omit to mention his text message. The Council will probably write a threatening letter to Larry, informing him that he is in breach of the Act, warning him that he could be fined up to £30,000 and also put on the rogue landlords’ register if he doesn’t repay Tony within 14 days. They will tell Larry that if he is a licensed landlord he could lose his licence and then be subject to further fines and enforcement action if he continues to manage his rental properties. Think I am exaggerating? I know from experience that this is how some councils operate. They don’t have the resources to investigate properly. Threatening landlords with heavy penalties ensures a swift response. It’s the line of least resistance. If Larry writes a detailed explanation and sends them a copy of Tony’s text the Council might, in a month or two, decide not to pursue the matter. They may even graciously write to let Larry know or he may just never hear from them unless he chases. However, Larry is technically in breach. Tony has not broken the law and some councils may think that a tenant enforcing his rights is entitled to do so. After all, Larry is a landlord and must be rich. Tony is a tenant and must be presumed to be an innocent victim. Will Larry risk the matter going to the council or getting to court? He will have to spend hours dealing with the council and more time and money on legal advice to defend a claim. If Larry wins, he will be hundreds of pounds out of pocket and have had to go through a stressful few months. If Tony wins then, by definition, Larry has breached the Act and may be fined. In the circumstances why would Larry risk it? It will be safer (and Larry’s solicitor will probably advise) to repay the £200. The Act makes councils unwitting blackmailer’s accomplices.

In cases of doubt, the landlord is guilty

Landlords take holding deposits as an earnest of the tenants’ intention to proceed whilst finances are checked and references taken up. They will be limited to one week’s rent. If the tenant provides false or misleading information the landlord can only retain a tenant’s holding deposit if the information is such that it “reasonably affects the landlord’s decision to let the property to the tenant”. This is a matter of judgment and will depend on the facts of the case. What is the landlord to do if a tenant who has lied about his income and criminal record challenges his decision? If the council or the court agrees with the landlord’s judgment, he has wasted hours of his life dealing with the matter but is in the clear and can keep the deposit which will usually be less than £300. However, If the council take the view that a little bit of lying was not sufficient, the landlord is in breach, has to repay and is then liable to a fine unless he risks further expense and stress by taking the matter to appeal.

The oft-repeated lie about no-fault evictions

Until a prohibited payment has been repaid the landlord cannot serve a notice under section 21 of the Housing Act. Section 21 notices allow a landlord to recover possession of his property without having to give a reason. It is an oft-repeated lie that eviction by this process is “no-fault eviction”. The reality is that landlords use it because the alternative under section 8 of the Act is slower, cumbersome and more expensive than using section 21. The law does not allow landlords to combine claims under both sections so they have to issue two sets of proceedings and pay two court fees. Using section 21 means the landlord has to forego rent arrears because the court has no power in s21 proceedings to make an order for payment of arrears. Parliament could have allowed this but landlords don’t expect help from that quarter. Most landlords value tenants who pay the rent on time, look after the property and don’t disturb the neighbours. The vast majority of landlords don’t evict without good reason. There are already rules preventing revenge evictions if a tenant complains about disrepair. Section 21 is also invaluable to people who rent out their home whilst they work abroad temporarily and need to get it back without any arguments. If a landlord wants to redevelop a dilapidated property section 21 allows him to get vacant possession in an orderly manner and without paying ransom money to the last tenant in a block.

By making repayment of any and every prohibited payment (however small) a pre-condition to a s21 notice being served the law positively encourages tenants to ambush landlords in court. Shelter, the Citizens Advice Bureau and some ambulance chasing firms encourage tenants to take technical points. This leads to injustice. Suppose a tenant, Theo, is persistently several days’ late in paying his £1000 a month rent. For several months his landlord, Leo, warns him that he needs to pay on time. Theo ignores the warnings. Leo’s standard form tenancy agreement has been amended to remove the £20 charge for sending a late rent letter but it says that late rent bears interest at 3% per annum over base rate. After three reminders have been ignored, Theo’s rent is again 10 days’ late. Leo sends a stroppy letter and, to make a point, demands an additional £1.00 interest for the 10 days. Theo apologises for the late payments and pays the additional pound. The tenancy continues as a periodic tenancy for some time. Leo does not increase the rent. One day without warning, Theo stops paying rent. He appears to have left the house but all his furniture and belongings remain there. He does not respond to phone calls, texts or letters. If Leo want to use section 8 he will have to wait until Theo has arrears of at least two months and then wait 3 to 9 months for a court hearing date. Absent any communication from Theo that seems pointless, so Leo serves a section 21 (so-called “no-fault eviction”) notice. He sends a letter to Theo saying he will withdraw the section 21 notice if the arrears are paid. Leo hears nothing and so he applies for a court hearing. He gets one four months later by which time Theo owes £4000 with a further £1000 due the week after. Theo maintains radio silence.

I owe you £4000 but first repay that £1 you owe

Just before the hearing, a friend of Leo’s shows him Theo’s Facebook page. He has been back-packing round the world, partying with a different girl in every city, getting new tattoos and “finding his inner Zen”. Leo is surprised to find Theo at the hearing. “Consider me a Prodigal Son who has returned”, says Theo. “But we’re not related” replies Leo. The judge is not impressed with Theo’s conduct and is about to give an order for possession. Theo plays his trump card. He produces Leo’s stroppy letter and a bank statement showing he paid Leo £1001 that month. The £1 interest is a prohibited payment. Section 17(3) of the Act says that no section 21 notice may be given in relation to the tenancy so long as all or part of the prohibited payment has not been repaid. Adding insult to injury the Act goes on to say that s17(3) does not apply if Theo consents to the £1 being applied towards his rent arrears. Why would he? He now has Leo at his mercy. The judge has to throw out Leo’s claim for possession. If the judge does not do so, Theo can appeal and has an excellent case. The CAB will probably assist him and Leo will have to pay for a barrister. The judge will suspend possession until the appeal is heard months later. Leo will have to repay the £1 to Theo before Leo can serve another section 21 notice. Leo might keep the £1 and use the section 8 route instead. Either way he will have to wait months for a new court date. Theo may then raise the stakes and point out that Leo is in breach of the Tenant Fees Act and liable to be fined. Would the Prodigal’s “father” like to write off some or all of the £4000 if Theo leaves the property and doesn’t dob him in to the left-wing local council?

Even when landlords win, they lose

Government lawyers and tenant advocacy groups will doubtless say that no court would penalise Leo in these circumstances. That’s almost certainly true, but that argument completely misses the point and in one important particular is simply wrong. The vast majority of cases don’t get to court and if tenants are given leverage against landlords, many will use it. Tenants who owe thousands of pounds in rent will use the legal tools they are given to “persuade” a landlord to reduce the debt. The court might not fine Leo but throwing out his section 21 notice is effectively a penalty. Leo has to re-start the legal process and risks further arrears accumulating at the end of which Theo disappears again.

£30,000 fine for a 40p debt

If Leo’s experience were not bad enough, the provisions for interest on late rent lead to absurdities. The maximum interest rate allowable for late payment is 3% over the Bank of England Base Rate. Suppose Lenny, a landlord has two tenants each paying rent of £1000 a month. Both are 28 days’ late. Base Rate has gone down from ¾% to ½% but Lenny has forgotten this or never knew. He demands 28 days’ interest of £2.88 from each of them. The permitted interest at 3½ % pa is only £2.68. If the tenants pay the extra 20 pence, Lenny cannot now serve a section 21 notice until each is repaid his 20p. The instant the excess sums are paid, Lenny has committed two breaches of the Tenant Fees Act and so, in theory, could be fined £30,000. Enforcement authorities are supposed to have regard to Government Guidance which says: “Generally, we expect the enforcement authority to consider each breach on a case by case basis and for the maximum amount to be reserved for worst offenders.” Landlords will be fearful that the maximum or a harsh penalty may still be imposed. Most reasonable people would think being fined £3000, 10% of the maximum £30,000, for twice over-charging 20p is extremely harsh. A fine of even £300 is more than most shoplifters get. The thing which the Government ignores and tenant advocacy groups fail to acknowledge is that statutes like this give defaulting tenants and the proverbial “Tenants from hell” as seen on TV and dreaded by all landlords, power to threaten to destroy a landlord’s business by waving disproportionate penalties at him. Tenant advocacy groups encourage tenants to use this leverage. However, Parliament’s sauce for the goose is not sauce for the gander. If landlords do not promptly repay prohibited payments they are liable to pay interest on them – at 8% per annum.

Russian Roulette with the gun always pointed at the landlord’s head

It is a scandal that landlords are already effectively being blackmailed into writing off substantial arrears of rent over trivial or even non-existent mistakes. When landlords take tenancy deposits they are required to use a Government approved service to protect the money. They must within 30 days give the tenants certain Prescribed Information about how the deposit is protected. If they fail to do so they cannot serve a section 21 notice and can be made to pay between one and three times the deposit to the tenants. Once the breach has been committed it can never be remedied in law without payment. There are cases where a county court judge decided that although the deposit had been protected and the tenant had received the Prescribed Information form within 30 days, the form had not been properly served. The section 21 notice was invalid because the form had not been signed by two directors of the landlord company. Lawyers disagree whether the County Court judge is right about this but until a landlord has £10,000 to £20,000 to pursue a test case on a point of principle, we will not get a decision binding on the lower courts. After being ambushed over signatures on the form, landlords either have the case thrown out and start again or have agree to the tenant’s demand to knock three times the amount of the deposit off thousands of pounds of rent arrears. There’s British justice for you.

The Act creates a version of Russian Roulette where the gun is passed between the landlord and the tenant but is always pointed at the landlord’s head. The Act does not apply to social housing providers. Presumably their tenants do not require protection as housing associations are paragons. Their tenants won’t be able to play the system as PRS tenants can.

The unscrupulous can blackmail landlords

The Tenant Fees Act is complex, runs to 38 pages with numerous cross-references, qualifications and exceptions. It needs a lawyer to wade through it. The Government has produced a guidance booklet for landlords and agents. It runs to 59 pages. Local authorities have a 42 page booklet to assist with enforcement. Tenants have even more reading to do. Their booklet is 81 pages long. The Act is entirely one-sided. There are no penalties for tenants who abuse the process or give false or misleading information and no mitigation for landlords for minor “offences”. They are given no opportunity to put a trivial matter right. If landlords step a millimetre out of line they will be hit and hit hard. The intention of the Act was to stop the mischief of rip-off fees. It is ill-thought out, poorly drafted and is a means for unscrupulous tenants who are in serious breach of their tenancies to blackmail landlords.

Landlords and agents are already looking to increase rents to compensate for the loss of fees and for the lack of any proper sanction against late payers. Deposits will be limited to five weeks’ rent except for those with million pound houses and rents of £50,000 a year or more. They can have deposits equal to six weeks’ rent (the Act gives no explanation why). The family with pets can’t offer a larger deposit to cover extra wear and tear. They will be asked to pay a higher rent or rejected altogether. The successful freelancer with savings but no evidence of regular income may have to find a guarantor even if he or she could provide a substantial deposit.

From next year, some landlords will face tax on their rental income of over 100%. George Osborne brought that in when he was Chancellor but that’s another story. PRS landlords (85% of whose tenants according to a recent survey are satisfied with them) are reeling under several coshes. Many feel this “Tory” Government has declared war on them. Decent landlords are leaving the sector. Landlords who lose a year or two’s net income because of a minor mistake or the caprice of a county court judge are likely to follow.

The Tenant Fees Act 2019 does nothing to improve landlord/tenant relations. It is yet another cosh to landlords’ heads. If, despite their protestations to the contrary, the Tories want to decimate the PRS, they are going the right way about it.

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